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Author: zero18 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308722  
Subject: Student Loans Date: 4/8/1998 6:50 PM
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Hello, Fools, I'm looking for advice.

The scenario: I have amassed $34,000 in student loans at %7.75 interest. Add an additional $4,000 at 5%, and my situation grows bleaker (more bleak?).

The good news: I have approximately $21,000 in assets. I see a scenario where I use all my assets to reduce the larger loan and then continue aggressively to pay them both off. Only then, when I've reached zero debt, would I begin investing.

Given that the interest rates are comparitively low, is there a better scenario that involves the combination of paying off debt with investing?

Also, how do you feel about paying off any remainder of the higher interest loan with credit cards offering low introductory rates, and then playing the transfer game among new credit cards?

Thanks for your time and insight.

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Author: TMF2Aruba Big funky green star, 20000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1075 of 308722
Subject: Re: Student Loans Date: 4/8/1998 7:24 PM
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Hi, zero18!

<<I have amassed $34,000 in student loans at %7.75 interest. Add an additional $4,000 at 5%,...I have approximately $21,000 in assets. I see a scenario where I use all my assets to reduce the larger loan and then continue aggressively to pay them both off. Only then, when I've reached zero debt, would I begin investing.>>

First, I agree with you on investing after you've become free of your debts. You don't specify where the 21K in assets are, so I'm assuming that you're referring to available cash. If this is the case, you may want to use some of this to pay down your debt, but you want to be sure to not leave yourself with an emergency fund. You always want to have access to funds in case unforeseen circumstances arise.

<<Given that the interest rates are comparitively low, is there a better scenario that involves the combination of paying off debt with investing?>>

That's a tough call. I think you're asking about income from investments to use as a means of paying off the debt, and that could be risky. While you have the advantage of low interest, you don't want to put the assets at risk by investing money that you will definitely be needing to get your hands on.

<<Also, how do you feel about paying off any remainder of the higher interest loan with credit cards offering low introductory rates, and then playing the transfer game among new credit cards?>>

This is a very dangerous thing to consider, in my opinion. I wouldn't take a chance playing with credit cards for this purpose, as credit cards can become a source of debt that can get out of control. Besides, even with low introductory rates, I think you'd have a hard time finding one that would beat what you're already paying. Additionally, the introductory rates change after a period of time.

My thought would be to use *some* of the available cash you have to get the debt down to a more manageable level, and then make sure you keep up with your payment schedule. Along with this, you can make great headway on the principle by sending extra with each payment--send as much as you can handle. It will dramatically reduce the debt, and shorten the lifespan of the loan. Make sure you contact the lender to make it clear that you want the extra money you send to go directly to the principle. They should have no problem with that.

Good luck!

Tony
...but I still am...

Off2Aruba

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Author: TMFRunkle Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1079 of 308722
Subject: Re: Student Loans Date: 4/8/1998 11:01 PM
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<<The scenario: I have amassed $34,000 in student loans at %7.75 interest. Add an additional $4,000 at 5%, and my situation grows bleaker (more bleak?).>>

Your interest rates are relatively low. I would consider paying the student loans off on schedule rather than avoiding investing altogether. Many of us feel any loans below 8% should be paid on schedule and not accelerated. The reason is you have a good chance of getting better returns than that if you invest the extra funds. By the way, that $4,000 you owe at 5% is below the risk free interest rate from treasuries. Is it a "teaser" rate for a short period? If so, you may want to jump on that before the rate goes up. Otherwise, I'd just pay that on time too.

Of course, you have to look at your own situation. If being in debt makes you uncomfortable, by all means pay it off. Also, if you have concerns about future cash flows or employment, you will want to pay off the debt too.

George

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Author: mjskas Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1080 of 308722
Subject: Re: Student Loans Date: 4/9/1998 12:03 AM
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zero18 wrote:
<The scenario: I have amassed $34,000 in student loans at %7.75 interest. Add an additional
$4,000 at 5%, and my situation grows bleaker (more bleak?).>

The thing that I would like to add is that your student loan interest may be tax deductable, effectively reducing the interest rate. In addition, some student loans have provisions which lower the interest rate after so many years of good payment history.

Mike

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Author: CarlosKB Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1081 of 308722
Subject: Re: Student Loans Date: 4/9/1998 10:07 AM
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Rate below 8 on education loans is pretty good. I wish had locked in at such a low rate. Given that rate, my advice would be to continue to make regular payments on the loans while also investing some of your assets. By following Foolish principles, you should be able to obtain an investment return higher than the loan interest rate.

On the other hand, and I can testify based on personal experience, making regular payments on a long term loan can be a real headache administratively, even if you've consolidated your loans such that only one or two payments are required monthly. And generally, loan servicing companies make Ken Starr look like Gandhi in their vigilance and aggression. So, if you want to avoid years of such trauma, you might want to consider paying off the loans ASAP.

Good luck

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Author: CarlosKB Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1082 of 308722
Subject: Re: Student Loans Date: 4/9/1998 10:14 AM
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The interest deduction on student loans is applicable for tax returns filed beginning next year. It's tied somewhat to income and maxes out at $2500. For more details, check out the Tax board. TMFTaxes provides a more detailed and coherent explanation of the deduction than I just did.

CarlosKB
"I'm not an accountant but I play one on t.v."

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Author: whineluvr One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1083 of 308722
Subject: Re: Student Loans Date: 4/9/1998 11:53 AM
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I would suggest that you keep making scheduled payments on your student loans. As my banker said "When again in your life will you be able to borrow that much money for that low of an interest rate?" Unless it makes you very uneasy to have this debt, use your assets to invest and maintain an emergency fund.

Christine


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Author: Bottles Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1090 of 308722
Subject: Re: Student Loans Date: 4/10/1998 1:39 AM
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Christine,

Was thinking about your, somewhat Rehtorical question...

<<"When again in your life will you be able to borrow that much money for that low of an interest rate?">>

Then it dawned on me when I was looking over all my acounts in quicken. The only other time that comes even close to that low an APR and that large of an amount of money would have to be when you buy a car now-a-days. We have one car that is financed at 5.9% APR and the loan was around $13K. It turns out that was an even lower APR than the Student loans we had. They were fianced through Sallie Mae at 8.5%. I believe the total blance we ended up borrowing was around 10K or so. (we were very lucky.)

Note, this really only applicable to the current economic situation.. back in the 80's this wouldnt have been true.

Sorry but thought it was kinda funny.

Rob

bottles


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