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All,

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%

OR

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

What would you do?

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

Much thanks,
CP
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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%

OR

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.

AJ
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To follow up with what AJ wrote - government backed loans have a lot of advantages in terms of repayment that private loans don't have to offer. In particular, deferment, forbearance, and income contingent repayment plans are all standard on federal loans.

I tend to pay down extra on my student loan, and would suggest that you consider investing a moderate level, in particular enough to get your company 401k match, if available or fund some moneys in a Roth or Traditional IRA.
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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.

It is currently non-deductible, and not eligible for loan forgiveness


I'm not sure how you think you could do 'better' than 5% today.

Well, I was thinking, if I can refinance a new loan somehow, with a better rate, and pay off this loan with that money, that would be a nice deal. I just worded it wrong by using the term "consolidate"


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.

I don't like the idea of a home equity loan - we just crossed under 80% LTV on our house and I want it to stay that way. Also note that I do already max out my 401k and we contribute as much to IRA as we can, so we are operating efficiently on that end. The private student loan refinancer is perhaps more along the lines of what I was looking for. So there are private student loan refinancers out there that can simply pay off your loan and issue you a new loan at a lower rate? Does it matter if the current loan is gov't or private?


Thanks for the ideas and advice!

CP
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Well, I was thinking, if I can refinance a new loan somehow, with a better rate, and pay off this loan with that money, that would be a nice deal.

Please keep in mind - in looking at your loan from the perspective of getting credit in general, you already have a 'nice deal.' You have a long term unsecured loan at about 5%. Long term secured loans (like a mortgage) are running in the 3.5% - 4% range right now. Even short term secured loans (like a car loan) are running in the 1.5% - 2.5% range right now. In comparison, other than student loans, most lenders don't even offer long term unsecured loans, and short term unsecured loans are running in the 8% - 10% range. You seem to be looking for a long term unsecured loan at a short term secured rate. That's probably not going to happen.

Also note that I do already max out my 401k and we contribute as much to IRA as we can, so we are operating efficiently on that end.

Another thing to keep in mind - at a 5% rate, every $10k in principal is costing you $500/year. By dropping to a 4% rate, you will only save $100/year per $10k in principal; at a 3% rate, it would be $200/year. While I certainly wouldn't advise turning down an extra $100 - $200 per year, I'm not sure I would advise spending a lot of time chasing that amount, either, unless you have student loan debt that's several multiples of $10k. If you really do have several multiples of $10k in student debt principal, then I'm not sure why you are looking to invest beyond maxing out 401(k)s and IRAs, rather than paying down the debt.

If you really want to gamble that you can consistently get an annual after-tax investment gain in excess of the 5% rate you are being charged on your student loans, then go ahead and make that bet, realizing that that's what you are doing - betting. If you want the sure thing, then I would suggest focusing on paying off your debt more quickly so that you don't start investing with a built-in margin loan. That decision is completely up to you, and dependent on your risk tolerance and financial goals.

The private student loan refinancer is perhaps more along the lines of what I was looking for. So there are private student loan refinancers out there that can simply pay off your loan and issue you a new loan at a lower rate? Does it matter if the current loan is gov't or private?

If you are looking to hedge your bet by decreasing the after-tax hurdle rate that you would need to hit with your investments, there are lots of lenders offering to refinance student loans. However, I would note that many of these lenders have popped up since the 'student loan crisis' started hitting the front page, so you may find it difficult to get much information about how they are to deal with when they are actually servicing your loan for several years after they sell you the loan. Since you are looking to make a long term commitment with the lender, that's probably a important factor. I would suggest starting with a google search for 'student loan refinance' if you are interested in pursuing this hedge.

AJ
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The private student loan refinancer is perhaps more along the lines of what I was looking for.

Here's an article that touches on several of the risks vs. benefits when refinancing student loans:

http://www.usnews.com/education/best-colleges/paying-for-col...

As always, YMMV.

AJ
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Let's think about this in a different way. Let's say you are debt free and if you could borrow the amount of debt that you have in your student loans at 5% to invest. Would you do it?
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