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iX | How much of my student loans should I pay off immediately? |
I'm finishing up my masters degree in electrical engineering soon and here's my situation:
$40k in student loans @ 6.8%
No other debt/revolving balances on credit cards
$10k in savings @ 3.75% interest
My question is should I use funds from my savings to pay off some of my loans right away to avoid interest? If so, how much of that $10k should i use? Or, should I just wait til I get a job, start a payment plan based on my salary, and not touch my savings at all just in case I hit some hard times later? Any suggestions?
Additional Details
FYI, I'm 23 years old, have a job lined up salaried at approx. $75k a year starting mid summer, and I plan to live at home for about a year to get on my feet. |
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coach
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Congratulations on earning your Master's degree; I'm sure you will find that it was an excellent investment.
$40,000 @ 6.8% = you owe $227 per month in interest.
$30,000 @ 6.8% = you owe $170 per month in interest.
$10,000 @ 3.75% = you earn $31 per month in interest.
You could save $57 per month in interest by paying $10,000 up front, but you give up the $31 per month earned in interest. In my opinion, the $26 monthly difference is worth keeping the entire $10,000 liquid for an emergency fund and future goals (car fund, house fund, etc.). You should wait.
But wait, it gets better... considering how favorably student loan debt is treated at tax-time, you will be able to reduce your income by the amount of interest you've paid. Because you can deduct student loan interest without itemizing and its low rate, student loan debt is the best kind of debt out there. The $10,000 can go to reduce or prevent having to gain costlier types of debt later. Besides, interest rates on student loans reset in July and you may be able to consolidate your loans at lower rates
If you decide to use the $10,000 towards the student loans, at least wait until those paychecks start rolling in! At that point, open a 401k retirement plan and contribute at least enough to earn the full company match. Then use as much of the remainder of your paycheck to prepay your student loans as you feel comfortable doing. In the meantime, be comfortable knowing that you won't have to borrow on credit cards or from the parents if an emergency arises.
Good Luck! |
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oldhag
 |
Since student loans are charged at a lower interest rate, you would want to pay them off slower than your higher interest rate payments.I would keep my savings and let it accrue interest for emergencies or to get into a home. |
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octophetus89
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In my opinion you should pay back your minimum payment each month, maybe a little more. But MAKE SURE you keep that money in savings, because who knows, you may lose a job or hit a rough spot and not be able to make those payments let alone eat. Even if you make a huge down payment you still have a monthly minimum.
I just had to make this decision myself a couple weeks ago and this was the only reasonable option i saw. Pay it back each month and just keep your money in savings :) |
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James F
|
How old r u? Another things to think about. Retirement and emergency funds. I have been hearing keep up to 3 months is a savings account to bad times. And, I just read to try saving for 6 months lately. And for retirement. If you would put $3,000 a year in a Roth IRA starting when u are 20 until ur 70 u will have up to 5.3 million dollars. Saving how for retirement is the greatest idea anyone could give u. If u would take someone that saved all of their money from when they had "summer jobs" (High School - early college) and put that into a retirement fund and never added to it. You would have more at the end than your buddy that added double of what you did per year when he start after college. |
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firerookie
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Student loans are not a house guest to be kept around and cared for--Kick it out! |
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beebee
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put all towards debt. there wont be hard times. |
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pupz00001
|
I say put about a third of your savings towards it and then pay monthly on it, but always make sure you pay MORE than the monthly bill. (I pay double the monthly bill) If you don't you'll be paying forever. As long as you save approximately three times your monthly living cost you should be fine (if you were to lose a job or something). I would also look into putting a small portion of your savings in to a money market, stocks, or CD. You could be drawling a lot more interest off of it. |
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Chris H
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My two cents, I'd do a 50/50 split on it. Pay half off as soon as possible(it'll save you a lot in interest) and then invest the other half, preferably in something liquid, that will make you more than 6.8%. With $5000 and a good financial advisor that's pretty easy. You'd actually be making money that way by not spending the entire savings on your debt. |
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arch0049
 |
Hold your savings. What if you don't get the job? What if you have to relocate?
You seem to have skills that are wanted by companies and should make you employable. But, keeping a good saving like you have is probably in your best interest.
Typically, paying off debt is the best bet. But, crap happens. Start that job, and then start plucking away at those loans. Remember, they typically give you 10 years to pay them back. So, maybe make double or triple payments and get it done in 3 or 4 years. But, worse case sceario is you empty out most of your savings. Then, something terrible happens. You get fired/laid off. Then, you need to move to get a new job. Or, you get sick before the job and have to come up with a large chunk of money for medical bills. Now, since you paid off your school loans at 6.8%, you are using credit at 10%-15%-20% or higher inplace of the savings you had.
Saving is just that. Savings. All debt is bad. But, some is better than others. I am all for attacking student loans. I am going blitz that when I pay off my car.
I owe 10,000 at 2.45%. I pay 90 dollars a month. Emptying out he 5,000 dollars I have in savings, only to have my car break down, lose my job, or have some huge dental bill and using credit then, makes no sense. |
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Tsunami
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pay them off as much as you can it would bemaking sense and you should know this. |
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