Should I pay off my student loans early?

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benevo
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Should I pay off my student loans early?

Post by benevo » Mon May 20, 2019 1:37 pm

Good afternoon!

I'm curious what people think; long story short, the question is: should I pay off my student loans early?

A bit of background: I refinanced my graduate student loans with Earnest back in July 2017. The minimum monthly payment was not a problem (actually a bit less than when they were federal loans), but I had just started a new job with a higher salary and made an effort to overpay each month - for a few months I was paying about 1.5x per month, and for the past 8-10 months consistently I've been paying almost 2.5x per month. Obviously, this has been great - and my projected payoff is now in January 2020! (If I payoff on that date, I will have paid my loans off in 6.5 years vs the full 10.)

My partner and I share the majority of our expenses, but we do keep a bit separated too, even though I manage most of our finances. We pay separately on things like our cars (when I still had a payment), student loans, spending money, haircuts, and general medical eg flu shot, dr appointment, etc. That's all probably going to change one day when we're married, but that's how it is for now. For emergency funds, I currently save them as 2 separate funds (probably worth rethinking) - I have a "me" emergency fund, which is calculated to cover if I lost my job, and that fund currently has about 4 months of emergency savings in it. I also have an "us" emergency fund which is calculated to cover if we both lost our job, and that has about 1.5 months of savings in it.

So, here's my question. If I take the "us" fund and apply that toward my student loans, along with a bit I have saved up from my bonus this year, I'll have them paid off by next month (!). I could then put my monthly student loan payment directly into the "us" savings, and build it back up to where it currently is by the end of the year.

I know the interest on my loans by not paying them off until the current overpayment date of Jan 2020 will only end up being a couple hundred or so (4.21% rate) - but I'm balancing between paying them off or not. Anyone have any thoughts one way or another? And, is there any negative to paying them off early - will it hurt my credit at all losing that account?

Thanks for any insight. :)

MJD
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Re: Should I pay off my student loans early?

Post by MJD » Mon May 20, 2019 2:01 pm

I chose to payoff early. There is something to be said for losing that monthly obligation.

Phrased another way - would you pay a couple of hundred dollars to have that burden off your back? For me, it was worth it.

I would doubt very strongly that you would see an adverse impact to your credit, especially since you have been diligent about paying them for many years. Someone with actual knowledge can likely confirm that.

Congratulations on your achievement and the discipline it showed.

mortfree
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Re: Should I pay off my student loans early?

Post by mortfree » Mon May 20, 2019 2:09 pm

Pay off the student loans.

Good job!

Note: I assumed (correctly) that the “us money” was solely yours.
Last edited by mortfree on Mon May 20, 2019 2:54 pm, edited 2 times in total.

deikel
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Re: Should I pay off my student loans early?

Post by deikel » Mon May 20, 2019 2:32 pm

Given that you are not married yet and possibly not even in fiancee status (?), I would be very very careful in using joint money to pay off personal loans at this point. Obviously your partner has input at this at a minimum, I would even argue you should not do your partners finances at all (or the joint accounts) - you two should keep things separate and just split the bills...otherwise, yes, get rid of the loan and start the next stage in life without that baggage (also true for your partner if also carrying student loans)
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immediately and destroy any copy or remembrance of it.

Topic Author
benevo
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Re: Should I pay off my student loans early?

Post by benevo » Mon May 20, 2019 2:36 pm

deikel wrote:
Mon May 20, 2019 2:32 pm
Given that you are not married yet and possibly not even in fiancee status (?), I would be very very careful in using joint money to pay off personal loans at this point. Obviously your partner has input at this at a minimum, I would even argue you should not do your partners finances at all (or the joint accounts) - you two should keep things separate and just split the bills...otherwise, yes, get rid of the loan and start the next stage in life without that baggage (also true for your partner if also carrying student loans)
Thanks! Totally understand your POV. We are however both looking at this together, and the emergency savings funds were funded completely on my part anyways. We've been in a committed relationship for 6 years and both want to, just also weren't rushing to do so - I am planning to propose within the year. :)

Big Dog
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Re: Should I pay off my student loans early?

Post by Big Dog » Mon May 20, 2019 2:36 pm

sure, payoff the debt but first obtain concurrence from your partner if you are using "us" funds.

TSR
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Re: Should I pay off my student loans early?

Post by TSR » Mon May 20, 2019 3:23 pm

Perhaps not enough information to answer your question. I would not pay off anything early if I weren't already maxing out tax-advantaged retirement accounts including Roth, 401k, and HSA. If you're doing all of that then sure, why not go ahead and pay it off? I paid my loans off early and it was a great feeling, but it was only a great feeling because I had also been saving toward retirement and was thus not starting at zero. The tax savings from those options will far exceed your relatively low interest rate, never mind any investment gains you get.

Good luck!

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Nate79
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Re: Should I pay off my student loans early?

Post by Nate79 » Mon May 20, 2019 3:25 pm

A guaranteed 4.21% after tax rate is much much better than anything you are earning on the money or can earn with something that is even close to risk free. Yes, I would pay off my debt asap and then build up your own emergency fund.

megabad
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Re: Should I pay off my student loans early?

Post by megabad » Mon May 20, 2019 6:24 pm

TSR wrote:
Mon May 20, 2019 3:23 pm
I would not pay off anything early if I weren't already maxing out tax-advantaged retirement accounts including Roth, 401k, and HSA. If you're doing all of that then sure, why not go ahead and pay it off?
+1

I am on board as long as you are contributing the maximum to retirement accounts first. Otherwise, I would pay as agreed and divert any excess to retirement accounts.

airborne
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Re: Should I pay off my student loans early?

Post by airborne » Tue May 21, 2019 6:00 pm

megabad wrote:
Mon May 20, 2019 6:24 pm
TSR wrote:
Mon May 20, 2019 3:23 pm
I would not pay off anything early if I weren't already maxing out tax-advantaged retirement accounts including Roth, 401k, and HSA. If you're doing all of that then sure, why not go ahead and pay it off?
+1

I am on board as long as you are contributing the maximum to retirement accounts first. Otherwise, I would pay as agreed and divert any excess to retirement accounts.
The maximum ($6k tIRA + $19K 401k) or the maximum to receive a full employer match? The true maximum is quite a challenge for most people.

Trader Joe
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Re: Should I pay off my student loans early?

Post by Trader Joe » Tue May 21, 2019 6:02 pm

benevo wrote:
Mon May 20, 2019 1:37 pm
Good afternoon!

I'm curious what people think; long story short, the question is: should I pay off my student loans early?

A bit of background: I refinanced my graduate student loans with Earnest back in July 2017. The minimum monthly payment was not a problem (actually a bit less than when they were federal loans), but I had just started a new job with a higher salary and made an effort to overpay each month - for a few months I was paying about 1.5x per month, and for the past 8-10 months consistently I've been paying almost 2.5x per month. Obviously, this has been great - and my projected payoff is now in January 2020! (If I payoff on that date, I will have paid my loans off in 6.5 years vs the full 10.)

My partner and I share the majority of our expenses, but we do keep a bit separated too, even though I manage most of our finances. We pay separately on things like our cars (when I still had a payment), student loans, spending money, haircuts, and general medical eg flu shot, dr appointment, etc. That's all probably going to change one day when we're married, but that's how it is for now. For emergency funds, I currently save them as 2 separate funds (probably worth rethinking) - I have a "me" emergency fund, which is calculated to cover if I lost my job, and that fund currently has about 4 months of emergency savings in it. I also have an "us" emergency fund which is calculated to cover if we both lost our job, and that has about 1.5 months of savings in it.

So, here's my question. If I take the "us" fund and apply that toward my student loans, along with a bit I have saved up from my bonus this year, I'll have them paid off by next month (!). I could then put my monthly student loan payment directly into the "us" savings, and build it back up to where it currently is by the end of the year.

I know the interest on my loans by not paying them off until the current overpayment date of Jan 2020 will only end up being a couple hundred or so (4.21% rate) - but I'm balancing between paying them off or not. Anyone have any thoughts one way or another? And, is there any negative to paying them off early - will it hurt my credit at all losing that account?

Thanks for any insight. :)
Yes, pay them off asap.

megabad
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Re: Should I pay off my student loans early?

Post by megabad » Tue May 21, 2019 7:57 pm

airborne wrote:
Tue May 21, 2019 6:00 pm
megabad wrote:
Mon May 20, 2019 6:24 pm
TSR wrote:
Mon May 20, 2019 3:23 pm
I would not pay off anything early if I weren't already maxing out tax-advantaged retirement accounts including Roth, 401k, and HSA. If you're doing all of that then sure, why not go ahead and pay it off?
+1

I am on board as long as you are contributing the maximum to retirement accounts first. Otherwise, I would pay as agreed and divert any excess to retirement accounts.
The maximum ($6k tIRA + $19K 401k) or the maximum to receive a full employer match? The true maximum is quite a challenge for most people.
To clarify, yes the true maximum for tax advantaged retirement accounts is indeed what I meant. This number could actually be much higher than 6k+19k. For a some folks, it is well over 60k per person. Investing in a tax advantaged account when you are young is extremely advantageous. Also, you can never, ever get tax advantaged space back once you have lost it. Unless you're debt's interest rate is very high or variable, I am very much inclined to prefer tax advantaged investing in most cases.

Dottie57
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Re: Should I pay off my student loans early?

Post by Dottie57 » Tue May 21, 2019 10:47 pm

If the “us” fund is totally funded by you and not your partner, yes pay it off. If funded even a bit by partner, then no.

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sunny_socal
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Re: Should I pay off my student loans early?

Post by sunny_socal » Wed May 22, 2019 7:09 am

Didn't even read OP's post.

Yes pay them off. It's worse than a depreciating asset. It's like a giant credit card bill with a teaser rate.

Nowizard
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Re: Should I pay off my student loans early?

Post by Nowizard » Wed May 22, 2019 7:25 am

Probably pay it off. One way to determine a possible answer is to ask if you could invest the money you would use to pay the loan at a rate higher than the 4+% loan rate and whether the potential gain was worth the risk. It sounds like the loan balance is relatively small and that the best approach would be to pay the loan and move forward debt free, an extremely positive accomplishment.

Tim

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Psyayeayeduck
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Re: Should I pay off my student loans early?

Post by Psyayeayeduck » Wed May 22, 2019 7:39 am

I would pay it off early and ASAP. Student loans are nearly immune from being written off in bankruptcy and that enough reason, for me, to get rid of them.

TheMadEph
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Re: Should I pay off my student loans early?

Post by TheMadEph » Wed May 22, 2019 3:41 pm

megabad wrote:
Tue May 21, 2019 7:57 pm
airborne wrote:
Tue May 21, 2019 6:00 pm
megabad wrote:
Mon May 20, 2019 6:24 pm
TSR wrote:
Mon May 20, 2019 3:23 pm
I would not pay off anything early if I weren't already maxing out tax-advantaged retirement accounts including Roth, 401k, and HSA. If you're doing all of that then sure, why not go ahead and pay it off?
+1

I am on board as long as you are contributing the maximum to retirement accounts first. Otherwise, I would pay as agreed and divert any excess to retirement accounts.
The maximum ($6k tIRA + $19K 401k) or the maximum to receive a full employer match? The true maximum is quite a challenge for most people.
To clarify, yes the true maximum for tax advantaged retirement accounts is indeed what I meant. This number could actually be much higher than 6k+19k. For a some folks, it is well over 60k per person. Investing in a tax advantaged account when you are young is extremely advantageous. Also, you can never, ever get tax advantaged space back once you have lost it. Unless you're debt's interest rate is very high or variable, I am very much inclined to prefer tax advantaged investing in most cases.
+1
This is the right answer - use all the tax advantaged space first. That is a better return on investment than the interest rate anyway. I would, in fact, decrease my monthly payments to the minimum to ENSURE i was maximizing my tax advantaged space. Or at least dial it back to 1.5x as you were doing earlier.
You could, if you were so inclined, run your estimated taxes for next year to check the results of the different approaches with respect to tax savings. I am guessing, however, that it will be a no brainer to maximize tax advantaged space now (depends on lots of factors, including interest deductability of student loan debt)

HawkeyePierce
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Re: Should I pay off my student loans early?

Post by HawkeyePierce » Wed May 22, 2019 3:47 pm

Get rid of them as quick as possible.

I finished paying mine off earlier this year. I originally had a six-figure (!) debt at 5.25% and nothing compares to the feeling of no longer needing to worry about it.

Flyer24
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Re: Should I pay off my student loans early?

Post by Flyer24 » Wed May 22, 2019 9:37 pm

Pay off the loans.

SanAntionetta
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Re: Should I pay off my student loans early?

Post by SanAntionetta » Thu May 23, 2019 5:03 am

Oh you are such a planner - :sharebeer If they are going to be paid off in six months at your current trajectory I would stay the course and keep your EF funded. I am in a similar situation (yay Earnest!) but maxing our my 401k and HSA has priority. The EF also gives you flexibility to pay it off at any time if you change your mind, but also fix your car if the transmission blows or something.

When we pay our student loans off I am going to make the same payment the next month to a charity and then have an extra average persons mortgage payment to save each month...can’t wait!

CrazyCatLady
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Re: Should I pay off my student loans early?

Post by CrazyCatLady » Thu May 23, 2019 8:20 am

If they are weighing on you, pay them off. I felt so much better when mine were gone.

Re affecting your credit score, the only way it could do that is by affecting your average length of credit history and the effect is fairly minimal. My loans were large enough I was on the 30-year plan and paid them off in 17 years (I know - 16 of those were pre my boglehead days). By the time I had paid them off they had been outstanding 20+ years (grad school) and were my oldest debts by at least 10 years. When I paid them off, there were 5 accounts that came off my credit history and greatly reduced my average age of credit (most of my credit cards came within the past 5 years after I discovered points cards). I think my credit card score dropped from 840 to 818. It's been less than a year and I'm back up to 832, so clearly no long lasting effects. Your loans have been open a shorter period of time, so should have less of an effect unless they are your only credit history.

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Sandtrap
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Re: Should I pay off my student loans early?

Post by Sandtrap » Thu May 23, 2019 8:32 am

Pay off high interest rates early, especially if low balance compared to others.
j :happy

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JupiterJones
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Re: Should I pay off my student loans early?

Post by JupiterJones » Thu May 23, 2019 9:37 am

Imagine an alternate universe where you did not have either the student loan or an "us" fund.

Now imagine that your bank offers to lend you 1.5 months of expense money at 4.2% so that you could establish an "us" fund. Would you take them up on that offer?

If the answer is "no", then pay off the loan. Because keeping the loan around a bit longer, just so you can maintain the "us" fund is basically the equivalent of saying "yes" in this example.
Stay on target...

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