Author Topic: Student Loans in deferment, should I pay them off sooner or later?  (Read 1226 times)

mcj

  • 5 O'Clock Shadow
  • *
  • Posts: 32
I currently have student loans in deferment, as in no payment & no interest deferment, and the outstanding balance of the loans is less than 10% of my NW (if that makes sense, trying to give a sense of scale here). They begin bearing interest at ~4% around 1.5 or 2 years from now depending.

I am going back and forth in my head about how I should pay them off. I theoretically could sell investments and pay them in full right now, or I could pay them in full in payments during the no interest period, but at 4% over 10 years and deductible interest, I wonder whether I should even bother and just pay the minimums over 10 years.

Is anyone willing to share their experience or advice on this sort of student loan situation?

Jack

  • Magnum Stache
  • ******
  • Posts: 4734
  • Location: Atlanta, GA
Re: Student Loans in deferment, should I pay them off sooner or later?
« Reply #1 on: April 13, 2016, 12:07:10 PM »
I'd pay the minimums and invest the difference.

onlykelsey

  • Handlebar Stache
  • *****
  • Posts: 2172
Re: Student Loans in deferment, should I pay them off sooner or later?
« Reply #2 on: April 13, 2016, 12:10:10 PM »
4% is about the threshold for me between "I can do better in the market" and "guaranteed return, sweet!"

A few questions you should think about:
1. How long will the interest be deductible for?  It phases out as you earn more money (and could theoretically be phased out at any time, I suppose).
2. Are the rates fixed?  If not, I'd definitely lean towards paying them off as I think most people agree rates will rise soon-ish.
3. What is your expected return in the market?  Obviously no one has a glass ball, and I lean towards lowballing the market (which makes me pay off debt more often), but what's your number?
4. Will either option have an effect on your credit score? Does it matter?
5. Does your debt to income ratio matter in the near future (ie for a mortgage or business loan)?

Slow&Steady

  • Pencil Stache
  • ****
  • Posts: 719
  • Location: Midwest
Re: Student Loans in deferment, should I pay them off sooner or later?
« Reply #3 on: April 13, 2016, 02:13:19 PM »
My student loans are in deferment for the next 1.5 years while I am in grad school and I am working to have them paid off before I finish with school.  The big difference is that they are 7.5% interest when not in deferment.  On top of the 7.5% interest I hate having the debt so I know with out any doubt that I would be happier having them paid off than if I made a couple extra dollars because I invested that money instead of paying them early.

I have you done the math:
What would the total cost (P&I) be on the loans if you paid the min for 10 years and invested the extra? What would you make on the investment assuming X% return?  What about if you paid them off while at 0% interest and then routed the payment to investments, what would your ROI be assuming the same return over those 10 years? What is the actual tax benefit to you once they come out of deferment? 

Do any of these numbers sway your decision?