Hello,I would like to hear opinions on whether I should pay off a $13k student loan with a recent received inheritance or pay it off over time. The loan has a 6.8% interest rate. I am currently working with a comfortable income and have no problem making payments.Thanks for your input.
For me this would come down to the "sleep at night factor".Would you sleep better with the money in the bank, or with the debt paid off?Ishtar
Thanks for the reply. Im leaning towards paying it off but I thought maybe paying off the loan over time could help my credit score ( FICO ~ 750).
Unless you are planning to borrow immediately, don't worry about your credit score. What does it matter? Is your credit score with paying $884/year for? Really? I can think of many things I'd pay that for, but a credit score isn't one of them...
Do you have an emergency fund? That would be a good thing to have in place before paying off the loan.
Can you consolidate the student loan to a lower interest rate?Do you have an e-fund?Do you rent or own - if you rent, are you looking to buy a place anytime soon where the money could go towards a downpayment?If you have an e-fund, and you're either not looking to buy property or already have and if you can't consolidate to a lower interest rate, than I could see using the money to pay off the loan. If you could consolidate to a much lower interest rate, than I probably wouldn't pay off the student loan early.
kahunacfs,You wrote, It is actually quite easy to find investments that will earn more than a 6.8% rate of return. Some Quality Utility companies as well as Master Limited Partnerships and Pipeline Companies have dividend yields that exceed 6.8%.But is he paying the 6.8% with after-tax money? If so he needs to consider tax consequences too. Assuming a 25% marginal tax bracket, he'd need about a 9.1% APY to break even. Even assuming the government renews the qualified dividend rate of 15% (unlikely with Obama re-elected), he'd need an 8% APY. You simply can't get those kinds of yields today without taking big risks.In any case, Flashq213 simply does not give enough information about his finances to give any well-informed opinion. However, the general advice found in the Credit Card / Consumer Credit Board FAQ applies and is probably the best advice anyone here could give, without more specific information. The applicable advice from the FAQ ( http://boards.fool.com/okay-here-it-is-thanks-for-the-help-w... ) is here:Do I pay off my credit cards/student loans/mortgage before investing? - If your employer offers a 401(k)/503(b) plan, at the very least invest the maximum amount your employer will match. (if applicable) After that, pay off ALL your credit cards. Period. End of story. They are most likely going to have an interest rates far exceeding what you can reasonably expect to earn on your investment, after costs and taxes. Paying them off is like an instant 10+%, guaranteed, tax-free return. No investment can do that. There are certain very limited exceptions to this rule, (6-month, no interest deals) but that is it.For a student loan: It depends. If you have a loan locked in at a low interest rate, maybe you can invest first. Otherwise no. The same guaranteed-return statement above applies here. (NOTE: Student loan interest is sometimes tax-deductible. This can lower your effective interest rate.)Mortgage: For a regular (as opposed to sub-prime) mortgage, it is purely an emotional decision. From a financial perspective, the historical, after-tax, returns from the stock market exceed that of tax-deductible mortgage interest. From an emotional perspective, it can be a great lift to own your home free-and-clear. Obviously, if the mortgage is paid off it takes a lot more traumatic financial event to have you leave your house As a side note, you should really build up a 3-6 month e-fund before you go investing "spare" cash.So the correct answer is, It depends...- Joel
I would like to hear opinions on whether I should pay off a $13k student loan with a recent received inheritance or pay it off over time. The loan has a 6.8% interest rate. I am currently working with a comfortable income and have no problem making payments.Thanks for your input.Would paying off the loan wipe out all the inheritence money? Or would you still have some cash left when the dust settles?Personally, I'd pay it off, but that's me. If you don't have any other debt, and you'd like to keep some of your cash available for emergencies, you could always make a large payment to pay it down in order to shorten the payback time.LWW
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