Paying off a student loan - any reason not to?

[SavingsDad]

I have a student loan debt in the amount of $5,900 with an interest rate of 4.625%. My wife and I have the funds in savings to pay it off. Our current bank is paying 1.08% for savings, which isn't much. Obviously on paper it makes sense to pay off the balance. Any reason why we should not?

We do have 6 months emergency fund (which is a part of savings) that wouldn't be affected by paying off the student loan. We also do not have any other debt outside of the mortgage and student loan, which I have listed above.

Any advice would be appreciated - thanks!

[savingmama]

I have a student loan debt in the amount of $5,900 with an interest rate of 4.625%. My wife and I have the funds in savings to pay it off. Our current bank is paying 1.08% for savings, which isn't much. Obviously on paper it makes sense to pay off the balance. Any reason why we should not?

We do have 6 months emergency fund (which is a part of savings) that wouldn't be affected by paying off the student loan. We also do not have any other debt outside of the mortgage and student loan, which I have listed above.

Any advice would be appreciated - thanks!

Looks like you guys are doing pretty well. You didn't mention how much you are putting into retirement, such as if you are maxing your 401Ks and Roths. That is the only other place to consider putting your money besides paying off student loan. Keep in mind that if you AGI is below a certain amount (I think about $130,000) then the interest you pay on the student loan debt lowers your AGI for taxes.

One other thing. You mentioned that you only get 1.08% interest on your savings account. You should really look into online banking. There is probably some post on here that lists all the great online banks that would offer between 3 to 3.5% interest. And if you put some of the money in CDs, you would even get a higher return. Someone else on the forum might be able to point you in the right direction for a list of all the banks and interest rates.

[jIM_Ohio]

Make sure the payment you budget for the student loans is used to further your path to financial independance (bank the old payment, preferably in a retirement account).

[SavingsDad]

Thank you for the replies. My wife and I each currently put 6% of our pay towards our 401k, with the company matching 3%. We also each put in $300/month in a Roth IRA and we max out a Coverdell account for our daughter (which is $2000/year).

As for the paltry interest for our savings account, we both agree that our money in savings could be put to better use than the 1% that our bank is offering. I think we are going to put a majority of the money from savings into a money market account at USAA, along with cds.

[kork13]

Thank you for the replies. My wife and I each currently put 6% of our pay towards our 401k, with the company matching 3%. We also each put in $300/month in a Roth IRA and we max out a Coverdell account for our daughter (which is $2000/year).

As for the paltry interest for our savings account, we both agree that our money in savings could be put to better use than the 1% that our bank is offering. I think we are going to put a majority of the money from savings into a money market account at USAA, along with cds.

Sounds like you have things very much under control, that's great to hear. So it seems you just want to do better. First, about the loans, I totally understand the desire to pay them off--it's less money that someone else has hanging over your head. But if you're comfortable with taking a little bit of risk, you can probably come out ahead more by keeping the loans, using the minor tax deduction to your advantage, and instead putting your money you would otherwise put into the loan into a simple index mutual fund, tracking (for example) the S&P 500. Especially given the current market you may be wary of that, but there is promise that over time you'll come out ahead--making up to 7% or 8% (over the long-term) on the same money while losing only the 4.625% on the loans. Net gain: up to 4%. It really depends on your tolerance. If you're not comfortable with investing the money, then I would definitely pay them off without a second thought.

I'll also say that I use USAA for banking, investments, retirement, insurance, etc., and I love using them. However, I also have an ING Direct savings account getting 3% that has been consistent over the last year or so (previously had been as high as I think 4.75%). I have some money in USAA's money market, but currently have moved most of it to ING because it's currently only yielding about 2.3%. It has been as high as 4.5% though, so when it starts to go back up I may go back toward it. For CD's, an online savings account company will also generally do better. I'm starting CDs with ING, so just for comparisons, i'll pit ING v. USAA... for 6, 9, 12, and 18 month CDs, USAA currently offers: 2.6%, 3.3%, 3.37%, and 3.82%. On the same time periods, ING currently offers: 3.75%, 3.75%, 4.0%, and 4.5%. All I'm trying to demonstrate is that while I love USAA and they're a great bank, OSA companies are generally able to best most other banks. So my recommendation would be to lean toward an OSA, or even better, OSA CD's.

[maat55]

If you are sure of your income in the near future, I would be done with it, Pay it off, then rebuild your EF. If you are not sure of your income, holding on to the EF would be prudent.

[SavingsDad]

Thanks for the advice, kork13 and maat55. While I don't mind us having this student loan, my wife feels it's something that she'd rather just get it paid off and not worry about it. We do see a slight kickback at tax season as a result of paying interest on it.

As for our EF, this payoff amount would not touch our EF. We don't really have a plan yet for our money in savings - we just consider it savings/EF and don't touch it. My grandma has always told me to have 6 months EF set aside....and for the longest time I never listened to her and lived mostly paycheck to paycheck. Now being married with a kid, I see the importance of an EF and how it brings about a certain peace of mind if something were to happen.

Thanks for the information on ING - I will have to take a look into online banks, as well.

[disneysteve]

While I don't mind us having this student loan, my wife feels it's something that she'd rather just get it paid off and not worry about it.

Let me weigh in with the voice of $102,000 of student loan experience behind me.

My loans were all at low interest rates during a time when the stock market was on one of it's greatest bull runs ever. I could have paid the minimum on my loans, invested the difference and made out quite well. I didn't go that route. I hated having the loans hanging over me. Had I paid according to schedule, I would still have been paying when my own daughter was in college.

So I set out to repay all of my loans in 10 years. I almost made it except after about 7 years, I left my job and took a while to get back on track financially. Even with that detour, I finished repayment in 12 years, which was 13 years ahead of schedule, and I've never looked back or regretted that decision for a moment.

We all talk about doing what makes the most sense financially, but sometimes you need to do what makes the most sense emotionally. If your wife would rest easier knowing this debt was gone and you've got the money to make that happen, go ahead and pay it off.

[DebbieL]

I agree with Steve. Some of us just don't like the debt from an emotional standpoint (I'm in this group). I tend to pay any debt I incur as quickly as possible. I just don't like having debt. I have been known, however, to accept an extremely low interest offer on credit cards, bank the cash in a high interest account, then pay it off before the interest rate goes up. I guess just knowing that the money is there and I could pay it off any time helps me, lol.

[kork13]

While I don't mind us having this student loan, my wife feels it's something that she'd rather just get it paid off and not worry about it.

I have to agree with the others--if your wife would like to have them gone, and you don't appear to lean either way, it would probably be best to just be done with them. That's what i'm doing with my car loan right now--I originally planned to pay it off in 2 years (3 yrs ahead of schedule), but I realized that I just didn't want to deal with it anymore. . . . ...sure, part of that was also some level of frustration with Bank of America, and a somewhat-higher interest rate than i'd prefer, but in the end, i could have dealt with both... but i just want it gone, and now by next month it will be.

[cptacek]

but i just want it gone, and now by next month it will be.

Good for you!

[financestrategy]

logic of comaprison of interest rate being charged and earned is fine...Only reason for not repaying would be if you are able to earn any thing more than the interest rate on your student loan 4.625%. In other words if you can identify investment oppurtunities which offer higher returns then you can avoid prepaying your loan and instead earn on that amount

[SavingsDad]

Just to give you an update, I paid off the $5837.77 balance on my student loan yesterday. Now we're down to one debt (house). It felt good to finally pay off the loan and I know it's a load off my wife's mind.

And to give an update on our savings account, our bank lowered it's interest to 0.5% on their savings account. We moved a good portion of the money over to a tax free money market account at USAA, which is currently offering over 5% (which will drop soon and we'll move it to something else). I do know that our bank paid us $42 in interest for our savings account the past month and we earned $5.88 in one day after moving our money over to the tax free mma account at USAA (which I know will drop % wise).

[notallboutmoney]

Good job SavingsDad! Oh how I wish I were in that situation.

Are you planning on paying your house down fast now?

[disneysteve]

Good for you. We are also debt free except our home. We have a home equity loan that is under 5K and will be paid off by the end of the year. Then we'll start chipping away at the mortgage.

Also congrats on moving your money to somewhere that is actually paying a decent interest rate. Folks could make millions more each year if they would all do this.