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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Coach78 on February 12, 2015, 04:33:30 PM

Title: Student loan at 1.6%
Post by: Coach78 on February 12, 2015, 04:33:30 PM: Hello Mustaches,

I'm about to knock out our high-interest debt, leaving only a $19,000 student loan with a 1.62% interest rate. For awhile I was hung ho to pay that off next, but I'm starting to think that perhaps mathematically it would make sense to maximize tax advantaged savings first. We've been contributing just enough to meet the match, so as to have the biggest shovel possible for our high-interest debt. Besides the SL, there's no other debt or payments. We rent and have no interest in owning a home. What would you do?

Thanks!
Title: Re: Student loan at 1.6%
Post by: TN_Steve on February 12, 2015, 04:44:56 PM: 1.6%? Unless it is a private loan from a family member who needs/wants the money back, fill up the tax advantaged accounts first.
Title: Re: Student loan at 1.6%
Post by: Bracken_Joy on February 12, 2015, 05:38:29 PM: Quote from: TN_Steve on February 12, 2015, 04:44:56 PM
1.6%? Unless it is a private loan from a family member who needs/wants the money back, fill up the tax advantaged accounts first.

+1

Advice given in another thread: if it's 4% and under, invest instead and pay minimum. 6%+ pay it off immediately. Between 4-6% depends on your stomach for risk and your goals and timelines.
Title: Re: Student loan at 1.6%
Post by: Investing4Freedom on February 12, 2015, 05:55:52 PM: Damn, I thought my 2.33% was good. Minimum payments!
Title: Re: Student loan at 1.6%
Post by: 27y/oTennesseeRetiree on February 12, 2015, 06:27:01 PM: You can write $2500 off a year in student loan interest in the US. So... If it offsets taxes on earned income then your effective rate is lower than 1.6%.

On $19,000 you are paying about $300 in interest a year. At a 25% tax bracket you are saving $75 in taxes. That drops your effective rate to 225/19000 = 1.19%.

That being said... Unless there is a huge peace of mind from having it gone or it is one of the other reasons above... I would make minimum payments.

The average inflation for 2014 was 1.6%. Meaning your effective interest rate is lower than inflation which is awesome!
Title: Re: Student loan at 1.6%
Post by: Coach78 on February 12, 2015, 06:55:53 PM: Whoa, this is all great info and very helpful! Although I'm aware of the deduction of student loan interest, I hadn't really thought about how it lowers my effective rate.

I consolidated these loans after grad school in 2003. I had no idea that 1.62 was a great interest rate. (Liberal arts, hah.) But I sure do appreciate it now! I'll definitely follow y'all's advice. 👍

Thanks so much!!
Title: Re: Student loan at 1.6%
Post by: johnny847 on February 12, 2015, 07:01:08 PM: Also factor in that inflation is sitting somewhere around 1.6% (average of last year), and that's a real interest rate of about zero.
Title: Re: Student loan at 1.6%
Post by: DK on February 12, 2015, 07:38:46 PM: keep that loan as long as you can. invest with your money instead. mine are under 2% as well. taking my time paying'm off....