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I am just beginning to make payments on a 30 year student loan (close to $500/mo). The current interest rate is 6.79%, which dropped between June and July from 8.25%. Is this a variable interest rate loan?

I've read article on the fool that talks about paying off a mortgage early, and that it would be smarter to invest the extra money. Do the same principles apply to a student loan?

My big question is, should I try to pay off the student loan early by making larger payments, or should I invest that extra money?
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Smeyely wrote:

I am just beginning to make payments on a 30 year student loan (close to $500/mo). The current interest rate is 6.79%, which dropped between June and July from 8.25%. Is this a variable interest rate loan?

My big question is, should I try to pay off the student loan early by making larger payments, or should I invest that extra money?


Yes, it's variable, or the interest rate wouldn't have dropped. The interest rate on a fixed rate loan, by definition, never changes. When you sign up for a fixed rate loan, you are betting that the rates will go up and that the bank is going to bear that risk. When you sign up for a variable rate loan, the opposite is true.

The answer to the next question depends on a number of factors:

1) Can you reliably earn more than the loan's interest rate on your money in the currently flat economy?

2) How certain are you of keeping your job and being able to make that $500/month payment every month for the next 30 years?

3) Is having this debt closing off other possibilities for you? Such as buying a house or starting a business?

4) You can't write off student loan interest the way you can mortgage interest. You get the Hope Credit or the Lifetime Learning Credit, neither of which is very big, and both of which are limited depending on your AGI.

Given my experiences in the previous recession, I'd pay it off as soon as possible. You never know what may happen in your future and it never hurts to be prepared.

But, of coure, this is your call.

CCSand
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I am in a similiar situation-

What I did was figure out how much to pay each year so that I could get the max tax benefits for the student loan interest and then I paid about six months ahead at the amount that I figured out (more than the min). This gave me a 6 month cushion so that I would never be late. Student loan debt is not looked down upon like other consumer debt (credit cards, etc) so it shouldn't be blocking any oppotunities for you. I would use the extra money to build up my emergency fund and then invest in somehting safe- like a protected growth fund or a carefully chosen stock. 6.79% will not be difficult to beat, even is the present market. (this is all assuming that you do not have any other high interest consumer debt)

W
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"I would use the extra money to build up my emergency fund and then invest in somehting safe- like a protected growth fund or a carefully chosen stock. 6.79% will not be difficult to beat, even is the present market."

You don't have to look back that many months on this board to find voices confidently stating that 20% a year was a snap. So this advice strikes me as comparatively sane. However, the idea of safety does not bare scrutiny. A carefully chosen stock is never "safe," although there is certainly a range of risk even in one company. 6.79% return must be after-tax to match the benefit of the loan repayment, which means you will need close to a 9% return per annun (depending on tax bracket). I follow funds pretty closely, but I've never heard of a "protected" growth fund. Perhaps the writer means a value fund, or one with a more conservative bent. These funds lose money in a bear market as well, as sometimes languish, as they did during the last few years of the recent bull market. This doesn't mean that paying off the loan is the only option--but my own take, psychologically and strategically, is to fight to get in a position where your only debt is a mortgage, with its tax benefits and potential for leveraged appreciation. I know I'd want to pay it off as soon as possible.
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if you are interested in leanring about a protected fund (also known as a MITT) oick up a copy of Money magazine and flip to the last page.
Basics- you buy into a fund for ~10$ a share- 7 of that goes into a bond and the other 3 goes into an index fund. When the certain tiome period is up, if the market grew then you get 85% of that gain and the company gets 15%, but if the market goes down then you still get your initial 10$ back. Minimally you break even.

Caveat: dealing with quarterly taxes. I guess that if the market soars one quarter and then loses huge the next you might lose in taxes...however if the savings has a set purpose (close to retiement age, close to college age, close to buying a home) the safety of not losing money and having a shot to gain alot is pretty tempting. As always do your own research and make an educated choice.

W
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I'm in the same boat. My take is to try to pay it off ASAP, within reason. However, I am also taking this opportunity to lock in those low rates (they change every July 1). You can do it with a consolidation SmartLoan from SallieMae. This lengthens the life of the loan(and lowers your monthly payments, increasing your total cost, if you stick to the schedule), but it also gives you a fixed rate (the one you've got now). There are no penalties for pre-payment, so you get the best of all worlds.
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Invest the money, you should be able to get a higher return over the lofe of the loan and you'll have a lot more financial liquidity. If you want to buy a house and want 10% for a downpayment WOW you've got the house. A paid down student loan, and maybe you've got the house put you'll pay more intrest etc. Student laons are VERY cheap and tax deductible debit and it isn't always a great idea to pay them off.

Fool On!
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Hi,

I'm in a similar situation to the person who started this thread, except I can pay off the entirety of my loan as soon as the grace period is over. So basically, I can write a check for the entire amount of my loan ($25k), or I can put it in some kind of investment.

On one hand, I'd like to live debt-free. There's something liberating about not owing anything to anyone.

On the other hand, I don't want to pass up an opportunity to earn more money, either. People tell me that college loan debt is largely ignored by creditors (e.g., if I look to buy my first home). So whereas they might see $25k in credit card debt as a major problem, the same amount in outstanding college loans doesn't matter. If this is true (and correct me if I'm wrong), wouldn't it make sense to drop the dough into a few carefully-selected stocks or funds?

Thanks,
Norm
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