Student loan - Help me make a decision

[Comar]

Here is the deal.

I have a student loan of about 21k. It has an interest rate of only 1%. So no big deal right? Except this loan is “inflation-indexed” meaning it has an extra interest rate that keeps it up with inflation. Inflation rate in my country has been 4,7% on average for the past 18 years and even worse in the more distant past. So in reality you could say my student loan has an interest rate of 1%+4,7%. In reality, my student loan has an interest rate of 5,7% given mean inflation rate for the past 18 years. I don’t see this changing any time soon.

I have yearly payments of about 2k dollars. Killing the loan would reduce my burn rate and give me peace of mind to focus on index funds. Also I will have a refund of 7% if I finish the whole loan in one payment, which would give me around 1500 in cash that I can put into an index.

I have three forms of money saved. I have 17k in a vanguard s&p 500 index fund. I have 10k in cash. And then I have around 23k in a mutual fund. That’s right, you see just recently my country was allowed to invest in foreign funds and domestic mutual funds were pretty much my only way of investing in companies. The fund has been extremely volatile due to it’s small size and number of companies, it hasn’t kept up with the global market and has delivered negative numbers for the past 3-4 years.

In the past years I have become increasingly unattracted to mutual funds and I want to focus purely on large foreign indexed funds, like the vanguard s&p500.

What do you suggest? Should I keep things as they are? Should I sell the mutual fund and kill the student loan? Should I sell the mutual and put the money into an index? Will the s&p500 beat a 5,7% rate for the next years? I know nobody can answer that but maybe you understand why I wonder about killing the student loan.

Thank you for all your input and helping me make a rational decision.

[actonyourown]

There are some factors to consider.

• What would you pay in taxes to sell out of the mutual fund?
• How volatile is your country's economy? (if you only have a few companies in a domestic mutual fund, I would assume it is small?)

Personally, pending answers to those questions, I would get out of the mutual fund and use it to pay off the debt, especially if it is costing you money to hold it and you can guarantee yourself 5.7% return on paying the loan.  It will reduce your monthly expenses and your $10K in cash will go further should something go wrong.

[Radagast]

I can go either way on this, but I too lean towards "kill the loan." A big argument for keeping most loans is that they go down with inflation, but yours does not.

Be careful looking at the recent past for the S&P500 vs. your country. While I am sure diversifying away is a great idea, currencies and national stock indices go in and out of fashion all the time, and there is no telling when your currency might suddenly stabilize while the dollar and S&P500 go through a period of weakness, making a sharp reverse of what you have been expecting. I think of a plan now so you can follow it as situations change, without chasing after the latest fad but never quite catching it. Now might be a better time to be buying in your own country.

[Comar]

There are some factors to consider.

• What would you pay in taxes to sell out of the mutual fund?
• How volatile is your country's economy? (if you only have a few companies in a domestic mutual fund, I would assume it is small?)

Personally, pending answers to those questions, I would get out of the mutual fund and use it to pay off the debt, especially if it is costing you money to hold it and you can guarantee yourself 5.7% return on paying the loan.  It will reduce your monthly expenses and your $10K in cash will go further should something go wrong.

I can go either way on this, but I too lean towards "kill the loan." A big argument for keeping most loans is that they go down with inflation, but yours does not.

Be careful looking at the recent past for the S&P500 vs. your country. While I am sure diversifying away is a great idea, currencies and national stock indices go in and out of fashion all the time, and there is no telling when your currency might suddenly stabilize while the dollar and S&P500 go through a period of weakness, making a sharp reverse of what you have been expecting. I think of a plan now so you can follow it as situations change, without chasing after the latest fad but never quite catching it. Now might be a better time to be buying in your own country.

Thank you for your insights. It actually came as a surprise to me that you told me to kill the loan because most here as so hardcore vtsax. Which I'm also but I may be leaning more towards finishing the loan. If I sell the mutual fund I pay a 22% capital gain tax. And the country has been pretty volatile because of our currency and then there may be strikes and increased inflation on the horizon which may hit the companies hard. But Radagast makes a fair point on diversification. I just think I would prefer a domestic index fund. I don't like wise asses having their fingers in all this money especially given their poor record.

Thank you again for your insights.