With the savings rates falling like bricks lately, there is no advantage to me keeping my student loan payments low while keeping my bank account in the stratosphere. My student loan interest rate is 4.25% and I may not qualify for any tax advantages which would otherwise effectively reduce that interest rate. My savings aren’t earning much more in interest, and after income tax, it’s likely less.
I’ve decided to speed up my student loan payments. I’ll end up with less cash on hand in the next few years, at the same time I might be purchasing a house, but the lack of debt will put me in a better position to afford a mortgage.
This week, I sent $5,000 to my student loan.
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8:50 am (reply)
Hey Flexo, yea it doesn’t make sense to keep a whole bunch of cash in your savings account when you have non-ded debt on hand. Considering that the interest earned on your savings is taxed as income, and paying down your loan is like an after tax return.
For example, if your savings account paid you 5.5% @ 40% marginal tax rate, your after tax return is: 3.3%. If you pay down your student loan, your after tax return is 4.25%.
FT
9:25 am (reply)
Better to pay off debt..it will be worth it in the long run. Good for you!
10:17 am (reply)
Congrats on paying off a chunk of debt! That sounds awesome :)
11:43 am (reply)
That is always a pretty good feeling to do that – it is more psychological than anything. Just don’t celebrate by buying a new TV with debt :-)
11:45 am (reply)
DividendGuy: Heh. No, I already bought my new TV (but not with debt).
4:43 pm (reply)
Congrats on getting rid of that debt. The student loans were next on my list before buying my wife a Mini. But we’ll have that paid off before January and then get back to the student loan payoff.
7:22 pm (reply)
Awesome! Congrats on the big payment. I think a lot more people will start doing something similar in the near future.
9:17 pm (reply)
That is awesome! I did the same thing this week thanks to the dropping interest rates. I managed to take out around $13,000 of my student loan. Not too much longer….
9:19 pm (reply)
Congrats! That must have taken a big bite out of your debt. :-) It also sounds wise, considering the situation.
12:57 am (reply)
luckily my loans are below 3%. I’m really in no hurry to pay them off. My wife’s on the other hand is a totally different story. She’s stuck w/ a variable rate and it’s super high right now. I’m actually trying to dump the amount onto a fixed rate credit card b/c of the difference in payment. The tax benefit of her loans isn’t worth it.
2:17 am (reply)
Thanks for the words of encouragement, everyone!