Student loan - would you ever pay this one off early???

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burgrat
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Student loan - would you ever pay this one off early???

Post by burgrat »

I have a large student loan from my dental education. I am fortunate to be in a position where I can pay it down significantly (or completely off) if I choose to. It is approx. $160,000 at a fixed 2% rate. My monthly payment is about $700 for 20+ more years. Another important factor is that it is 100% forgiven in the event of my death, so there is no risk of burdening my family with this debt if something were to happen to me.
I would like the Bogleheads' opinions: is there any reason to pay this thing off early??? The reason I ask is that I hate debt, even "good" debt, and would love to have the satisfaction of not owing anything. My plan right now is to stay the course and to leave this loan on autopayment through its full term. Even at today's interest rates, I can buy a long term CD for more than 2%! I'm curious if anyone suggests something different.
grberry
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Post by grberry »

Disability comes to mind, but that is about as good a loan as you can find.
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Post by Sekar »

I have student loans with low interest rates but I am working on paying them off as fast as I can. Becoming debt free is more important to my peace of mind than trying to make a little money on investment difference.
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neurosphere
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Post by neurosphere »

I would not even consider paying this off. Not because of the interest rate, but because of the death clause.

If you pay off the loan today, and die tomorrow (not that you will, but just sayin'...), your heirs are out $160,000.

A wise man once told me, make sure you are worth more ALIVE than dead. :wink:
musbane
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Post by musbane »

neurosphere wrote:I would not even consider paying this off. Not because of the interest rate, but because of the death clause.

If you pay off the loan today, and die tomorrow (not that you will, but just sayin'...), your heirs are out $160,000.

A wise man once told me, make sure you are worth more ALIVE than dead. :wink:
Except...except that would be a reason to pay it off.
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neurosphere
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Post by neurosphere »

musbane wrote:
Except...except that would be a reason to pay it off.
:oops:

I forgot to add the "although...." prior to the 'a wise man'.

So perhaps paying the loan off ensures those closest to you want to keep you around to 'earn back' the cash you just spent to pay off the loan. :D
nokkieny
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Post by nokkieny »

thats ridiculous, no wonder college tuition is so high..
If you pay that off than you probably did not get a very good education
Beantown85
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Post by Beantown85 »

I would not consider paying that off early. Not a chance.
musbane
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Post by musbane »

Seriously, if the object is to FEEL debt free, buy 20year treasuries with a yield of more than 2% in an amount that will pay off the loan - dedicate the bonds in your mind (and believe it) to the debt.
The bonds will cost less than the debt and if you die early, your heirs get what is left of the bonds and no debt. Zero risk. Win - win. Except of course for the debt holder, but then they made the rules.
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Post by sport »

I always felt that while it feels good to be debt free, knowing that you have the money to pay off the debt any time you wish is just as good. Just make sure that the money is in a safe investment, such as a CD, and then you don't need to be concerned about it. Under these circumstances, the debt becomes a mere bookkeeping entry. Some people will want to make more aggressive investments with the money. However, then you are investing with borrowed money -- not a good plan for someone who is bothered by being in debt.

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DTSC
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Post by DTSC »

May I ask how you got this loan? What is the catch? Why would anyone want to loan you money at such a low interest rate?
therub
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Post by therub »

I recently finished mine off with a similar rate. My reasoning was that it frees up that much income for other things. Additionally, it means I need less income to live in the case of hard times.

Besides all that, it feels great, and that's worth something.

This is similar to the mortgage discussion which pops up frequently. I always wonder if all those who advocate keeping the loans would sing the same song if the question was reversed.

That is, "I'm debt free but can take out a 160k loan at 2%, should I do it?"

Therefore, I would work on it, but I wouldn't sacrifice tax-advantaged retirement savings, emergency fund, or to some extent lifestyle, to do it.
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Taylor Larimore
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Post by Taylor Larimore »

Hi Bergrat:

In the early 70s we purchased a small 4-unit apartment building with a 4% GI loan. We decided to sell in 1980 at a time when the Prime Rate was 21%. Unfortunately, no one could get a commercial, reasonable interest rate mortgage loan to buy our building. However, we easily sold our apartment building for well above it's value by letting the buyer assume our (now valuable) 4% loan.

Your low interest loan has value. I would keep it--especially with the pay-off at death clause.
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Post by Toons »

I would pay it off :D :D
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bdpb
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Re: Student loan - would you ever pay this one off early???

Post by bdpb »

burgrat wrote:Even at today's interest rates, I can buy a long term CD for more than 2%! I'm curious if anyone suggests something different.
You'll have to pay taxes on the CD. At your tax rate you will probably need
to get a 3% CD.
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Post by relentless »

Best "mortgage" you will likely ever get even accounting for possible mortgage interest deduction. I am in a similar position (with somewhat higher) interest rates but still below market for 30 year mortgages. I plan to pay off my future mortgage (currently renting) super fast and treat my 30 year student loan effectively as my house mortgage while building up an investment portfolio.

Also unlike a standard mortgage your great rate will effectively "transfer" to your next property if you sell that house. I don't think you can get a conventional mortgage to do that. Once you have a paid for house and reasonable retirement nest egg, then perhaps might make sense to start paying this loan off for peace of mind depending on rates at the time.

Also, like you I consider it an extra life insurance policy for my family.
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burgrat
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Post by burgrat »

DTSC wrote:May I ask how you got this loan? What is the catch? Why would anyone want to loan you money at such a low interest rate?
There is no catch. I consolidated all my Stafford (subsidized and unsubsidized) loans in 2005 and this was the rate. It actually was 3% fixed with a 1% reduction with autopay from my bank account. If I default on a payment, the rate will return to 3%, so I do not plan on letting that happen. If this amount of student loan debt sounds high, it is the result of 4 years of dental school and 3 years of specialty residency. I have paid off an additional $80,000 in private student loans, which could not be consolidated, that were at a much higher rate. I know this is an insane amount of school debt, but for me the risk did pay off.

Thanks for all the replies everyone
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market timer
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Post by market timer »

No, I would never voluntarily pay down such a low ahead of schedule in this interest rate environment. In fact, I'd try to extend repayment using any reasonable means available.
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Post by Niko »

burgrat wrote:
DTSC wrote:May I ask how you got this loan? What is the catch? Why would anyone want to loan you money at such a low interest rate?
There is no catch. I consolidated all my Stafford (subsidized and unsubsidized) loans in 2005 and this was the rate. It actually was 3% fixed with a 1% reduction with autopay from my bank account. If I default on a payment, the rate will return to 3%, so I do not plan on letting that happen. If this amount of student loan debt sounds high, it is the result of 4 years of dental school and 3 years of specialty residency. I have paid off an additional $80,000 in private student loans, which could not be consolidated, that were at a much higher rate. I know this is an insane amount of school debt, but for me the risk did pay off.

Thanks for all the replies everyone
I believe the rate. I consolidated my law school loans that same year and was able to lock in at 1.625% fixed for 30 years. I then entered the "graudated" payment plan to defer payments as long as possible. Rates were incredibly low back then, especially if you knew where to look. Plus, I get a tax deduction for what little interest I do pay to boot!
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Post by marco100 »

If you have 160k rather than pay off the loan, since you are a professional, if you don't want to invest in stocks or bonds, you can think of ways to use the funds, or some of them, to expand your practice; or perhaps improve your credentials somehow.

I agree with those who state that paying off such a low fixed interest rate is not optimal.
beareconomy
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Post by beareconomy »

You have zero reason to pay that loan off at 2%. You can earn more interst in a 10 year cd from discover bank at 3%. Just my 2 cents. Looks like other people's money to me.
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Post by slug »

I'm sitting on about $70k at about the same rate, and like others I graduated around the same time. Half of mine is variable rate. That half I am attacking. The other half will receive the minimum payment for the life of the loan.

If I could borrow more at that rate now, I'd be doing it.
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kenyan
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Post by kenyan »

burgrat wrote:
DTSC wrote:May I ask how you got this loan? What is the catch? Why would anyone want to loan you money at such a low interest rate?
There is no catch. I consolidated all my Stafford (subsidized and unsubsidized) loans in 2005 and this was the rate. It actually was 3% fixed with a 1% reduction with autopay from my bank account.

Thanks for all the replies everyone
Concur with the no catch. We refinanced all of my wife's federal student loans in 2005 at 1.6% (which I think was with a 0.5 or 0.25% autopay plan). We also have no plans to pay this debt off early...I think it's a 25 year graduated payment plan that started off small and increased payments over time. Our income is such that we even get a partial tax benefit to the meager interest we do pay. Not quite as much debt, though...$55k (originally) or so in addition to some private loans that are variable rate and that we are paying down.

I believe that consolidation rates rose significantly in the latter part of 2005.
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Post by caluchko »

Re: the "death clause": I thought that for any unsecured loan your estate would not get stuck with any of the debt. Am I mistaken? So for credit card, medical, student loan debt, when you die the bank eats the loss.
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Post by Sekar »

caluchko wrote:Re: the "death clause": I thought that for any unsecured loan your estate would not get stuck with any of the debt. Am I mistaken? So for credit card, medical, student loan debt, when you die the bank eats the loss.
This is not so. If the loan is yours only, your estate becomes responsible for paying it off before heirs get anything.

Even if this were not so, would you want to be remembered as a person who belongs to a family that does not pay off its debts? There used to be a social stigma for this and people were thrown into prison if they did not pay off there debts.
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Post by caluchko »

Sekar wrote:
caluchko wrote:Re: the "death clause": I thought that for any unsecured loan your estate would not get stuck with any of the debt. Am I mistaken? So for credit card, medical, student loan debt, when you die the bank eats the loss.
This is not so. If the loan is yours only, your estate becomes responsible for paying it off before heirs get anything.

Even if this were not so, would you want to be remembered as a person who belongs to a family that does not pay off its debts? There used to be a social stigma for this and people were thrown into prison if they did not pay off there debts.
No worry about social stigma for me. Does the agency collecting the debt worry about the social stigma of collecting from a poor, grieving widow who will now have to care for her sick, hungry children for herself? Social stigma only works if it applies to all entities equally. Better to have laws.

For me it would be strictly business, just like a decision for a business or individual to file for bankruptcy. I would never pay off a relative's debts if I was not required to by law, unless I knew that an individual would be significantly hurt (i.e. a person loan from a friend). Otherwise, the possibility of default is part of the interest rate I was paying. The same sort of situation as a decision on whether or not to forclose on a home. And debtor's prison was not social stigma. It was law.

So back to my question. Let's say I rack up $100,000 in medical bills and then die. The collection agency calls my grieving next-of-kin the week. Can they just tell the collection agent to buzz off? Could the collection ageny sue? What if I left my 401k to a relative? Could they get that money?
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Post by Scott S »

This is (probably) the cheapest money you'll ever get. I'd be tempted to keep it as long as possible, as inflation will help you out, too. :wink:

- Scott
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Post by jlq39 »

Scott S wrote:This is (probably) the cheapest money you'll ever get. I'd be tempted to keep it as long as possible, as inflation will help you out, too. :wink:

- Scott
This has been my rationale as well for keeping my wifes student loan. The rate is 1.6% after tax fixed for the life of the loan. While I absolutely hate debt and would like to see it off my balance sheet, there are definitely other things we are working toward that are more important, as in, maxing our retirement accounts and paying off our mortgage. The student loan is last on the totem pole. From an emotional standpoint though, I do not like debt, so it does bother me to let it sit there, so I understand the back and forth on the decision.
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Post by kenyan »

Sekar wrote:
Even if this were not so, would you want to be remembered as a person who belongs to a family that does not pay off its debts? There used to be a social stigma for this and people were thrown into prison if they did not pay off there debts.
...and then the housing bubble burst. Not going to comment on whether or not there should be a stigma, but I think there has been a definite shift in this country in the past few years on whether or not one should feel morally responsible to pay back one's debts.
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Post by jasonlitka »

grberry wrote:Disability comes to mind, but that is about as good a loan as you can find.
My wife's undergrad loans are at 1.875%. :D
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Post by Random Musings »

Tuition has been historically inflated at a high rate, but loans on them are typically attractive. Almost sounds like a subtle way how the government is subsidizing public and private colleges.

Entitlements are for the poor and wealthy.

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Post by relentless »

Two addtional concerns about the long-term CD you mentioned.
First, not sure if dentistry is as litigious as surgery but may need to consider asset protection issues. Would hate to have you exposed to a large judgment that took the CD money and left you with the loan! I am not an expert on this subject but 401ks/IRAs investing in fixed income funds might be better option than a CD from this standpoint (may depend on your state?). Might look at the asset protection threads here and consider legal counsel. Was a major concern on my part. But maybe I am paranoid.
Second, would think hard about committing to a multiyear CD with rates as low as they are given both inflation risks and the reduced liquidity and penalties for early redemption. I would personally not commit to over a one year CD in this market (actually probably would not use a CD at all) but others might disagree.
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