Paying off a student loan

**jpg7n16** · 02-17-2011, 12:56 PM

Few questions:

- how much do you have left over each month for debt repayments?
- what are the interest rates on the loans?
- do you have any other debts? (car payments, credit cards, etc.) does your fiance?

To pay it all off in that timeframe, you'd need to pay a little over $1,667/month. Is that possible?

Depending on the interest rates, you may have better options.

**musicrocks0304** · 02-17-2011, 01:03 PM

Hmmmmm. The interest rates are all around 6%. This plan is assuming my soon to be wife gets a job. We will have a decent amount of extra income (can't remember exact amount). We will have enough for food, entertainment, rent and such. Are there any important things I'm not thinking about?

Yes I have a car payment. It's in the range of $350 a month. No credit card debt.

what are my better options?

**jpg7n16** · 02-17-2011, 01:28 PM

Then I would probably pay the minimums on your loans and save up cash until you're able to determine the exact amount of your income and expenses.

If you save up a little too much cash, you can always apply it to the loans later on. Or retirement savings, whatever you wanted to do at that time.

What's the interest rate on the car?

If it's around 5% or higher, once your incomes are figured out, I'd likely pay down the car first as the interest on the student loans is tax-deductible.

6% loan - 15-25% tax break = 4.5-5.1% range

If all your student loans were at 3% ish, and you had no other debt, I may even suggest saving for retirement before paying extra on the student loans.

What I meant by 'better options' was your options might be between:

1) Paying extra on student loans
2) Paying extra on car/credit cards/mortgage/personal loans/etc. (if applicable)
3) Investing the money to hopefully earn more than current interest costs over time

If the interest rate on your other debt is higher than your student loans, it's better to pay off that other debt.

If the interest rate on all your debt is very low (less than 5%) it might be better to invest the money for retirement, rather than pay off debt.

**musicrocks0304** · 02-17-2011, 01:30 PM

My loan interest rates are around 6%. My car interest rate is 0%.

So go with my orginal plan then?

**jpg7n16** · 02-17-2011, 01:40 PM

Then yes, I like your original plan

Then build up your emergency fund to 3-6 months expenses held in cash.

And I would absolutely begin investing for your retirement before paying any extra on that car loan.

If they want to let you borrow their money for free, I'd let them

Ultimately once your school loans are gone, your goal should be to save 15-20% of your income. Not something you have to do right away, but something you want to shoot for over time. If you're not sure where to start, most people start around 7-10% and build up over time. (maybe increasing 1-2%/year, till you're at 15-20%)

**Demetrius** · 02-18-2011, 02:44 AM

It is always better to pay of all the loan as soon as possible as you now the authorities will not forfeit it and sooner a later you have to pay.So pay off all if you have finance to do it.

**DanielB** · 02-18-2011, 07:18 AM

Originally posted by Demetrius View Post

It is always better to pay of all the loan as soon as possible as you now the authorities will not forfeit it and sooner a later you have to pay.So pay off all if you have finance to do it.

I think you're overlooking the fact that student loan interest is a useful tax deduction. Considering the OP also has an auto loan, likely at a higher interest rate, it makes more economic sense to payoff the auto loan first. While it is true that federally-guaranteed student loans cannot be discharged in bankruptcy court, they are much more flexible than an auto loan; federal student loan payments can be deferred or put in forbearance during times of hardship, while auto loan payments cannot!

**musicrocks0304** · 02-18-2011, 07:21 AM

But my auto loan interest rate is zero. So I would want to pay off the student loans then, right?

**jpg7n16** · 02-18-2011, 08:31 AM

Originally posted by DanielB View Post

I think you're overlooking the fact that student loan interest is a useful tax deduction. Considering the OP also has an auto loan, likely at a higher interest rate, it makes more economic sense to payoff the auto loan first.

About interest rates:

Originally posted by musicrocks0304 View Post

My loan interest rates are around 6%. My car interest rate is 0%.

About tax deductions:

(6% * 75%) > 0%

(edited to add-)
-- ie. even after adjusting the rate for the tax benefit, it's still higher than a 0% loan.

On $10,000: 6% interest generates $600 interest, which generates a tax deduction of $150 (25% bracket) = net loss -$450

On $10,000: 0% interest generates $0 interest, which generates no tax decution = net loss $0

Losing $450 is worse than losing $0.

While it is true that federally-guaranteed student loans cannot be discharged in bankruptcy court, they are much more flexible than an auto loan; federal student loan payments can be deferred or put in forbearance during times of hardship, while auto loan payments cannot!

Maybe, but cars can be sold to pay down debt, and you can't sell anything to pay down student loans.

I'd stick with the plan of paying down the student loans.

Paying off a student loan