Payoff Student Loan, or hold onto cash?

[bill1958]

Thought I'd post this question to get some other perspectives on paying off around $10,000 in Stafford loans that my daughter currently has (She is still attending school for another 2.5 years). Loan interest is not deferred, and accrues interest at 6.8%, which she's been paying while in school to avoid the interest compounding further until after graduation (she had the option of letting it accrue until then without payment).

My daughter's University has a strong coop program which she is enrolled in (as a Nursing student). She just completed 6 months of Coop work (she has 2 other 6 month work periods before graduation to earn approximately 15-20K), and has earned enough to pay off the student debt if she chooses to, with about $8,000 to spare (which is plenty for my daughters emergency fund). We've set aside enough funds (from parents) to just about fully fund the remaining college expenses, so this cash shouldn't be needed for future college expenses (for undergrad anyways).

My questions/options are:
1) Should my daughter pay off the student debt now, vs. waiting until it comes due at graduation in 2.5 years? Its seems that she would basically be getting a 6.8% return on her savings if she did so. Only consideration here is that once she pays off the debt, this cash would not be available to use towards graduate school education (she's not planning to go to grad school as of now) if she went.
2) As an alternative to fully paying off the student loans, would my daughter be better off only paying 1/2 the debt, and hold the remaining cash in short term CD's until graduation and she determined with certainty that she wasn't attending grad school.
3) Don't pay off any debt for now, and keep the cash in short term CDs until graduation in 2 1/2 years.

Only other background is that she has an additional $17,000 in Roth IRA's/mutual funds in addition to $19,000 in cash that she has on hand.

Thanks in advance for your thoughts on this matter.

BC

[NYBoglehead]

I'd pay off the loans. 6.8% is a heck of a lot higher than you are getting on savings...no downside to not having any debt coming out of college!

[Valuethinker]

+1

Pay off the loans. 6.8% is a higher cost than any feasible return (even stocks in the long run, we'll be lucky if we do 7%-- before tax).

Unless you can backstop her, she should hold on to enough cash for 1-3 months emergencies eg rental deposit on apartment, car needs urgent repairs etc.

[stan1]

Think about it from a cash flow perspective (and what's her expense vs. what's your expense).
Apartment deposits, car repairs, car replacement, clothes for job interviews, relocation, a few weeks in Europe that she'll remember for a lifetime.
6.8% is high, but its a heck of a lot less than credit card debt.

[Watty]

I'd pay off the loans. 6.8% is a heck of a lot higher than you are getting on savings...no downside to not having any debt coming out of college!

+1

My son is a recent college graduate so he does not have a lot of credit history but he was able to get a car loan in the low 2% range from a credit union.

That is not a good interest rate loan that is she would want to keep.

[FlyOverState]

She sounds responsible. Why not loan her the money to pay off the student loan? My Mother did something like this with me when I graduated. The loan from Mom only required that I give her simple interest once a year for several years and covered roughly half of my total student loan debt at the time. I was then to concentrate paying down the other half as fast as possible. Mom gave me the money at 4.5% and my student loan debt was around 9%. 4.5% was about the same or a little higher than CD rates at the time so it worked out for Mom as well. This worked for us, YMMV.

[zebrafish]

I'd have a check in the mail to pay the debt by the end of today

[thebogledude]

she has enough emergency cash and projected income to pay the whole thing off. no need to drag it out and pay interest.

[bill1958]

Thanks everyone for your replies. I'll discuss the options with her. In the event she wants to hold onto some of her cash, I think at minimum I can lend her the money at a lower rate (3%- which is a rate I have on a HElOC) til she graduates and can fully assess her cash needs.

I'm inclined to have her just fully pay the loan now, and I can backstop her the loan in the near future should she need the cash for something else (semester abroad, or other school related expense).

[PreemieNurse]

Normally I would say go ahead and pay off the debt, but your daughter is going into a profession that often has great benefits packages for new hires. In Florida, nurses who work in certain under served areas (teaching hospitals, public schools, etc). can apply to get $4000/yr. of nursing student loan principle paid off up to $16,000. Some employers will also offer loan repayment stipends or pay for grad school if she agrees to work with them for a few years.

She may want to continue paying down the interest and then see what her options are upon graduation. She could possibly have the loans paid down by government or employer, and use her own cash for other purposes. She will probably have the most options if she chooses to work for a hospital.

[bill1958]

Thanks Preemie. Very interesting input to consider. Do you think the benefit packages you mention are mostly available from inner city hospitals? She's been working at a Boston hospital on coop, but hasn't heard of these types of packages to new hires.

[PreemieNurse]

No, in the state of Florida, any teaching hospital qualifies. These are usually premier hospitals affiliated with medical schools. The main thing is that they are not for-profit, corporate owned facilities. I have my packet right here since I'm working on my own application...state facilities, public schools, specialty hospitals for children, health department, teaching hospitals, etc. are eligible. You can google nursing student loan forgiveness in the state she would like to work to see if anything similar is available.

What area is your daughter interested in? If she plans on bedside nursing, I think the areas that are in need and offer the most lucrative packages are usually specialized acute care such as ED, OR, and ICU. Almost all of my nursing school peers were recruited into these areas and we all had jobs lined up several months before graduating.

[PreemieNurse]

I should add, the nursing loan forgiveness is run by the state department of education here and not offered directly by the facilities.

[bill1958]

I don't think she's decided what area she wants to work in yet. Her first coop job has been in med-surg, which she has enjoyed working in. She still has 2 more coop stints left before graduation, which may help her decide what area she may pursue. I did google the student loan forgiveness program, and it appears to be available in our state. Do you know up to how much actual dollars of debt can be forgiven? I only see percentages of debt shown. Seems to me that if there's no debt limit for forgiveness, that it makes sense to borrow more as an undergrad (though I'm hesitant to have her borrow more than we originally budgeted, until I know more about this).

[PreemieNurse]

In my state, they will do $4000 a year (lump sum at the end of the year) up to $16,000. I'm not sure I would borrow specifically hoping it would be paid off though. It's dependent on funding, and I know they have suspended this program at times due to economy, so it would be a gamble. Also, you do need to continue making your own payments on the loans.

[RobInCT]

I don't know whether you have yet done so, but it might be helpful to involve your daughter in this conversation at this point. She is likely in the best position to know about things like loan repayment incentives, the likelihood that she will end up working in one of the fields where they are offered, etc. And if she in fact does NOT know, she is still probably better situated to investigate and obtain this information, perhaps with the assistance of a career service office.

If she's already good with personal finance, she should be able to look at the alternatives out there, the pros and cons, and help make a good decision. If she's not already good with personal finance, it would be a great teaching opportunity.

I say this as a thirtysomething who arrived late to the personal finance game around the age of 30 purely because it's when I finally had to start dealing with the realities of student loans. I wish I'd thought more about them at 20 instead of letting my parents make all the decisions!

[bill1958]

Good advice Robin. I do plan to involve her in the decision- I plan to show her this website and thread as well. I would say she's cautious with money, but not really good at personal finance yet ( though learning more each year).

[campy2010]

Good advice Robin. I do plan to involve her in the decision- I plan to show her this website and thread as well. I would say she's cautious with money, but not really good at personal finance yet ( though learning more each year).

I agree with Robin. Very good advice.

Going forward, you should avoid the high interest unsubsidized loans if you have cash available to pay expenses. New unsubsidized loans now have a 1% origination fee along with the 6.8% interest rate. Far too expensive in my book if you have a reasonable alternative.