Should I slow down paying a student loan balance at 2.7%?

[JRstasher88]

Hi all!

I thought I would take this question to the Mustachian boards, as it's something I've been musing over the last month or two. As a young avid reader of the blog, I would appreciate some wise input!

About me:

- 24 year old male, 4-year college degree
- Projected 2013 income is about 25k (I work two jobs, neither of which are well-paying but one of which has potential).
- Student Loan: 6k at 2.7% interest, currently paying monthly minimum of $50.
- I have about 12k in mutual funds and 4k in a Roth IRA I just started (looking to top this off for 2012).

Up until recently I had been paying 4X the minimum on my student loans, and used my savings from last year's job to knock off my other student loan of 8k completely.

Psychologically, it'd be nice to be debt free. But I'm starting to wonder if I should just keep plugging along at $50/month on the loan and focus the surplus on the Roth IRA and other taxable investments where I could likely beat 2.7%. Only the other hand, with just 6k left, I could probably wipe out the loan by mid-summer if I throw every extra buck at it. I live extremely frugally, and have kept my monthly expenses (including rent) to about $850.

Any suggestions or thoughts?

[TN_Steve]

I'd not rush to pay the loans off.  Given that interest rate, you should do better long-term by putting the money into Roth account, and probably into taxable accounts, given your tax bracket.  If those mutual funds are equity holdings, putting an emergency fund together would be nice as well. 

OTOH (and there is always another hand), would you sleep better at night with no debt?  Although it is "only" $162 the first remaining year in interest, that is 2 and 1/2 days of your gross income, which may be noticeable.  If it feels better, pay it down.

You'll see a ton of threads on this topic, and in in the end it comes down to your comfort level.

[frugal_engineer]

2.7% is awfully low.  If there is no risk of that rate increasing in the future when general interest rates pick up, you're better off putting that money to work in your mutual funds or IRA.  Like TN_Steve said it might feel nice to be debt free, but i'd imagine it would feel worse to be losing the 3-5% opportunity cost of paying the loans first (~7% return - 2.7% interest).

[JRstasher88]

Thanks for the responses. What you've both said confirms the way I've been leaning - in the long run I will make more $$$ by putting the extra cash to work in investments. I am almost positive the 2.7% is fixed, but will closely monitor it. With inflation being 2-3% anyways, it seems to make sense to keep filling up the Roth IRA and then adding to mutual funds.

[arebelspy]

I pay the minimums, even though I have over 6-figures liquid, and have about 1900 in student loans.  I was quite sad when my wife's paid off last year.

I can definitely earn more than the 3.7% I'm paying by investing that 1900 rather than paying it off.

YMMV, and some people prefer no debt.  It depends what your goals are.

[Prob8]

It will probably work out better if you invested the money.  However, I hate being in debt and I would pay it off immediately.  After that, I would be extra focused on putting that money back in the market as quickly as possible.  Being debt free is great feeling.  I would certainly get more enjoyment and peace of mind from paying the debt than I would earning a high return on $6k.  If the debt were significantly higher, I may have a different opinion.

[Jamesqf]

If you invest your money in something reasonable, like an index fund, then even if that 2.7% interest rate does increase significantly, there's a good chance that you could sell some of your appreciated investment and pay it off.

Another minor point, but are you in a situation where the interest on your student loan is tax-deductible?  That could lower the real interest even further.

[Left]

Something that hasn't been brought up is that keeping the student loan debt actually helps you in terms of building credit, if you pay off the payments on time each month. Since a lot of former students haven't had time to build credit yet.

You know, if you wanted another reason to keep it and all

[TN_Steve]

Something that hasn't been brought up is that keeping the student loan debt actually helps you in terms of building credit, if you pay off the payments on time each month. Since a lot of former students haven't had time to build credit yet.

You know, if you wanted another reason to keep it and all

eyem,

I am definitely not a credit scoring fanatic, but my understanding is that paying it off will not hurt the OP.  Rather, it just shows up for at least 7-10 years as "paid in full according to terms" [or similar verbiage].  On our credit reports (and at least on scores accessible to me at creditkarma), stuff that we paid off some years ago is still in the mix. 

That appears consistent with this two-year old equifax blog posting:  http://blog.equifax.com/credit/faq-how-long-does-information-stay-on-my-credit-report/ 

Steve

[Jaherman99]

Virtually nobody actually consistently invests the money that they are not using to pay down a loan, so that argument is usually a false one.  In practical terms, getting rid of the debt increases your cash flow and reduces your risk of running into financial trouble.  Granted, 50 bucks won't break you, but you will still be paying that $50 every month when you are in your 30's.  That's a stick in your craw for a long, long time.  This anonymous internet guy says, "pay it off"

[Zaga]

I'd say to get your Roth's filled up for both 2012 and 2013, then work toward paying off the student loan.  It really is such a small loan that you aren't making a bad decision either way I think, but I believe in paying at least some extra on loans to pay them off sooner than the term of the loan.

*this spoken by someone with almost $70K in student loans at 5%, so we can't even deduct all of the interest :-(  Plans are to start paying extra as soon as the home equity loan is gone this summer, enough to get it paid off by our 10th wedding anniversary in 4 more years.  We could pay it off faster, but investing is very important to both of us as well.

[grantmeaname]

Virtually nobody actually consistently invests the money that they are not using to pay down a loan, so that argument is usually a false one.

If you don't have the discipline to consistently save, you have little business on a FI forum... it may be false for many, but it's true for nearly everyone here (and everyone here who has any hope of retiring early), I'll wager.

Even setting that aside: couldn't you set up an autopayment in like two minutes and then never have to deal with it again?

[chucklesmcgee]

2.7% is hardly above inflation...I'd be very surprised if you can't average higher than those returns in anything. If you're disciplined enough, I'd say just make the minimum payments.

[Honest Abe]

I'm paying my 2.9% loans with minimums and investing as much as I can

[JRstasher88]

Thanks again for the replies! Like someone else said, it's certainly tempting to have a lot of extra money lying around when I'm supposed to be investing it. But I am committed to throwing that extra monthly cash towards my Roth IRA. I'll plan on setting up monthly automatic transfers to make it a smooth process. I like the idea of topping off the Roth for 2013 and then setting my sights on the loan for the next period of time.

[arebelspy]

Virtually nobody actually consistently invests the money that they are not using to pay down a loan, so that argument is usually a false one. 

You must be new here.

Mustachians try to spend as little as possible. All the rest is saved. Whether you route those extra funds to debt payof or savings, we're not the type to just spend extra money.  YMMV, and your statement holds true for most people. But not us, and hopefully not the OP if (s)he's embraced Mustachian lifestyle.

[slugsworth]

I think you are making the right call.

I am in the same spot. . .I've got a 0.75% student loan, larger balance, larger income, older. . . and I still sometimes have the urge to pay it off despite the math. I know it is under inflation. . .and under my 3.875% mortgage, but still having debt stinks. If I end up with some extra cash beyond my savings goals I might pay off a chunk of the student loan for the 'sleeping better' factor.

[feistygg]

I agree with hanging on to it for a minute. I have a 2.25% student loan, but I'll keep saving towards FI and pay off that loan for my 32 bday.

[anastrophe]

Mine is at just under 2%, but it's 15K, which makes me uneasy, and the minimum payment is big enough (and my income is low enough) that it makes a difference in my cash flow. Planning to pay it down to $10K and then pay the minimum.