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Personal Finances / Paying Back Student Loans

URL:  https://boards.fool.com/answer-is-it-depends-if-you-plan-to-pay-the-loan-21950201.aspx

Subject:  Re: Student Loans Date:  1/22/2005  9:15 PM
Author:  W505a Number:  3587 of 4854

Answer is: it depends.

If you plan to pay the loan off relatively fast, then you want the 3.33% principal reduction in Month 30,

BUT

if you plan to pay the loan off over a long period of time, then the lower interest rate is always better!

I used $50,000 and a 4.5% interest rate, over 360 months, and found that the reduced interest rate finishes the loan in about 308 months, while the principal reduction gets you to 'done' at 340 months.

Run a spreadsheet for yourself, and you will see that the advantage of getting principal reduction is eaten up in just a handful of years, compared to paying a lower interest rate. You have to keep the monthly payment constant, of course, or it will confuse the analysis.


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