should I pay off my student loans in full before intrest kicks in?

General financials:

I can afford to pay them off in full and have plenty left over for general life needs

The interest rates on them should be 4.53% according to their chart of when it was awarded.

If I do hold onto the money and pay off monthly I can put everything into a CD but I’ll still be losing .03% if I lock in the student loan money maybe I’ll beat but .07-.43% so not a ton of upside unless there’s sudden political will to actually follow through on student loan forgiveness.

Is there anything else I’m missing when considering this? I am leaning towards just pay off as I’ve been planning for this, but I want to make sure there isn’t something else to do.

blueskycorporation,

With a 0.03% difference, it doesn’t make a lot of difference. That being said, it depends on your financial situation. Some things to consider:

  • Repaying the loan early or investing the money into cds such that the cash flow from the cds matches the cash flow to the loan repayment is almost equivalent. In the corporate world, this would probably even qualify for accounting defeasance, which would allow you to keep the debt but removing it from your balance sheet. This is just an illustration of how accounting wise, both situations are pretty equivalent
  • keeping the loan outstanding and the cash invested vs repaying early gives you option. If you do the former, you always have the options to do the latter later. Whereas if you repay the loan early, it is a definitive action. So there is an advantage to not repay early. You can always wait and see. If you invested in bonds instead of CDs, you could even potentially benefit from movements in interest rates.
  • your return on investments might be 5% at your current level of assets, but your marginal return might be different. As an example, someone with only 10k to invest might not be able to bear much risk and only be limited to bonds. 100k and it opens the door to a diversified portfolio of stocks and bonds. At 1M they are qualified investors and have access to more options. So even though your whole portfolio might give 5% return now, every dollar you add on top opens the door for potentially more returns. If you use money to repay loans, you are shaving off the dollars that would have brought you the highest expected marginal return.
Chapo_is_Red,

Depends on whether sleepy Joe actually implemented the much more generous income based repayment plan

Maybe,

I don’t think there’s a bad decision.

A CD isn’t the only option. A 2-year treasury note pays 4.82% right now. You could do that and then reevaluate in 2 years. Having more accessible/liquid assets leads to more flexibility if you need money for an emergency or even a move or downpayment or whatever.

There’s also the very remote possibility for loan forgiveness.

I don’t think the interest spread is large enough for that to be the “slam dunk” answer though. If you’re not great with money or just don’t want to deal with another administrative burden I’d lean towards just being done with the loans.

yenahmik,

I think at that rate there isn’t a bad decision. Pay it off for the peace of mind. Or, if you have a higher risk tolerance, invest it in the market, since long term it would likely return more than 4.5% (historically speaking, of course). I think keeping the money to keep it in a money market account or CD is probably not worth it, though.

magiccupcake,

I’d be in favor of this approach too.

Another thing is that if for whatever reason you need that money you still have acess to it, but if you pay off your loans, you can’t easily get it back.

bytor9,

I think you’re okay either way but personally if I have an emergency fund and no higher interest debt, I’m paying that off for sure. Even if I lost a couple bucks, worth it for peace of mind.

Would be different if the debt was a mortgage at 3%, which many people do have right now.

Edit: One note for folks doing similar math, don’t forget interest and yield on bonds are taxed as ordinary income (20~30% in the US).

Art3sian,
@Art3sian@lemmy.world avatar

100% pay it off. Not only are you eliminating all interest, but an unpaid loan sits as a liability on your credit ledger which affects future borrowing.

potpotato,

Generally, student loans dont impact mortgage lending, but if they need other loans I suppose..

Glaive0,

I’m watching this now because we’re about to do the same in October or whenever that turns back on. We’re even having to return the Pell grant credit from being that close to paying everything off.

I just want to be done with it all, there’s no political will for it. The excuses are constant. The Supreme Court majority would call an Apple a banana if it meant they could deliver something miserable to their very politically defined opponents by legislating from the bench.

I think the only thing going through is if you’ve been paying for more than 20 years. It’ll be a LONG time before that happens for us, so we just want to send it all back.

I’m curious if anyone else knows more though.

bytor9,

Interesting you say SCOTUS legislating from the bench in this case. Deferment and forgiveness were both “legislated” from the White House. Seems the only party not legislating here is the legislature.

hypelightfly,

No, they weren't. Congress passed laws giving the executive that authority.

It was in fact legislated by the legislature.

bytor9,

I think it’s disingenuous to make it sound that simple.

If Congress supported forgiveness, we wouldn’t be having this discussion. Whether they had implicitly given that power to the executive with previous legislation is controversial, thus the SCOTUS case. But it’s not like SCOTUS was the first to question it. Pelosi and even Biden had previously stated it was not an executive power.

Again, it could be easily settled now by the legislature if they supported it, but they do not.

hypelightfly,

I think it's disingenuous to say it's not that simple. Because it is.

Glaive0,

Under powers that were explicitly granted to the White House by the legislature. You can doubt their validity all you want, but they’re there—including the right of the secretary to “waive or modify”—WAIVE or modify—“the existing provisions.” It’s quoted in the majority opinion then ignored by the ruling.

That is the apple being legislated into a banana.

bytor9,

I guess you must know more about law than Biden did 2 years ago when he publically talked about probably not having the authority: politico.com/…/student-loan-forgiveness-biden-469…

It’s nowhere near that straightforward. And for a third time, if it was the intent of Congress, now would be the time for them to clarify that with direct legislation. But they are not.

Ret2libsanity,

The government is never going to take responsibility for pushing predatory loans onto young kids. The last hope was the Biden forgiveness plan.

Pay it off.

judgeholden,

why go through all that just to make less than a tenth of a percent? what is that, like a couple dollars? may as well pay it off for peace of mind, unless you think someone’s going to cancel student loan debt or something.

qwamqwamqwam,

The absolutely optimal move is probably to keep 5 or so k of debt around just to hedge the forgiveness play. But just paying it all off is also a great investment. You’re not likely to find another way of using your money with a >4% ROI. If the hassle of keeping another set of bills current is going to significantly add stress to your life I would pay it off. Really, though, there’s no way to lose here.

giantofthenorth,

I do still lose by having to over pay the bloodsuckers either way 👉😎👉

kakes,

The [S&P 500] index has returned a historic annualized average return of around 11.88% since its 1957 inception through the end of 2021.
investopedia.com/…/what-average-annual-return-sp-…

specialdealer,

Adjust for inflation and taxes and the margin thins considerably

kakes,

True true.

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