Student Loans vs. Savings

[adpiterp]

Hi everyone! I just wanted to get your opinions on putting more money towards student loans or savings.

I just received my annual bonus and I usually put it in three different pots of money: Roth IRA, general savings, and travel fund.

I have a healthy emergency savings fund with 8 months of expenses. I have maxed out my Roth IRA this year. I have another general savings fund. I also have investments, but I don't have a lot in there. I also have a 401k with a match.

My question is if I should put the money towards my student loans (lower amount is at 2.3% interest and the other, higher amount is at 3.4% interest) or continue putting money in savings. I know I've made a dent; I am more than halfway done, but just seeing the amount of interest they have gotten from me since I graduated just kills me.

I asked a few of my friends and they said since student loans isn't "bad debt", I should just continue paying off little by little. However, 3.4% interest is NO where near where my savings account interest is (paltry .8%).

I think I should just put more money towards the loans, but I am worried that something bad will happen in the future and I'm going to need the cash. I guess that's why I have an emergency fund, but what if I need more than that? Am I being overly paranoid?

[NetSkyBlue]

You do know that student loan interest is tax deductible, correct? So you are getting money back in the form of a tax refund or a discount off taxes owed. I would continue paying the minimum, at least until you have a comfortable emergency fund built up.

[phantom]

Since you've got an 8 month emergency fund, I really don't think you have anything to fear from paying down your student loans. So, I would probably throw money at the student loans rather than just throwing it into savings.

My husband and I recently paid off our student loans. Our interest rates were very similar to yours, 2.5% and 3.75%, and we held off on paying them off for a long time. Our only other debt was our mortgage, and we reasoned that we were better off throwing extra money at the mortgage, which had a rate of 4.25%. Then we refinanced our mortgage, and suddenly, it clearly made more sense to put extra money on the 3.75% student loan. So, we did, and we paid it off quickly. It felt so good to actually make a payment go away, that we decided to pay off the other student loan too even though it still had a lower rate than the mortgage.

If I were you, I might partly base my decision on how close I was to completely paying off the loans. If the extra payment eliminates one of the loans either now or in the near future, you'll be freeing up a little money each month, which should stretch how long your emergency fund can last and give you the ability to build up savings faster.

[johna]

It sounds like you have a comfortable amount in savings. If you do not have enough to itemize your deductions, then you are not getting any benefit from carrying the student loan debt. I would just put your extra funds toward paying the loans off.

[dczech09]

You have your emergency fund nailed down. And you are maxing your Roth IRA.

What I think you should do is save to meet any short term goals. If you have a vacation, or a large purchase that you forsee in the near future, save for that.

Then with any extra money, knock out the student loans. I understand that the interest rates are low and there is a tax deduction. However the tax deduction is getting smaller every year (as the balance gets smaller), and the deduction can only be made if you itemize.

Either way I would knock those things out. That way you free up that cash flow in the future and can put that towards whatever you want.

[phantom]

It sounds like you have a comfortable amount in savings. If you do not have enough to itemize your deductions, then you are not getting any benefit from carrying the student loan debt. I would just put your extra funds toward paying the loans off.

You can get a deduction for paying interest on a student loan regardless of whether or nor you itemize because student loan debt works as an income adjustment rather than as a deduction. (See the IRS web site.) But, the deduction probably won't be big enough to make up the difference between the interest you're paying on the loan and the interest you're making on savings.

[BudgetSurgeon]

I would pay off your student loan first, UNLESS you can find an investment that you feel comfortable with that pays more than the average rate on all of your loans (after any tax-deductibility adjustment is made). If you cannot do better via investment, then definitely aim to pay off loans first, since you have enough of a nest-egg for emergency purposes.

[kalikala1980]

You can only write off $2,500 in student loan interest and there are income limits to that. I pay more than $2,500 in interest on my loans.

[stazstaz]

I agree with johna, you already have a comfortable amount in your savings and even though your interest rates on your student loans are low the longer you have them, the more interest you'll be paying. Put more money into your debts and cut that down some more before you start seriously adding into your savings again.

[adpiterp]

Thanks everyone for their answers and advice!

Sorry for my delay in responding, I was traveling for the past 5 days for work.

I will put more money into my student loans instead of adding to my savings. I don't know why I'm so paranoid about saving/not having enough, even though I have an EF and savings. My parents just hoard money, etc, so I think that may be why I do that also, but they don't have any debt at all.

Anyway, thanks a ton everyone!!