Author Topic: Pay off very low interest student loans early?  (Read 801 times)

jkowalsk23

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Pay off very low interest student loans early?
« on: November 02, 2018, 02:01:39 PM »
Hello Mustachians! I'm a new forum member, so please direct me to a relevant thread if necessary.

I have a small amount of student loans from college--I graduated in 2005 and was able to consolidate my loans with a 1.625% interest rate. I lucked out and continue to be grateful for this (and for the fact that I was able to cover grad school with fellowships). My loans were in deferment until about 2014, when I completed my PhD and began working. At this time, I owe about $12,000. I have no other debt and don't yet own a home.

I'm currently paying the loans off on a 10 year schedule--$125/month. My partner and I have finally reached a point where we're able to start socking away significant chunks of our income, and our "emergency" savings just sailed past the total dollar amount of my loans. I'm wondering, given the low interest rate, if it makes sense to take that money and just end the loans, once and for all. On the other hand, we could put that money in an index fund, or IRA, or other investment vehicle; we'll be buying a home in the next year or so, so this could also go towards the down payment or improvements to make our home more energy efficient. With such a low interest rate, does it make sense to pay off the loans ahead of schedule? My understanding is that the interest rate is lower than inflation's been over the past few years. I should also add that we're both late to starting to save for retirement, early or otherwise, due to our long ride on the higher education train.

Thanks, Mustachians!

RWD

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Re: Pay off very low interest student loans early?
« Reply #1 on: November 02, 2018, 02:19:18 PM »
Wow, that is an incredibly good rate. Bonds or even some savings accounts would likely be a better investment that paying extra on that. See the investment order post.

DS

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Re: Pay off very low interest student loans early?
« Reply #2 on: November 02, 2018, 02:23:26 PM »
Wow, that is an incredibly good rate. Bonds or even some savings accounts would likely be a better investment that paying extra on that. See the investment order post.

Second for checking out investment order!

That rate is so low! A no-minimum savings account at Ally is 1.90%. Can't think of a good reason to pay off early.

Lady SA

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Re: Pay off very low interest student loans early?
« Reply #3 on: November 02, 2018, 03:05:02 PM »
Keep those loans for as long as possible! That rate is amazing!

Dicey

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Re: Pay off very low interest student loans early?
« Reply #4 on: November 02, 2018, 03:05:45 PM »
Another don't do it vote.

yourusernamehere

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Re: Pay off very low interest student loans early?
« Reply #5 on: November 02, 2018, 03:20:44 PM »
I had about the same amount in student loans, locked at 2.04%. Once I got really dialed in and that was my only non-mortgage debt, I paid it off. Was it mathematically optimal? No certainly not. But $12,000 is a tiny portion of what I will ultimately save (and a tiny percentage of my current worth) so functionally it's not a big deal. But hot damn, I love not having student loans

If you've got other debt to pay down or it would keep you from meeting your investing goals to pay it off, then sure, optimize. But if everything else is dialed in and you just want to pay it off to get it over with? This is not going to make or break you

Telecaster

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Re: Pay off very low interest student loans early?
« Reply #6 on: November 02, 2018, 03:25:31 PM »
Another vote no.  If you want safety, bonds pay more than that these days.   

dodojojo

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Re: Pay off very low interest student loans early?
« Reply #7 on: November 02, 2018, 05:02:23 PM »
I graduated from grad school in 2006 and also consolidated at a very low rate.  I think it's 1.875%.  I've kept it because it is so low.  The only thing I can't figure out is why I'm still paying it off 12 years later and still have a hefty amount to go.  I thought my term period was 10 year also.  I better look into this...

Ok, checked in with my loan company and when I consolidated the terms were changed to 240 payments, 20 years.  Still at the 1.875 rate, it's still worth keeping, right?  I did lose one benefit in the most recent years--my income is too high for me to claim student loan interest paid.
« Last Edit: November 02, 2018, 05:23:26 PM by dodojojo »

Brother Esau

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Re: Pay off very low interest student loans early?
« Reply #8 on: November 02, 2018, 05:19:59 PM »
Keep the loan at that rate.

dodojojo

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Re: Pay off very low interest student loans early?
« Reply #9 on: November 02, 2018, 05:29:44 PM »
Wow, that is an incredibly good rate. Bonds or even some savings accounts would likely be a better investment that paying extra on that. See the investment order post.

Second for checking out investment order!

That rate is so low! A no-minimum savings account at Ally is 1.90%. Can't think of a good reason to pay off early.

Woah, I obviously haven't been keeping up.  I've been with Capital One forever and I'm at .75%.

Classical_Liberal

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Re: Pay off very low interest student loans early?
« Reply #10 on: November 03, 2018, 02:23:29 AM »
For a dissenting opinion... 12k isn't enough to make a difference for low rate leverage.  I'd pay it off.  Student loans are a sticky debt that can't be discharged in bankruptcy in emergencies.  The Fed's will garnish your social security 40 years later to get them paid, yikes!! 

On a separate note, Capital One's MM actually pays 1.85 APY at the moment, you just need a 10K balance.  One year CD's are competitive as well, around 2.5