No. of Recommendations: 4
Does it make more sense to:

1) Pay down some of the principal on a student loan with 20+ more years on it that has an interest rate of 5%


2) Simply invest the money somewhere and hope to earn >5%

What would you do?

If you choose to invest, rather than pay down principal, you are effectively using your student loan with 20+ years left as a long-term margin loan to fund your investments. Whether you choose to do that or not is dependent on many things, including, but not limited to, your investment goals and strategies; the after tax return of your investments; the terms of your student loan repayment; whether you can deduct the student loan interest and whether some of your student loan may end up being forgiven. Because of all those variables, it's not something where someone else can tell you which is 'better' for you.

Personally, if the loan is a non-deductible loan that's not going to be eligible for any loan forgiveness, and it's at 5%, that's more than I want to pay for a long-term margin loan, so I would lean toward paying down the debt.

Are there options to refinance student loans that were already consolidated about 5 years ago? I bet I could do better than 5% today.

Consolidating government student loans doesn't change their interest structure, it just combines them into a single loan payment with a single rate consolidated rate, based on the weighted average of the loans being consolidated. Therefore, I'm not sure how you think you could do 'better' than 5% today.

You always have the option of refinancing your debt in another way - like using a private student loan refinancer, moving the debt to your credit cards via balance transfer or getting a loan using some type of collateral (equity in your house, equity in your car, equity in your investment accounts, a 401(k) loan, etc.) and using those proceeds to pay the student loan off. You would have to look at the various trade-offs to determine which option is 'better' for you.

Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.