Student loans-early payment or invest?

[munk]

I just finished my 2nd year of college. During this summer, I'll be coming across some extra money and I was wondering if I should invest it or pay off or lessen my debt early. I intend to pay one lump sum so I don't have to deal with any hassle of monthly payments. I really want to pay off my debt but some others tell me to wait and invest it, but I don't think that's such a good idea.

Here's the situation. I'm currently around 15K in debt. By the time I graduate, I figure I'll be around maybe 35K in debt. 8K of current debt is in subsidized stafford loans and 7K of current debt is in Perkins loans.

Both of them are subsidized by the government but if I were to pay back some of my loans, I would only pay back my Stafford loans since once you start paying for your Perkins loans, it starts accumulating interest (but not so for Stafford, I believe). I was assured that lessening the debt before graduation+grace period would NOT put me on repayment.

However, like I said before, people have told me to invest the money but I think it's a terrible idea because it would show up under my investments under the FAFSA and therefore raise my EFC, negating the interest of my investment. I agree it would be a good idea only if I were out of school.

Any advice on what I should do? Am I making the right move here? Thank you in advance!

[MiikeB]

If you can invest and still get subsidized loans that would be best. If investing would make you uneligable for sub loans then it would be best to put it towards the loans.

[munk]

If I invest, I'm mostly sure I'll still get more subsizidized loans, but I'll have to pay more out of pocket theoretically since these things show up when I file my FAFSA.

[ea1776]

Do they consider retirement funds in FAFSA?

If not, you could invest in a Roth IRA.

Otherwise, I would not invest and focus on debt.
Either way, you should be _saving_ a couple months worth of expenses as a minimum for emergencies.

Good luck!

[jIM_Ohio]

Are taking of wiping out all 15k of debt, or a portion of the same debt?

If you are dealing with a number which is small compared to the 15k, maybe 5k or less, I say invest.

1) the 5k should NOT disqualify you from aid
2) if you think it would, the month before the FAFSA application, just have bank issue a cashiers check to you (to zero out account) and then open a new bank account the day after you mail in the FAFSA from the cashiers check.
3) I think the FAFSA will look more at your income than savings, but that is just a guess at best.
4) If you put money in a deductable IRA, that would hide even more of the money from taxes and the FAFSA.

[noppenbd]

Looking at the formula for EFC for an independent student, 50% of untaxed income is expected to be contributed, as well as 20% of unprotected assets. Traditional and Roth IRAs are considered protected assets. So money in a Roth/tIRA should not affect your EFC.

Completing the FAFSA 08-09/The Application Questions(43-45)

EDIT: While those percentages are basically true you should look at the EFC Formula in detail to figure out what effect savings would have on your EFC. There are some adjustments to your assets and income that allow small amounts to be sheltered depending on your age and marital status.

http://www.ifap.ed.gov/eannouncements/attachments/0809EFCFormulaGuide.pdf

[munk]

I'm a dependent student, and I'm not currently worrying about saving anything until I graduate since I plan to live with my parents for 1-2 years before I move out and I'll save then. Currently, I'll probably be trying to pay off about 6K off my Stafford loan. Also, keep in mind I don't have any debt besides student loans.

I don't know anything about retirement plans...but I should probably look into it if they are not included in the figures in the FAFSA. I know it's always good to start early with these things, but isn't 19 a tad young?

Thanks for the advice!

[jIM_Ohio]

I'm a dependent student, and I'm not currently worrying about saving anything until I graduate since I plan to live with my parents for 1-2 years before I move out and I'll save then. Currently, I'll probably be trying to pay off about 6K off my Stafford loan. Also, keep in mind I don't have any debt besides student loans.

I don't know anything about retirement plans...but I should probably look into it if they are not included in the figures in the FAFSA. I know it's always good to start early with these things, but isn't 19 a tad young?

Thanks for the advice!

Never too young. Even getting unsubsidized loans at 3-5% might be better if the investment at age 19 is earning 8%.

[ea1776]

I know it's always good to start early with these things

Yes! The future is cheap. Imagine how much even $500 in a Roth IRA would grow by the time you were 60.

Compounding at 9% in a modest mutual fund... that $500 would grow to:

$17, 118.10 !!!

And in a Roth, you pay the government $0 off that 16, 618.10 gain! Not a bad deal if you ask me!

but isn't 19 a tad young?

No. See above.

[ea1776]

Even getting unsubsidized loans at 3-5% might be better if the investment at age 19 is earning 8%.

I would have to agree. The student loan interest you pay later is tax deductible as well, so young investments will easily outpace student loan interest rates. If there is a such thing as "good debt", student loans and mortgages are it.

[noppenbd]

I don't know anything about retirement plans...but I should probably look into it if they are not included in the figures in the FAFSA. I know it's always good to start early with these things, but isn't 19 a tad young?

No way! I would start a Roth for my daughter right now if I could! Unfortunately she's only 1 yr old, so she doesn't have any earned income yet...