I initiated the process to consolidate (again) my student loans in June, anticipating the completion of my Master’s degree in August. After a long delay, my outstanding loans have finally been refinanced as of October 10 at a fixed rate of 4.25%. Now comes the fun part: finding money to pay it off, and doing so at a rate faster than what the loan company suggests.
Looking back, there were several times I should have applied my tuition reimbursement check to the outstanding student loans rather than using the check to assist my cash flow. I think I may be trying to save more money than I can afford to save, or spending too much money eating out. Even the cafeteria in the office is surprisingly expensive, despite the meals being partially subsidized.
The point is I need to make my student loans disappear as quickly as possible.
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9:58 am (reply)
I don’t understand why you would do that. If you have the money to pay that loan off, even in part, you should invest it and make the minimum payments on the loan. You can beat 4.25% with risk-free investments, even.
10:13 am (reply)
Risk free investments providing about 5.0% APY before tax is not much higher than 4.25% after tax, if at all. Following your plan, inflation will quickly eat up the <1% advantage of investing the money in the highest paying money market accounts.
There are also tax incentives for paying off student loan interest… don’t remember if it’s a credit or deduction, so that lowers the effective APR of the loan—but only if the interest is paid, not if the money is invested elsewhere.
Your theory would work well for other, lower APR loans or 0% credit card balance transfer offers, but there’s no advantage to investing in a 5% MMA rather than paying off a 4.25% tax-incentivized loan.
Investing in the stock market sounds good, but nice returns are only guaranteed over a long period of time. In the short term, we may be heading for a “soft landing” if you believe El-Erian.
11:47 am (reply)
I hadn’t thought of the tax issue. Frankly that’s something that’s been on my mind to learn about. Can you recommend a good source of reading to understand the basics of the income tax structure for regular earnings, asset appreciation, stock sales, etc?
5:03 pm (reply)
Even if you could earn more by investing, there’s a lot to be said for being debt-free. Hopefully you’ll be able to lower the interest rate even more with on-time payments – for example, one of my lenders lowered my interest rate by 1% after the first 12 payments were timely.
6:00 pm (reply)
Which company did you consolidate through? I graduate in March and am looking to consolidate soon. I had one offer for 5.5%, which I should be able to beat. Thanks in advance.
5:00 am (reply)
http://www.graduateleverage.com groups student borrowers, and uses their bargaining power to get the best deal from lenders. The best deal is provided to the student borrowers. I ended up with $27K at 2.875% and a future 1% discount for auto payment/perfect payment history.
9:55 am (reply)
I went through the same company that services all of my loans, College Loan Corporation.
10:40 am (reply)
Flexo,
While there may be a tax incentive to pay your loan off faster, there is no inflation incentive. Jim at Blueprint for Financial Prosperity learned this last month:
http://www.bargaineering.com/articles/inflations-role-in-debt-vs-save.html
Specifically, check out comment VII.
11:00 am (reply)
Hey flexo,
Congrats on completing your Master’s…on that note, can we look forward to a continuation of the UofP online experience…
I would pay those loans off as soon as possible…debt is debt…regardless of the interest rate.
9:04 pm (reply)
Dave,
I should be getting back to writing the University of Phoenix Online stuff in the next week or so. Glad someone’s interested!
12:23 pm (reply)
You should be able to drop that rate even further. Electronic payment of your student loan, could probably shave a point off your interest rate, if your bank or whevet is competitive.
I really need to do this…ugh