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Learning, Sharing, and Teaching => Investor Alley => Topic started by: Log on January 30, 2021, 09:38:36 AM

Title: Student Loan Temporary 0% Interest
Post by: Log on January 30, 2021, 09:38:36 AM
With student loans not accruing any interest until at least September 30th, it seems reasonable to treat them at a slightly lower investment priority than their actual underlying interest rate. I'm expecting a windfall in the near future, are these 8 months of 0% interest enough to warrant jumping ahead to opening an IRA, and coming back to the loans once interest is accruing again? Or am I getting carried away and I should just proceed with reducing the debt as much as possible?

My highest interest loans are at 6.08%, and I could wipe that out entirely. My next highest loans are 5.05%, and the vast majority of my loans are below 4.5% interest rate.

Knowing it's fully possible the Biden administration could end up extending the 0% interest even further makes paying down student loans an even less-appealing investment, as money I would pay towards student loans might as well be wasting away in a savings account for those 8+ months in terms of returns.

Thanks for your thoughts and advice!
Title: Re: Student Loan Temporary 0% Interest
Post by: mistymoney on January 30, 2021, 11:43:52 AM
I'd say yes!

I'm trying to funnel about 500/month to my student loans during the break, but am maxing out my 401k while I do so.
Title: Re: Student Loan Temporary 0% Interest
Post by: youngwildandfree on January 31, 2021, 05:43:19 PM
I think that is a perfectly valid approach. Of course, there is no way to know if your returns will be > 0% in the next 8 months, so it's possible you won't come out ahead. Paying off the loans now will effectively save you 6.08% interest, so to really win with this strategy, you need to expect the gains to be >6.08% in the next 8 months. I like diversity, so I would probably split the difference and half toward each bucket (IRA/loans), but that would just make me feel good.

Keep in mind the intent of the interest freeze is to give folks flexibility in their budgets until the pandemic is under control. If you need this flexibility to pay for rent or groceries, or high interest loans, I would of course do that first.
Title: Re: Student Loan Temporary 0% Interest
Post by: cool7hand on February 01, 2021, 05:35:09 AM
I don't think there is a wrong way to go here. As Dave Ramsey is fond of explaining, for some people, tackling debt is more important than optimization. Do what feels right to you. Either approach is better than struthious consumerism! Congratulate yourself!
Title: Re: Student Loan Temporary 0% Interest
Post by: MustacheAndaHalf on February 01, 2021, 05:53:53 AM
You could view those loans as the rate you expect over the life of the loan.  If you have 2 years at 0%, then 8 years at 5%... that might roughly average 4%.  Would you rather invest or pay down a loan with money borrowed at 4%?

Another approach: take your previous monthly loan payments, and put as much as you can towards the 6% loan.  Just pay the minimum 0% interest payment on the 4.5% and 5% loans, and use the rest to push the 6% loan closer to being paid off.  That approach means you make the same payments, but you're paying off the most expensive loan faster.
Title: Re: Student Loan Temporary 0% Interest
Post by: Car Jack on February 01, 2021, 06:04:48 AM
You can do sort of half and half.  My son is in this boat.  Graduated last May.  Before his grace period ended and loans started, the interest got frozen with Covid and of course that's now continued until the end of September.  With the potential to have at least something forgiven, I've advised him not to pay a dime on them.  He's holding cash and adding extra towards his car loan (about 2%).  Once things settle, he'll have cash AND a taxable account from which he can draw and pay down or pay off the loan.

He doesn't know it yet, but my mom, who wants to reduce her estate because Massachusetts taxes estates on a cliff (nothing for $1M, but taxes from the first dollar if the estate is $1,000,001) and she plans to send him a birthday gift for $10k to $15k in the form of a check made out to his car loan holder. 
Title: Re: Student Loan Temporary 0% Interest
Post by: Log on February 01, 2021, 06:47:23 AM
Thanks all for your thoughts! I think I will focus on the IRA in the short-term, but will leave back enough in my savings account to make a big payment on that loan in September if there hasn't been any forgiveness by then.
Title: Re: Student Loan Temporary 0% Interest
Post by: ChpBstrd on February 01, 2021, 10:29:03 AM
Depends what you're investing in. GME stock at the peak, or a portfolio of low volatility preferred stocks yielding 5%?