Should I pay off student loan now?

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J-e-L-L-o
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Should I pay off student loan now?

Post by J-e-L-L-o » Sat Mar 15, 2008 11:14 am

I make 50k a year, but I am still taking classes to get my bachelors degree. I am in the military. Does it make sense to start paying my student loan now, or wait till after I get my degree?

I am seeing that without paying down my loan at least, my credit score isnt improving. It's in the mid 600's. I just recently paid off all of my other debt except for the loan. I want to get a rewards card, but I think I will have to wait more months for a better score, and also I plan on buying a vacation home in Florida where I am from in a couple years. I will still continue to rent in my current location.

So what's the best thing I can do? I am currently saving 20% for retirement, and will up to 25% in a few months.

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J-e-L-L-o
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Post by J-e-L-L-o » Sat Mar 15, 2008 11:16 am

loan amount is only 6,000 @ 6.0% interest

Ella
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Post by Ella » Sat Mar 15, 2008 12:53 pm

I doubt that your $6000 student loan is driving your low-ish credit score. I have $100,000+ in student loans and my score is none the worse for it. But, I think you can find FICO simulators online - they can estimate how much a $6000 loan payoff might improve your credit score.

If you just paid off some other debts, wait a few months for the payoffs to get reported to the bureaus, then check your score again. You might find it has risen.

Also, if you have any 30-day or greater late payments on your record in the past two years, that is probably the cause of your credit score - and only time will improve that.

Good luck,
Ella

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Abciximab
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Post by Abciximab » Sat Mar 15, 2008 1:34 pm

I'd have to echo what Ella wrote. I've always kept an eye on my credit report, but never paid to find out what my FICO score was. I finally had to check last week and found out it was in the 700's. I didn't think that was possible considering my student loan debt was over $100K. I guess it's more about length of credit history and timely payments.
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SpaceCommander
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Post by SpaceCommander » Sat Mar 15, 2008 2:51 pm

My preference is to keep student loans. It's some of the cheapest money you will ever borrow. The interest can be deducted above the line (you don't need to itemize to get the deduction).

Take advantage of auto-pay options which can lower your rate. Also, building a record of on-time payments can also lower your rate. Plus, you have the option of consolidating later if you wish.

Using these strategies can probably push your rate very low. I've got some substantial student loan debt too at 3.1%. After deducting the interest above the line, my net cost is 2 point something. Better return on my invested dollar elsewhere.

Since you're in the military, I would suggest taking maximum advantage of the TSP. I think maxing that out should be your priority before paying down cheap student loan debt.

JC
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ChefJeff
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Post by ChefJeff » Sat Mar 15, 2008 3:36 pm

my credit score isnt improving. It's in the mid 600's. I just recently paid off all of my other debt except for the loan. I want to get a rewards card, but I think I will have to wait more months for a better score, and also I plan on buying a vacation home in Florida where I am from in a couple years.


I have over $100K in student loan debt, and probably another $40K in unsecured credit. My credit score is mid 600's, and I would be tickled pink if the credit companies stopped sending me almost daily offers for rewards cards :D

Your credit score is just fine. You shouldn't have any problem getting additional credit at good rates, or a home mortgage at good rates. As far as whether to pay off the loan, SpaceCommander offers some good advice. However, you might want to consider the peace of mind that comes from being debt free. If this was the only loan I had, I would probably try to pay it off as quickly as possible. Why have a $6000 debt hanging out there for 10-20 years? If you didn't have this debt, would you go out and borrow $6000 at 6% so that you could invest it?

Just some thoughts. I doubt you will go wrong either way you choose.

Jeff

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grabiner
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Post by grabiner » Sat Mar 15, 2008 4:06 pm

ChefJeff wrote:Why have a $6000 debt hanging out there for 10-20 years? If you didn't have this debt, would you go out and borrow $6000 at 6% so that you could invest it?


This is the right way to think about paying down the debt, except that the 6% interest is tax deductible, at least for now. If you are in a 30% Federal and state tax bracket, then the effective loan rate is only 4.2%, and you can earn about that rate with no risk by maxing out the TSP; the G fund earned 4.66% last year.

If the loan ever becomes non-deductible, or you max out your tax-deferred savings, it is likely to become worth paying off.

I do agree with the advice of other posters; check your credit score, including the reasons your score is not higher. If your score is low because your credit history is too short, that will change over time, but you need to have open credit lines. (That is, if you have paid off a credit card, keep it, but if you use the card at all, pay the balance in full every month, so that the balance stays low and so that you don't pay anything in interest.) If you have negative items such as late payments in the past, they will age off the report.
David Grabiner

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ChefJeff
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Post by ChefJeff » Sat Mar 15, 2008 4:37 pm

ChefJeff wrote:
Why have a $6000 debt hanging out there for 10-20 years? If you didn't have this debt, would you go out and borrow $6000 at 6% so that you could invest it?


This is the right way to think about paying down the debt, except that the 6% interest is tax deductible, at least for now. If you are in a 30% Federal and state tax bracket, then the effective loan rate is only 4.2%, and you can earn about that rate with no risk by maxing out the TSP; the G fund earned 4.66% last year.


I don't dispute your math at all. The point I'm trying to make is that there is a real but undefinable value to "peace of mind". You can call it risk avoidance if you want.

For a $6000 loan it is probably not much of an issue. But what if we are talking about a $200,000 loan. Say a homeowner was advised to refinance a paid off house at 6% and invest the funds. On paper you could probably show that this is fantastic investment advice! Now fast forward a year, and he loses his job, his investments have gone south, he has no money to pay the mortgage, loses the house in foreclosure, and is now renting a one room apartment, when he could have still been living in his paid off house. Was his risk worth it?

All things being equal, I would rather not have any debt, and would let my investment portfolio hold all the risks.

Again, it's just a point of view.

Jeff

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J-e-L-L-o
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Post by J-e-L-L-o » Sat Mar 15, 2008 5:08 pm

Thanx for the advice. Mainly I want to be debt free. Even though interest is deductable (only that what is paid if I am correct), intrest still accrues.

Did a little digging since I really didnt know how student loan re-payment works. Turns out that while still in school at least half time (i stopped taking classes and thus was required to pay), the government pays the interest.

So I guess I will leave it alone. I'll have to look up a good 529 plan to pluck away bout 50 bucks a month to fund graduate school.

thanx again

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grabiner
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Post by grabiner » Sat Mar 15, 2008 11:30 pm

ChefJeff wrote:
ChefJeff wrote:
Why have a $6000 debt hanging out there for 10-20 years? If you didn't have this debt, would you go out and borrow $6000 at 6% so that you could invest it?


This is the right way to think about paying down the debt, except that the 6% interest is tax deductible, at least for now. If you are in a 30% Federal and state tax bracket, then the effective loan rate is only 4.2%, and you can earn about that rate with no risk by maxing out the TSP; the G fund earned 4.66% last year.


I don't dispute your math at all. The point I'm trying to make is that there is a real but undefinable value to "peace of mind". You can call it risk avoidance if you want.

For a $6000 loan it is probably not much of an issue. But what if we are talking about a $200,000 loan. Say a homeowner was advised to refinance a paid off house at 6% and invest the funds. On paper you could probably show that this is fantastic investment advice! Now fast forward a year, and he loses his job, his investments have gone south, he has no money to pay the mortgage, loses the house in foreclosure, and is now renting a one room apartment, when he could have still been living in his paid off house. Was his risk worth it?


That's why I make the comparison to investments of comparable risk. If you can take out,or hold onto, a long-term loan at 3.5% after tax (a 5% mortgage in a 40% combined Federal and state tax bracket), and earn 4% after tax [i]in Treasury bonds[i] (which you can do with Long-Term Treasury in a 401(k)), that is a good deal; the bond interest will be more than the loan payments. And in the current situation, you could keep the mortgage (but not take out a new one) and buy Insured Long-Term Tax-Exempt (yielding 4.24%) in a taxable account and make the mortgage payments from the bond payments. (The IRS will not allow you to borrow money and invest the borrow money in tax-exempt bonds; you will lose the tax deduction on the loan. However, if you already used the loan to buy the house, you don't lose the deduction just because you happen to have some tax-exempt bonds as well.)



I do not recommend taking out, or keeping, a loan if the only way to earn more after-tax than the loan payment is to invest in risky stock. Most investors choose to reduce risk by not holding 100% stock, and the decision to pay down the loan rather than buying stock is the same decision.

One of your points is important; you should not pay down a loan if this endangers your liquidity. Regardless of the size of your mortgage, you need an emergency fund (which should not be in your 401(k) unless you can withdraw without penalty), so that you can continue to pay your mortgage if you lose your job.
David Grabiner

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