Pay off student loans immediately or wait?
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posted by barman:
The power of compound interest is precisely a reason not to pay them off -- student loans aren't amortised the way that eg. a mortgage is, and you're only paying simple interest on the balance of the loan, not interest on the interest as one would with a credit card. On the flip side, money being made off of the funds being used productively can be compounded via reinvestment. Not a lot of people fresh out of college are going to get 6% credit on anything other than student loans; it makes economic sense over the long term to pay it gradually out of higher-paying returns. If it were a credit card or other higher-interest proprositon I'd say pay it off, but it just doesn't make sense to except in the context of the "all debt/interest is bad" mindset.
Frank
The power of compound interest is precisely a reason not to pay them off -- student loans aren't amortised the way that eg. a mortgage is, and you're only paying simple interest on the balance of the loan, not interest on the interest as one would with a credit card. On the flip side, money being made off of the funds being used productively can be compounded via reinvestment. Not a lot of people fresh out of college are going to get 6% credit on anything other than student loans; it makes economic sense over the long term to pay it gradually out of higher-paying returns. If it were a credit card or other higher-interest proprositon I'd say pay it off, but it just doesn't make sense to except in the context of the "all debt/interest is bad" mindset.
Frank
Lucky you.
I asked for a $160,000 loan for college and they told me that if they took $160,000 from my bank account and froze it for 4 years they'd give me a loan.
I kindly told the bank to go fuck themselves and now I'm paying $45,000/yr tuition out of pocket.
Fuck the credit crunch.
I asked for a $160,000 loan for college and they told me that if they took $160,000 from my bank account and froze it for 4 years they'd give me a loan.
I kindly told the bank to go fuck themselves and now I'm paying $45,000/yr tuition out of pocket.
Fuck the credit crunch.
truest thing i heard this year ... it's fuckin bullshit how much interest they are charging graduates, and i'm lucky, have a job paying mid XX,XXX per year, and only have 27k in debt ~ 1.5yrs of school worth
i feel bad for the ppl that have to pay for full schooling ~100k and are fresh out making 35-40k a year + living expenses ... thats FUCKED
If you can use that money to make more than what that interest costs you, then invest. If not, pay em off!
I'm in the same boat but I have 50k in student loans. May not be the best advice but I'm paying off as little as possible of my student loans now so that I can invest in my business. $1 today is worth more than $1 ten years from now.
^^^^ he's got it.
Personally I believe you should be able to get at least 10% in a broad index fund for the next 3 years. But the decision is different at 6-7% like you are paying vs 2-3% like what people had earlier in the 2000's.
Do you have emergency cash? Like 6 months worth? you want to build that up to so you don't end up trading your student loan debt for cc debt.
this is kind of my mind set. I have more money in the bank right now than i ever had before, and i'd hate to watch it just go away by paying off huge chunks of student debt ...
i just made a spreadsheet in excel that spans 10yrs, assuming i would bank 15k every six months and then that 15k-minimum student payments this is what i got:
If i had no student debt, i would have 312,000 banked after 120 months
If i had paid monthly minimum payments i would have 310,000 banked after 120 months
In the long run i would have paid 38K for a 27K loan, but a variance of 2g's after 10 yrs is like nothing
i feel like i calculated that wrong b/c those numbers are too good to be true
its always smart to hop into a 401k as soon as possible but at your age i'd pay off most of your debt. wait until you get a company match before you consider paying off debt vs 401k. ive found having awesome credit (i.e. paying down your debt as fast as you can) will help out a lot with insurance, buying a car/house, even job hunting.
i always tell my recent grad friends to wait until they are 25 before investing into their 401k - not only will you avoid any double dips, but you'll worry less about debt.
i don't know about that advice for the 401k. Every where i read it said investing early goes a long way, especially when you have no other expenses. Like 10K in my first 2 years can turn into like 50K when i retire (don't quote me)
as far as student debt, i'd consider that a "good" debt. besides that, i mean i spend over 30K a year on my credit cards usually, and pay those bitches off immediately
Take a shit in a bag and mail it to the accounting department. I've met very few people (my age) who have had a good ROI on their education.
My student loan is $22k and doesn't accrue interest, it does get inflation adjusted though which is like 2.7% or something. A bank account here pays about 6% interest, so I make more money keeping the cash in a bank account than paying off the student loan.
i have 27k in student loans ... fuckin sweet right? my interest rate is 6.8% - straight from the govt, also sweet
I have 10yrs to pay them off, if i make minimum payments that whole time I'm out an extra 10k in 10 years from interest
to those of you that have/had student loans, what do you do? let them ride or try to pay them off immediately?
I could eliminate a nice chunk of that 27k and not go broke, but I'd have to cut into my savings which i really don't like doing..
on a side note i have a 401k that I'm seeing 8-10% returns on, no idea if that is relevant though since i can't touch that money until ism dead or retired, whichever comes first
Hey I suggest don't pay em off. You'll generate more money in that 401k than saving money for paying the $27 student loan. You can just pay double the amount every month and cut that 10k interest in half and safe more. Like If you are paying $225 a month then pay $500 monthly. You'll save approximately 5k in the long run from interest and will not cut your savings interest because if you have that amount of money then $500 can easily be earned in 1 month right? If not then whatever you like just don't pay them in bulks it will cut your savings... What if an emergency comes? then you have to be prepared for it...
That's just for me or just ask Dave Ramsey
It's not US or US dollar though, big part of the interest rate is the currency and inflation level. I remember when USSR just broke apart, the interest was in XXX%, however, even with that rate you were losing a lot more to inflation which was well over 2500% in 1992.
As for my .02, just as the majority here, pay it off if you have extra money sitting around that don't make more % than your interest rate.
Bottom Line OP: Every such investment question is different and the only good answer takes all of your financial history and options into consideration:
A.K.A., Get a Pro Financial Advisor to do all that work for you and make the right decision. My wife was one years ago and man, you wouldn't believe all the crap they take into consideration before reaching a conclusion... It's really deep shit.
A.K.A., Get a Pro Financial Advisor to do all that work for you and make the right decision. My wife was one years ago and man, you wouldn't believe all the crap they take into consideration before reaching a conclusion... It's really deep shit.