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Holding onto those student loans

February 18, 2008

My new goal is to stop paying extra towards my student loans. Sometimes I see “extra” money in my checking account, and I just can’t resist shooting $50 over. (This is especially easy since my loan and my checking are at the same bank.)

Why do I want to stop this seemingly “good” behavior? It doesn’t line up with my goals at all! I know that extra payments on my student loans is practically the worst use of that $50 (other than spending it on something unnecessary). Even just the ~$50 extra I have automatically contributed is another $600 this year that could go into my 401k… which pre-tax is probably around $1000! It’s just a silly thing to be doing. In fact, I’m going to contact them and tell them to just take the minimum payment, and then up my 401k contributions by 1% I will do it! Even by 1.5%! (Can you do half percents?)  [Note:  I went overboard and upped it by 5% for now, though I doubt that will last.  I’m of the mindset that you contribute as much as you can and lower the contributions until you can live comfortably.  Best to start out too high.]

I do put some extra money each month in a specified “Student Loan Payback” account, though it does currently earn a little less than the 4.5% the loan is at. This is a good idea because, assuming I get the deduction for the interest (I may not qualify for 2008) it isn’t costing me much. If the rates ever go up again, it might save me money. If my brilliant plan to be a half time student and full time worker pans out, it will definitely be making me money. It also gives me more flexibility and security than paying extra. I would much rather have a $15000 loan and $15000 in the bank than a $0 loan and $0 in the bank.

See how much sense it all makes? Still, even understanding all that, it is really hard to resist the urge to send in extra money!

T also has a hard time with it, though even harder for him since he has neither a 401k or student loans. When I mentioned that if i started school, my loans would become 0% interest and payments wouldn’t be required, he said something like “But, you would still want to just pay them, right?” Well… It is a struggle I have with myself, but what kind of pf savvy girl in her right mind would pay down a 0% loan?!? I just can’t do it. Or, actually, I really want to do it because paying off loans feels great. But I need to make this more about math than it is about mind. So I won’t. I won’t!

5 Comments leave one →
  1. February 18, 2008 2:55 pm

    I agree with you that it is hard not to take extra cash and use towards debt. My fiance and I currently have a couple different loans that are at 0% (also with low balances) that I feel like just paying off but we know it is not the financially smart thing to do. Especially considering we have a small amount of credit card debt and a car loan that both have interest being paid.

    We are working on paying off all our debts and our student loans will be the last on the list since they have the lowest rates. When all our other debt is paid off and it is the student loans turn we will evaluate our situation and decide whether it is smarter to pay them down faster or put more money into our 401k or mutual funds savings.

  2. Andrew Stevens permalink
    February 18, 2008 10:37 pm

    It’s usually a bad idea to pay off student loans any faster than you have to. Mine are locked in at 2.625% and student loan interest is above-the-line deductible, so the after-tax interest rate is even better. At 4.5%, I would think about it a little harder, but it’s still almost certainly too low to bother with. If you’re not maxing out your 401k and IRAs, I certainly see no reason to pay off student loan debt.

    I am not a fan of excessive leveraging. If I believe the stock market is going to return 9% for the next ten years, I certainly wouldn’t take out a ten year loan at 8% in order to invest. There’s too much risk there, but if you offered me a 3% loan, I’d definitely consider it. (By the way, the $15000 in the bank and a $15000 loan versus $0 in the bank and $0 loan choice critically depends on interest rates. If that loan is at 29.9%, write a check. If it’s at 4.5%, hang onto your money.)

  3. sjean permalink*
    February 18, 2008 10:52 pm

    I completely understand it is (usually) a bad idea to prepay gov’t student loans. But psychologically it does make you happy, so it is hard to resit.

    For the 15k loan with 15k in the bank I was specifically referring to this case when the rate is 4.5%. A year ago, you could beat that (though not after tax) in savings. Obviously a 30% loan is a different case, but to me there is much more security in owing someone 133/mo and having 15k in the bank than owing nothing and having nothing.

    I think I will lose the income tax deduction in the next year or two…. But after 3 years of on time payments, the rate drops yet another percentage.

  4. February 19, 2008 6:54 am

    *raises hand* I totally do this.

    But I’m bad in a way that I’ll put in more than needed.. but some months I’ll just leave it at the fixed amount and KNOW that the extra ‘cash’ I have allocated towards the loan can be put towards something else…

    But then I feel bad because sometimes I overpay on my loans and have to dip into my EF for things that just ‘appear’…

    Then I feel really good.. like a drug addict when I see my balance being dropped

  5. February 19, 2008 6:54 am

    Oh.. I should mention the interest rate is at a whopping 8.75%

    Not a low % at all…

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