Quote:
Originally Posted by Joan.of.the.Arch
The person asking the question appears not to have taken out his/her loans yet. The current rates for students loans is not as low as assumed in calculations above. Current student loans run from about 6.8 to 8.75%. This increase went into effect in June 2006, I think. One cannot count on making investment returns equal to the higher range of this rate, a rate which the questioner is apt to encounter with private loans not backed by the federal government. Especially with people getting student loans currently, it may be advisable in the future to pay off the loans more aggressively than previous graduates needed to do.
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You are correct. When adjusted for the higher interest rate of the loan, the breakeven period will be slightly longer. I also didn't mention that early 401(k) withdrawal are subject to ordinary income tax and the 10% penalty.
Nonetheless, I still maintain that you are still better off investing in moderate to aggressive growth funds than paying off the loan early; however, if you're a cautious person I would contribute up to the employer matching and apply the rest to the loan.
The cautious person would have less debt but would also have less assets, which is what one of the posters above suggested. The only problem I have with this situation is should you become sick, disabled, relocate, return to school, or anything else that will affect your income, the cautious person would have little to no cash reserve and the opportunity cost would have been the ability to defer student loan payments to preserve cashflow.