Author Topic: Should I pay off my student loans? (Low interest edition)  (Read 4826 times)

mskyle

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Should I pay off my student loans? (Low interest edition)
« on: February 05, 2015, 03:34:55 PM »
I have around $10,000 in federal student loans. I have a $1500-$2000 surplus each month after maxing out my personal IRA and employer-provided SimpleIRA, so I could easily pay these off in the next few months. Otherwise, Iíll stash the money in my (taxable) Vanguard brokerage account (index funds, mostly). The source of my dilemma is that the loans only cost 2.0% and 3.5% interest, while my investments earn significantly more than that.

I have no other debt - I pay off my credit cards every month, and I donít have a mortgage. Iím considering buying a house in the next few years, though, and would probably not pay in all cash, so it seems a bit silly to pay off debt at 2% interest and then take on additional debt at a higher rate. And hopefully itís irrelevant, but if I die or become totally and permanently disabled before I repay them, the loans will be discharged, which I guess would be nice for my heirs and/or caretakers?

I donít think paying off the loans would be the most logical financial decision, but they just kind of weigh on me, and I really want to pay them off. Does anyone want to reassure me that it makes perfect sense to pay off these loans? Or would you rather reassure me that slow and steady wins the race and there's no need to rush to pay them off?

Iíve considered just paying off the 3.5% loan (which also has a longer repayment term - 10 more years, rather than 5 more years for the 2% loan). But Iím not sure that would be psychologically satisfying enough.

TexasStash

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Re: Should I pay off my student loans? (Low interest edition)
« Reply #1 on: February 05, 2015, 03:50:37 PM »
Someone with more experience with student loans or understanding of the financial ins and outs should probably comment, but I'm all in favor of paying off ASAP all non-mortgage debt. I think part of it is just not wanting to be beholden to anyone, part of it is that ive gamified the concept of shrinking my financial obligations to a minimum (so I'm competing wiith past Me to make my monthly expenses as low as possible).

I think the financial reasons you mentioned (investments could make higher and mortgage would be at higher rate) make sense... I just think the peace of mind of having this debt paid off, combined with the short time horizon (5 months if you get serious about it) make this a nice quick win for you to knock off an accomplishment on your financial to do list. Assuming you're going to have to pay off this debt regardless (barring death or permanent disablement), why not do it if it will only take 5 months? Plus you're clearly already putting significant money toward your FI every month with the mentioned retirement instruments.

Bracken_Joy

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Re: Should I pay off my student loans? (Low interest edition)
« Reply #2 on: February 05, 2015, 03:54:11 PM »
I have around $10,000 in federal student loans. I have a $1500-$2000 surplus each month after maxing out my personal IRA and employer-provided SimpleIRA, so I could easily pay these off in the next few months. Otherwise, Iíll stash the money in my (taxable) Vanguard brokerage account (index funds, mostly). The source of my dilemma is that the loans only cost 2.0% and 3.5% interest, while my investments earn significantly more than that.

I have no other debt - I pay off my credit cards every month, and I donít have a mortgage. Iím considering buying a house in the next few years, though, and would probably not pay in all cash, so it seems a bit silly to pay off debt at 2% interest and then take on additional debt at a higher rate. And hopefully itís irrelevant, but if I die or become totally and permanently disabled before I repay them, the loans will be discharged, which I guess would be nice for my heirs and/or caretakers?

I donít think paying off the loans would be the most logical financial decision, but they just kind of weigh on me, and I really want to pay them off. Does anyone want to reassure me that it makes perfect sense to pay off these loans? Or would you rather reassure me that slow and steady wins the race and there's no need to rush to pay them off?

Iíve considered just paying off the 3.5% loan (which also has a longer repayment term - 10 more years, rather than 5 more years for the 2% loan). But Iím not sure that would be psychologically satisfying enough.

Someone who knows more should definitely speak to this, but I have been told that I should keep at least some of my low interest loans until I get a house, since the additional credit type increases my credit score (over only having credit cards as my credit history). I don't know how true this is, and I intend to check it out more thoroughly once my higher interest school loans are paid off. Would love to get an answer on this from someone knowledgeable.

MDM

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Re: Should I pay off my student loans? (Low interest edition)
« Reply #3 on: February 05, 2015, 04:28:02 PM »
The source of my dilemma is that the loans only cost 2.0% and 3.5% interest, while my investments earn significantly more than that.

...it seems a bit silly to pay off debt at 2% interest and then take on additional debt at a higher rate.

I donít think paying off the loans would be the most logical financial decision....

From the quotes excerpted above, you can guess where this is headed: just set those loans on automatic payback, and get on with saving and investing from the net income after those loan payments are deducted.  When the loans are paid, it's like getting a raise.

Of course money can't buy happiness so if it makes you happier to be financially illogical, it won't be the worst thing in the world.

kpd905

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Re: Should I pay off my student loans? (Low interest edition)
« Reply #4 on: February 05, 2015, 05:52:22 PM »
I definitely wouldn't pay any extra on those 2% loans.  Maybe take out the 3.5% loans if you want to, even thought you'd probably be better off just putting that money in a taxable account.

Cheddar Stacker

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Re: Should I pay off my student loans? (Low interest edition)
« Reply #5 on: February 05, 2015, 08:36:19 PM »
Don't.
Do.
It.

Taxable brokerage account will exceed the loans within 6 months, and should out earn it. And you can cash it out at any point to pay them off. But you won't want to when you see how much better the investment helps vs how much the loan hurts.

Bracken_Joy

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Re: Should I pay off my student loans? (Low interest edition)
« Reply #6 on: February 05, 2015, 09:35:31 PM »
Don't.
Do.
It.

Taxable brokerage account will exceed the loans within 6 months, and should out earn it. And you can cash it out at any point to pay them off. But you won't want to when you see how much better the investment helps vs how much the loan hurts.

If you had to choose a "cut off" for loan rates that make this worthwhile, where would you put that at?

marblejane

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Re: Should I pay off my student loans? (Low interest edition)
« Reply #7 on: February 05, 2015, 09:42:53 PM »
Below 4%- don't pay off early, invest instead
Above 6% - definitely try to pay down early

Between the two? A super gray area that's really about personal preference.

Cheddar Stacker

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Re: Should I pay off my student loans? (Low interest edition)
« Reply #8 on: February 05, 2015, 09:49:56 PM »
Below 4%- don't pay off early, invest instead
Above 6% - definitely try to pay down early

Between the two? A super gray area that's really about personal preference.

+1. But there are variables. Anything less than expected inflation rates is silly to pay off. The only real reason I can think of is major monthly cash flow concerns. But even with that, if you have excess capital to pay off debts, that can be your float to cover the shortfall.

Bracken_Joy

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Re: Should I pay off my student loans? (Low interest edition)
« Reply #9 on: February 05, 2015, 09:56:59 PM »
Below 4%- don't pay off early, invest instead
Above 6% - definitely try to pay down early

Between the two? A super gray area that's really about personal preference.

Thank you! My figuring was that I wouldn't aggressively pay off my 3.86% loans, but I was unsure about my 4.66% loans. (definitely getting rid of the 5.74% as soon as possible!)

MetalCap

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Re: Should I pay off my student loans? (Low interest edition)
« Reply #10 on: February 06, 2015, 06:09:35 AM »
I have around $10,000 in federal student loans. I have a $1500-$2000 surplus each month after maxing out my personal IRA and employer-provided SimpleIRA, so I could easily pay these off in the next few months. Otherwise, Iíll stash the money in my (taxable) Vanguard brokerage account (index funds, mostly). The source of my dilemma is that the loans only cost 2.0% and 3.5% interest, while my investments earn significantly more than that.

I have no other debt - I pay off my credit cards every month, and I donít have a mortgage. Iím considering buying a house in the next few years, though, and would probably not pay in all cash, so it seems a bit silly to pay off debt at 2% interest and then take on additional debt at a higher rate. And hopefully itís irrelevant, but if I die or become totally and permanently disabled before I repay them, the loans will be discharged, which I guess would be nice for my heirs and/or caretakers?

I donít think paying off the loans would be the most logical financial decision, but they just kind of weigh on me, and I really want to pay them off. Does anyone want to reassure me that it makes perfect sense to pay off these loans? Or would you rather reassure me that slow and steady wins the race and there's no need to rush to pay them off?

Iíve considered just paying off the 3.5% loan (which also has a longer repayment term - 10 more years, rather than 5 more years for the 2% loan). But Iím not sure that would be psychologically satisfying enough.

Someone who knows more should definitely speak to this, but I have been told that I should keep at least some of my low interest loans until I get a house, since the additional credit type increases my credit score (over only having credit cards as my credit history). I don't know how true this is, and I intend to check it out more thoroughly once my higher interest school loans are paid off. Would love to get an answer on this from someone knowledgeable.

This is incorrect.  Mortgage lenders only look at past credit history to see if you paid on time.  Open loans negatively impact your possible approval amount as the mortgage company sees other debt and considers that into their pro-formas.  The least amount of debt you have the better when applying for a mortgage (This includes potential debt via credit limits).  The only good thing to have on a credit report is a credit card that has been open for a while to show you consistently maintain payments.


nereo

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Re: Should I pay off my student loans? (Low interest edition)
« Reply #11 on: February 06, 2015, 06:41:43 AM »

... I have been told that I should keep at least some of my low interest loans until I get a house, since the additional credit type increases my credit score (over only having credit cards as my credit history). ..
This is incorrect.  Mortgage lenders only look at past credit history to see if you paid on time.  Open loans negatively impact your possible approval amount as the mortgage company sees other debt and considers that into their pro-formas.  The least amount of debt you have the better when applying for a mortgage (This includes potential debt via credit limits).  The only good thing to have on a credit report is a credit card that has been open for a while to show you consistently maintain payments.
MetalCap is correct, but there's an even simpler solution here - check your credit score.  If it's north of 720 there's no reason to worry about how much your score will change by paying down debt.  Also, if you aren't taking out a loan anytime soon it's also a secondary concern. 

for the record, I agree with others that I would NOT pay down any SL lower than 4%.  keep investing and pay the minimum..  Some family members pressured me into paying down a loan at 2.2% (which later would have gone into deferrement @0% for 4 years) - biggest financial regret I've ever had.

chemgeek

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Re: Should I pay off my student loans? (Low interest edition)
« Reply #12 on: February 06, 2015, 06:55:44 AM »
If the money is genuinely going to go into another investment account then I wouldn't pay off either of them. We have the goal of buying a house and have been stashing cash into a regular savings account since we plan on starting the search in less than a year. For us, since the money was going towards a non-invested savings pile, we paid off all my loans before really focusing on the down payment ( I had one loan at 2.8, the rest were above 4% up to 6.8%). 

mskyle

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Re: Should I pay off my student loans? (Low interest edition)
« Reply #13 on: February 06, 2015, 07:55:06 AM »
All right, you guys have convinced me. It will be at least as much fun to watch this money grow in my index funds as it would be to stop paying one small, affordable autopayment a month. I think to make myself feel better about it I might just lump the payment in with my rent as "fixed costs" in my budget.

Bracken_Joy

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Re: Should I pay off my student loans? (Low interest edition)
« Reply #14 on: February 06, 2015, 08:03:13 AM »

... I have been told that I should keep at least some of my low interest loans until I get a house, since the additional credit type increases my credit score (over only having credit cards as my credit history). ..
This is incorrect.  Mortgage lenders only look at past credit history to see if you paid on time.  Open loans negatively impact your possible approval amount as the mortgage company sees other debt and considers that into their pro-formas.  The least amount of debt you have the better when applying for a mortgage (This includes potential debt via credit limits).  The only good thing to have on a credit report is a credit card that has been open for a while to show you consistently maintain payments.
MetalCap is correct, but there's an even simpler solution here - check your credit score.  If it's north of 720 there's no reason to worry about how much your score will change by paying down debt.  Also, if you aren't taking out a loan anytime soon it's also a secondary concern. 

for the record, I agree with others that I would NOT pay down any SL lower than 4%.  keep investing and pay the minimum..  Some family members pressured me into paying down a loan at 2.2% (which later would have gone into deferrement @0% for 4 years) - biggest financial regret I've ever had.

I actually feel a lot better about my monetary goals now. Thanks!

Numbers Man

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Re: Should I pay off my student loans? (Low interest edition)
« Reply #15 on: February 06, 2015, 08:57:03 AM »
I have around $10,000 in federal student loans. I have a $1500-$2000 surplus each month after maxing out my personal IRA and employer-provided SimpleIRA, so I could easily pay these off in the next few months. Otherwise, Iíll stash the money in my (taxable) Vanguard brokerage account (index funds, mostly). The source of my dilemma is that the loans only cost 2.0% and 3.5% interest, while my investments earn significantly more than that.

I have no other debt - I pay off my credit cards every month, and I donít have a mortgage. Iím considering buying a house in the next few years, though, and would probably not pay in all cash, so it seems a bit silly to pay off debt at 2% interest and then take on additional debt at a higher rate. And hopefully itís irrelevant, but if I die or become totally and permanently disabled before I repay them, the loans will be discharged, which I guess would be nice for my heirs and/or caretakers?

I donít think paying off the loans would be the most logical financial decision, but they just kind of weigh on me, and I really want to pay them off. Does anyone want to reassure me that it makes perfect sense to pay off these loans? Or would you rather reassure me that slow and steady wins the race and there's no need to rush to pay them off?

Iíve considered just paying off the 3.5% loan (which also has a longer repayment term - 10 more years, rather than 5 more years for the 2% loan). But Iím not sure that would be psychologically satisfying enough.

Loans at 2% and 3.5% sounds like an excellent contract to me. There's no need to accelerate your payments.

forummm

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Re: Should I pay off my student loans? (Low interest edition)
« Reply #16 on: February 06, 2015, 10:36:30 AM »
I have (and had) some 2% loans. Smart Me wanted to keep them, deduct the interest, and invest. Excited About Being Debt Free Me wanted to pay them off. As a treat I paid off half of them and now feel good about keeping the rest. The ones I paid, I paid off completely, so the monthly payments from those are gone.

In the end, I only owed a relatively small amount of money, so it probably doesn't matter much anyway.

rmendpara

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Re: Should I pay off my student loans? (Low interest edition)
« Reply #17 on: February 06, 2015, 10:39:19 AM »
Generally two ways to think about keeping/paying off debt.

1) Rate perspective. Compare rate you pay to what you expect to make off investments (differs based on risk tolerance, goals, time horizon, etc) as well as the rates on other debts, if any.
2) Cash flow perspective. Some people may have SL or mortgages at 2/3/4%, but their net cash flow each month is barely positive, or even in the negative, after servicing all their debts. Your "comfort" here depends on several things, some include income stability, near term liquidity needs, etc.

Two factors conflict at times, but assuming you have no other higher rate debt and your cash flow is not an issue, I don't see any problem in hanging onto them...

The only final consideration would be "happiness" or if not having those loans would reduce stress in any way. If yes, that's something to consider. If not, then keep on.