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I read on another forum how a girl says she is not in a hurry to pay off her student loan. She said instead of making huge payments in a hurry to pay it off, she'd rather make minimum payments and use her other income to learn how to invest (stocks, bonds, etc). She also says her interest is not so high that she doesn't think it's a big deal to have debt for ten years if she can also have some good investments after 10 years too. Anyone heard of this? What do you think about this logic? I would think that any form of high debt should be avoided.
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Heard of keeping low rate long-term debt in favor of investing extra money? Oh yes, I have heard of it.
The key with this strategy is to not fritter away extra money, but to actually go ahead and invest it. Will a person come out ahead with this strategy? Possibly yes, possibly no.
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I am not in any rush to pay off my student loan. My interest rate is 1.88%, and I am getting a far higher rate of return from my 401K than that. As of now, they won't be paid off until 2028, so I'll probably throw a little extra at it if my 401K and Roth IRAs (which we don't even have right now) are maxed out, but it won't be a huge priority for me. It would be great if I had it paid off before my kids start college, so 2026 Just on principle alone! I'd be slightly depressed to still be paying for my college when they're in it!
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At 1.88%, I would take forever to pay that off. If inflation exceeds 1.88% (and it has and will continue to do so), then you are actually making money every year by being in debt. If inflation kick into high gear at some point in the future, you are even further ahead. This is independent of whether you are making more ROS in other investments. Cost of money is a big deal and can be a powerful tool. Or a huge burden. In your case, @ 1.88%, it is a positive.Originally posted by frugalredhead View PostI am not in any rush to pay off my student loan. My interest rate is 1.88%, and I am getting a far higher rate of return from my 401K than that. As of now, they won't be paid off until 2028, so I'll probably throw a little extra at it if my 401K and Roth IRAs (which we don't even have right now) are maxed out, but it won't be a huge priority for me. It would be great if I had it paid off before my kids start college, so 2026 Just on principle alone! I'd be slightly depressed to still be paying for my college when they're in it!
BTW, where can I get a student loan for 1.88%?
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Originally posted by tomhole View Post
You would have had to graduate and consolidate them around 2001 It's my federal loans, granted, there's still $45000 of them left, but I'm not particularly worried about them!
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With IBR/PAYE I wouldn't necessarily be in a hurry to pay them off. My wife has substantial loans but they're all federal. As her income rises her payment amount will rise too. And likewise if her salary drops (which we hope doesn't happen, but sometimes it does), her payment should drop.Originally posted by purplish View Post
One caveat is that there is a "tax bomb" at the end, after 25 years your loans are forgiven, forgiven loans are taxed as income, so if you make $50K, and have $100K loans forgiven, you will be taxed as having $150K income for that year. However, you should also realize that using IRS insolvency rules, you may be liable for substantially less, depending on what assets you owe.
But yeah, with IBR the only thing I would worry about is that the government may take it away (another potential pitfall). I don't think they will take this away, as this will drive many, many people immediately into default, which will have huge downsides for the economy as a whole.
Also make sure you vote every election.Comment
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The interest on a student loan I took out in 2003 was under 2%. It's paid off now though.Comment
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A loan that is at 1.88% is more than likely a variable rate loan (probably indexed with LIBOR). So there is always the risk of that rate ratcheting up, especially if London hits an inflationary period.Originally posted by tomhole View Post
There is no US company who would be issuing 1.88% rates right now. You cannot even get mortgage that low! Even Federal loans for the 2013/2014 year were issued at 3.65%.Check out my new website at www.payczech.com !Comment
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Originally posted by dczech09 View Post
It's not a variable rate loan, it's fixed. That's what federal student loan rates were in the early 2000's when I graduated and consolidated them. My private loan is variable, currently at 4% but has been as high as 10% in the past. Luckily that loan only has about $2700 left on it so I can pay it off quickly if the rats start to go up again.Comment
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It all depends on your interest rates and amounts. I have about 63k left at an average 5-6% interest rate, and thats not worth going the minimum on. However, many people are lucky enough to have student loans that are either fully subsidized, or they went to school before the huge student loan interest spike (6-8% from 2~%), and in those cases it makes perfect sense. Investing, mathematically, will earn you more in those situations. Still though, a lot of it comes down to psychological reasons too. I think even with less debt at a lower rate, I'd still be scurrying to pay off my debt to be free!Comment
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I've done this thing before. I've gotten a loan (not a student loan a car loan) for 1.9%. I knew that I could earn a much better return with my money investing so I took my time paying the loan off.
But, it's like a previous commenter said: this only works if you actually invest the money and not spend it on a vacation, or clothes, etc. Unfortunately, most people don't have this discipline and therefore would be better off just paying off the debt.Comment
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