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Author: LaughingRaven Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308642  
Subject: Re: Student Loans or Invest? Date: 6/18/2008 5:49 PM
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which strategy will put me in the most secure financial position?

It depends on your definition of "secure." 4.75%, less discounts (I get .25% for automatic payments, and will get 1% off once I've made 48 consecutive on-time payments), less tax breaks if applicable, is pretty cheap. Mathematically, the strategy expected to create the highest net worth is to pay the loans slowly and invest. Loan forgiveness is an interesting twist. The big question there is whether they'll forgive your loans if they're held at another lender (I assume they would, but I've learned not to assume anything about the government.) If they are, consolidation looks like an even better option, since the normal 10-year amortization schedule on Stafford loans leaves almost nothing to forgive.

However, there's also the touchy-feely psychological stuff. You mention that you don't plan to buy a house until you've made significant progress on the loans; how eager are you to buy a home? Are you uncomfortable having that much debt? Do those payments represent a significant personal burden? If they do, you might want to pay the loans down as quickly as possible, so you can be rid of them.

Personally, I'd consolidate and stretch out the required payments, even if I planned to pay more than the minimum. At this stage in your career, a $1,300 monthly payment (assuming 10-year amortization) could be tough to manage, let alone anything higher. Stretching that out to 30 years reduces the required payment to about $700. That could be helpful if you find yourself searching for work longer than you'd expected. Aside from reducing your monthly obligation, consolidating locks in the current weighted-average interest rate*, whereas most student loans (I'm pretty sure all Federal loans) are variable-rate and can change every year on July 1st, going as high as 8.25%. As I said before, 4.75% less discounts is hard to beat.

One issue you don't mention is an emergency fund. Whether you invest or pay down the loans, you should have a few months' expenses set aside in an easily-accessible account, just in case. The question of second jobs, summer employment, etc., is a bit of a side issue. The money you earned there could go toward loans, investments, or a shiny new motorcycle if you wanted; it depends on whether you have the time, energy, and desire to earn more money through a second job.

--
Raven
* I could've sworn I'd heard otherwise, but http://loanconsolidation.ed.gov/borrower/bconsol.shtml
says consolidation loans are still fixed-rate. Be sure to ask before signing anything.
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