Author Topic: Student Loan or Save?  (Read 3347 times)

milla

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Student Loan or Save?
« on: May 17, 2013, 10:53:29 PM »
I haven't posted here before, but I have a quick question for another perspective:

If you had a 5k student loan at 4.25% and this was your only debt besides a mortgage, would you prioritize the payoff over investments?

Abe

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Re: Student Loan or Save?
« Reply #1 on: May 18, 2013, 12:09:54 AM »
I'd say it depends on how that $5000 compares to your emergency savings.  If you have low emergency savings, I would be more concerned about paying off all possible debts to reduce loss from interest payments. That's because I would consider the risk to principal needed to obtain an investment return comparable to your interest rate too high in the short term, when I may need that principal for emergencies. 

Conversely, if you have quite a bit of savings, you may be better able to weather losses on investments and in the long term come out (slightly) ahead.  Then it becomes a question of whether you are alright with still having a debt or not.

milla

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Re: Student Loan or Save?
« Reply #2 on: May 18, 2013, 02:20:15 PM »
We keep 5k liquid and about 10k in a Roth IRA. Everything else we have is either in 401k, T IRA or tied up in equity in the house. We do not have a big stash at this point. We are bouncing back from unemployment so our total net worth is about one year of income.

DavidR

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Re: Student Loan or Save?
« Reply #3 on: May 18, 2013, 05:02:32 PM »
I think your low level of liquidity is the driving issue here, and so I would not recommend paying off your student loan.  If you have not maxed out your 401k contribution and are comfortable borrowing money from the plan if you need it, you could use the money for an additional contribution.

If you are eligible for a home equity loan and can get one with little or no closing costs I would recommend you do that, and then you have that money as a reserve so  you would not have to borrow from the 401k or take money out of the IRA's with the attendant tax and penalties.

Borrowing from the 401k or using a home equity loan is FOR  EMERGENCY ONLY.

Another Reader

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Re: Student Loan or Save?
« Reply #4 on: May 18, 2013, 06:04:49 PM »
A recent bout of unemployment should reinforce the idea that you need an emergency fund.  I would keep the liquid reserves you currently have.  Then I would look to knock out the remaining student loan, an obligation you don't need should your current job disappear.  Once that's done, I would start investing.  Depending on your employment risk, I might divert some of the investing money to bulking up the savings.

Getting a HELOC in place can be a source of emergency funds and therefore an additional safety net.  Remember, the bank can cut the HELOC off for good or frivolous reasons entirely at their discretion.  Banks have a history of doing exactly that.

milla

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Re: Student Loan or Save?
« Reply #5 on: May 18, 2013, 07:31:01 PM »
We never even used our emergency fund while we were unemployed. We had unemployment for a while and we supplemented with short term gigs, freelance work and many other sources of income. 5k is two months of our full budget and we've always considered the Roth IRA our backup E fund should that not be enough. We were actually not planning on expanding the emergency fund right now but we are also not planning to use it to pay off the loan. It's just going to sit there for now.

HELOCs and 401k loans are not really something we've ever thought about and frankly we're not too keen on either one. Interesting idea, though...