Should I Pay A Low Interest Student Loan Off Now Or Is It To Better To Use That Money For Something Else?
I am 32 year old with good credit and a low interest student loan of $2,500. I don’t carry any balance on my cards and I have about 20,000 worth of savings and portfolio. My monthly payment is less than 75 dollars so it isn’t a burden, but I wonder what would be the smartest thing financially to do.
Lauren F said
am February 6 2010 @ 8:44 pm
I would first recommend you maximize all contributions you can make to a retirement plan (401k or IRA or Roth IRA). Then, make sure you have about 6 months worth of basic living expenses in a savings account for a rainy day emergency fund. Then, if you are married or have a child, make sure you have sufficient life insurance on you (and disability insurance for yourself in case you get hurt or sick).
Once you have taken care of all of these things, if you still have the spare cash, then I would pay it off. It is in theory possible that you could earn a little more investing this than you would spend to pay it down over time, but for such a small student loan, getting rid of it would add simplicity to your life and show you have no debt in the event you need to get debt in the future.
So, just make sure you have all the safety net stuff in place (emergency savings, disability and life insurance, and retirement savings fully funded), and if that’s all ok, pay off the student loan.
CarolO said
am February 6 2010 @ 9:44 pm
There would really be only 2 reasons to keep the loan rather than pay it off:
(1) You have bad or no credit history and this is an opportunity to show that you can handle the responsibility of paying back a loan in a timely manner. Not your problem.
(2) You can make more money by leaving the funds in a savings account than you are paying them in interest.
For example: Let’s say you left the $2,500 in a money market fund making 10% ($250/year) interest and you’re paying only 5% ($125/year) interest on the loan. Ignoring tax considerations, you would be earning 5% more by keeping the funds in your bank than you would be paying the lender, so you would leave as much as possible in the bank and pay off the loan as slowly as possible.
However, chances are you can’t find any no-risk investment paying more interest than you are paying the lender. So, if you earn 2% interest ($50/year) on money in your bank, but are paying 5% ($125/year) to the lender, you are losing money by keeping the loan.
I’d pay off the loan because I don’t foresee interest rates moving significantly higher before the loan is paid off.
Michael M said
am February 7 2010 @ 2:08 am
I would continue to do the payments on ths as it is such a small amount. I would call my loan provider and talk to them. If you put it on auto pay with your credit card, they may shave a 1/4 point off the loan. I used to do collections. If the first person you talk to, is clueless, ask to talk to a supervisor.
THen make sure you do it with a credit card that has rewards. I have a Citi Master CArd that gives me points and when I buy a new car, they will give me cash back. My ex wife had one with an airline for frequent flyer miles. So by doing that you will get monthly bonus points …
That is the best of both worlds.
One other tip. It is early in the month. IN collections and loan reconcilation, the reps get bonus each month on problem solving. I would call now, or at the tail end of Dec. to explore this concept. When a rep is striving for a bonus, the first days of the month and final days are very importatn. It could be that your call will help a represetative make bonus. So the 1/4 point I mentioned could be there and maybe two free months of payment. You will never know unless you try.
roderick said
am February 7 2010 @ 2:20 am
Let’s say the interest rate is 3%. Then paying the loan off now gets you a 3% return, with no risk. That’s what – $75 or so? A little less, because you’re paying the balance down.
Suppose you could find an insured savings account (again, no risk) at 3.5%. Then you get a whopping $12.50 a year of profit before taxes. This could be less than you save by buying something on sale or with a coupon.
If the loan interest is higher, or the savings account interest lower, that only strengthens the case for paying off now.
I’d pay off.now. It might even bump up your already good credit score a bit.
Mark said
am February 7 2010 @ 8:32 am
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STEVEN F said
am February 7 2010 @ 10:28 am
You have $20,000 in savings and are keeping a $2,500 loan like a PET. Your NEXT payment should be $2,600. Just the HASSLE of making a payment of $75.00 for the next 3 YEARS should be enough motivation to write the check TONIGHT.
Wordpress Autoblog Plugin said
am February 7 2010 @ 12:40 pm
the loan amount is so small I would consider paying it off. Or another option in the middle is increase your payment to $200 or $300 a month. then you will have it paid off in about a year.
Computer Guy said
am February 7 2010 @ 1:10 pm
I would advise you to pay it off. Who needs debt? Wish I had a little less.
Grandpa