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I pay $63.15 each month toward my student loan, a massive balance I (only) have cut in half since graduating more than 10 years ago. My interest rate is 2.625% and I currently earn .50% interest in my checking account. Should I pay off my loan?
Here are the options, as I see it.
Yes. The student loan interest rate is higher than what I am earning in my checking account. The money in my checking account is growing so slowly it doesn’t make sense to keep it on hand when I could reduce a debt that carries a higher interest rate.
Current CD rates aren’t much better than my .50% checking account, even for long term deposits, which tie up my money. I have enough to cover the remaining loan balance – a few thousand dollars – without depleting my savings.
Paying off the remaining balance may improve my credit score by having less debt on the books. With the economy still slagging, paying off debt is a better strategy than investing in the stock market (though I am still maxing out my Roth-IRA and contributing to another retirement fund).
No. My interest rate has dropped steadily over the years as reward for never missing a payment, so it’s possible that the rate will continue downward. I’m aware of a checking account with a significantly higher interest rate – 3.5% – so my time would be better spent researching and opening a new checking account.
In a fragile economy, it’s a good idea to increase my emergency savings balance because recovering from a financial loss could take longer than normal.
Maybe. Increase my monthly payments to pay it off more quickly, accruing less interest over the life of the loan. This solution allows me to keep the bulk of my savings on hand in case of an emergency or if a better opportunity comes up.
If the interest rate on my student loan were significant higher, say 6% or 7%, it would be easy for me to decide. Because it is only accruing interest at 2.625%, a seemingly low rate, I’m stuck. What would you do?
Welcome to Bargain Babe! I’m Mara, and I’m so glad you’re here. I am an obsessive bargain hunter and penny pincher, and I am determined to live a full life without EVER paying full price.
I would chose the last option doubling up on payments would get it paid off quicker, possibly lower the interest rate sooner as well. Then like you said you won’t to take so much out of your savings for emergencies. I am just starting up an emergency fund but got into a hit and run accident and I got left paying $500 to get my car fix when it was the other persons fault, having the extra cash helped without getting behind on payments for my all other bills.
Totally pay off the loan asap. 10 years? Yikes. I like Dave Ramsey’s advice: 1) emergency fund, 2) pay off all debts, 3) contribute to retirement. I married into student loan debt & we paid that off very fast. If anything happens to you now, God forbid, you’re stuck with the balance/interest of student loans if they’re from the government. Nearly all student loans are NOT bankruptable, so you’re better off getting that off your plate than being “rewarded” with a lower interest rate. Good luck. You’ll feel so much better when that debt is paid off!
I also think the last option is best. Maintaining a cash reserve is always important. If you can increase your monthly payment without dipping into your savings or crimping your lifestyle, saving the interest by paying off the loan sooner sounds like a winner.
You didn’t mention what the loan balance is.
If it’s small, pay it off and be done with it unless money is super tight. The tax benefit you are getting from the payment is minimal because your entire yearly payment (principal & interest combined) is under $800 and the interest amount is a deduction from earnings, not a tax credit. You will also feel like the weight of a debt is finally off your shoulders. FREEDOM!!!
My other suggestion is to throw a couple of extra bucks into your payment each month. This money will be used to reduce the principal balance, therefore saving the interest on that balance.
Student Loan interest is possibly tax deductible depending on your financial situation: http://www.irs.gov/taxtopics/tc456.html
You might consider that factor too when making your decision. Whereas, interest is taxable! 🙂
Personally, I would just double up the payments or even triple if your budget allows and keep your cash reserves in case of emergency at this point.
I would much rather have a student loan on my credit report than get stuck in an emergency and need the cash and then have to pay a higher interest rate….
@Briana Good point! The interest IS tax deductible, though lately my yearly interest has been so low it has not mattered. If I up the payments, however, I might be able to write the interest off. Thanks!
Absolutely increase the monthly payments to whatever you can comfortably afford, while continuing to add to (or maintain) your emergency fund.
bargainbabe
Think about the future, will you be spending large chunks of change and need to save up for it. 2.625% interest is much lower (right now) than any mortgage or probably car loan, credit card bill, etc.
I’d pay it off now and take what I had left to the checking account with the higher interest rate…plus I’d keep the “loan repayment” line in my budget but pay it to myself to rebuild savings.
I say put a dent in it. Don’t completely deplete your cash, but paying less than $100/month on whatever your balance is IS NOT going to help
First off, grats on maxing your contribution to your Roth IRA and putting money for another retirement fund! Paying off the loan would most likely improve your credit score, but it also depends on your current credit score. If it’s in the mid 700’s or higher, I don’t believe it actually helps you to get it higher as far as interest rates, credit limits, etc go. (though it is worth bragging rights ^_^)
If you can get a checking account that pays 3.5%, and isn’t too limiting in restrictions (like, say, can only write 10 checks a month or something like that), then it’s better to put your money there, and continue to make minimum payments on the loan. Consider this: if you paid off $1000 off the loan, you would save 2.625% which is… $26.25. If you put it in the checking account at 3.5%, you’d get $35 in interest. I’d say unless paying off the loan ups your credit score which happens to be kinda low (like 700 or lower), then go with option 2.
Best of luck! ^_^
Have a six month emergency fund on hand than pay it off. If you have enough in savings to call it a six month or greater month emergency fund than take out whatever is left to pay down or off this loan. That’s my opinion.
I have learned a lot about student loans and student loan forgiveness recently. When my wife and I got married 2 years ago, I learned she had a lot of student loans from her masters. Since she was still working on it, 3 were deferred, one was earning interest. We paid that off quick. Though she taught special ed in an inner city school for more than 5 years, she did not qualify for the $17,500 loan forgiveness because she had a non-zero balance after Oct 1, 1998, since she started school in Aug 1998. So she finished her masters 7 months ago, and now her loans were due (2%, 6%, 7%). Except her health has changed. Her muscles are getting weaker and weaker, and doctors cannot figure out why. She now uses a wheelchair and can only work part-time. I requested her loans be put on forbearance; they still collect interest. Next year, if we file our taxes as married filing separately, they will waive her payments as part of an income based repayment plan, due to low income. But it still collects interest. If she gets worse and can’t work at all, they’ll give her a disability discharge. So whether to pay them off or not became a difficult decision. I’ve decided we will NOT make payments, and if she gets better, our “cost” is the extra interest. If she doesn’t get better, the loans will be discharged. Also, we get 3% on our checking account at Southern Community bank in North Carolina; at the beginning of 2008, we got 6%. My advice for the Bargain Babe is to move her checking account to Southern Community and NOT pay her student loans off, given the low interest.
Thanks for all the suggestions! I’ve decided to double my monthly payment and use the rest to open the new checking account.