Student loans

[simozene]

Pay it off as slowly as possible?

I might be missing something but paying it off as slowly as possible isn't always the best thing.

I don't know everyones best situation, but my students loans that I owe right now are about 29k after 4 years of school, not to bad at all. If i paid them off as slowly as possible over the full course of the payoff it'll end up costing me over 52k after adding the interest, which is a decent 5.25ish%. Sure it's possible with the right investments to make that kinda money over 10-15-20 years or whatever your payoff happens to be, but in my case i'd be paying almost double what my loans were if i did the minimum payment. My goal is to pay it off as soon as possible so as to not pay all that interest. if i could get away with paying only 35-40k i'd consider myself lucky.

You are missing the point. There are two types of debt, good debt which can be used to make money and bad debt. College loans with a reasonable interest rate are good debt. If you pay the minimum amount and pay your loans over the full duration then you are obviously going to be paying a lot in interest. But the interest is tax deductible. Let's say that you have $100 to spare every month. You can either put this money towards your loan balance to pay off the loan quicker or you can put it into a savings account or investment to make money from it. If you do all the calculations and invest your money well, you will actually have more money by investing it instead of paying off your loans quicker. Even a basic online savings account (http://www.hsbcdirect.com) offers 5.05% APY. You can do even better with mutual funds.

Plus, by having your money in investments, it is there for you to use just in case you should need it for something. Say your car dies and you need to buy a new one and didn't plan on it. You have all this money sitting in investments you could use to accomplish this. If your money had been used to pay off your student loans quicker instead you might not have the liquid assets available to purchase a new vehicle. Even if investing in a savings account did not make more money for me than paying off the loan quicker I would still do it simply to have my assets readily available for me should I need to use them.

Here is an excellent excel spreadsheet tool for these type of loans that you can use. By inputting the loan amount, payoff period, interest rate, extra payment amount, and investment interest rate it allows a side by side comparison of the option of paying off your loan vs. investing the extra money. Keep in mind that it does not factor in that student loan interest is tax deductible and that some investment interest is taxed:
http://www.vertex42.com/ExcelTemplates/ ... ments.html

[Skyylya]

I'm not an accountant so i'm not fully aware of the tax deductability of student loans or mortage loans, so if one of you could elaborate on that i'd appreciate it.

But for what I was talking about with paying the interest on the front end is that by consolidating to the longer term and trying to pay it off early does not work to your benefit as you've already paid the interest. (again this has nothing to do with the opening an interest account and good vs. bad debt)

When you take out a loan you essentially take out 2 loans which are comprised of one payment. The ammortization or % of your payment that goes toward principal vs. interest. I just used your spreadsheet (which is cool btw thank you) and basically it shows what i'm trying to say better than i've said it.

For a 29000 dollar loan say there is going to 10000 dollars of interest. Your first payment of 200 dollars goes 75 toward principal and 125 toward interest. So the new balance is 28825 for the principal(or actually higher since most lenders compound daily) and 9875 for the interest. If you continue that payment eventually the ratio will swing to be equally spread between the principal and interest so after 10 years it'll look more like principal balance 22000 and interest balance of 2500. Even if you wanted to pay it off early, at half the time you've already paid all that interest and no amount of overpaying the principal is going to change that from this point forward.

It's the same concept with selling cars and how so many people end upside down in their cars.
Buy a car for 30000 over 6 years(72 months) and in the first 3 years you've paid off nothing but the interest value of your car so when you want to go trade it in and get something new and think you've paid off half your car you're wrong, you've only paid off maybe 8000 and still owe 22k but your interest has been paid off. Welcome to the car business you're now fucked on your car and stuck in it because you owe more on it than it's now worth.


Now, with all that said I have no idea how tax deductability works into the situation and could probably offset some things, I don't know. I agree with you that it's good to have liquid assets on hand in case emergency's come up. Lower payments do make things in the short term easier, but in the long term it's not always the case. Mutual funds aren't gauranteed return on your investment, when I was 18 I invested like 22000 with Meryll lynch and put 4k into a rIRA and in 5 years time lost 10k in teh mutual fund and 50 bucks in the ira. Granted I probably am one of the few that gets royally fucked but still, it's not gauranteed.

I don't know many banks that offer over 5.5% return on bank accounts nor many people with the will to not spend that money. People don't have the mindset of, i can pay 400 a month or 200 a month and bank the other 200. They think ok i can pay 400 a month or pay 200 a month and have an extra 200 to do whatever with. Not the case with everyone but i'm sure the majority of people wouldn't have the constraint to bank that and not touch it for 20 years, kudos if you can.

I wish I took a finance class when I was in school, i've learned a lot about loans/interest/financing since working at 2 car dealerships and with a financial lender, but a lot of it is unrefined and i'm sure there's a lot I don't know about. But the more I learn the more I wanna know. This thread needs to keep going as i'm sure since most of us are either in school, or will be out of school in the next few years could use some knowledge in this area.

[simozene]

I just used your spreadsheet (which is cool btw thank you) and basically it shows what i'm trying to say better than i've said it.

People don't have the mindset of, i can pay 400 a month or 200 a month and bank the other 200. They think ok i can pay 400 a month or pay 200 a month and have an extra 200 to do whatever with.

I wish I could take credit for making that spreadsheet, but I can't. I found it when I was researching mortgages.

Basically, when something is tax deductible it means you will get some money back from the government at the end of every year when you file taxes. If you are in a 25% tax bracket and pay $1000 worth of tax deductible interest on your student loans throughout the year you will be get back approximately $333. Granted, interest in a traditional savings account is taxed. So if you make $1000 in interest during the year in a savings account, at the end of the year you will be taxed $250 of that interest. Again assuming 25% tax bracket.

Your statement about mindset is 100% correct. Investing the extra money in a savings account rather than paying off the loan faster only works if you don't actually spend the money. Granted if an emergency arises, having the money there is useful and usually far better an option than taking out another loan when you need it. But if you don't have the financial mindset to actually save the money in the first place then the entire plan falls apart.

As I read the thread farther I saw that your interest rates on your loans are actually quite high. If you could consolidate those loans at a rate around 4-5% you would be in a much better situation to invest your money instead of paying off the loans quicker. The length of time on the payoff does not matter if you can get the interest rate low enough. In fact, I would almost always say that the longer the payoff the better simply because you are better off having liquid assets.

Also, just a tidbit of information. I consolidated my loans through SallieMae and originally sent them a check every month to pay them. Eventually I enrolled in their direct payment feature where SallieMae will automatically take money out of my bank account every month in order to pay the loan. When I enabled this option, SallieMae reduced my already low interest rate by .125% which was pretty cool. Saves me the annoyance of writing/mailing a check every month and saves me a little money too.

[archibaldcrane]

My dad made sure it was impossible to grow up under his roof and not be perpetually thinking about money. It made taking loans for grad school extremely stressful - that amount of debt didn't feel very good.

be glad he did. I learn this stuff for fun (if you can believe it) and its the type of information and way of thinking I wish I had as a kid or teenager. I'm curious what you meant by 'taking the loans was stressful'; did your dad give you heat because you were going into debt?

No, he didn't give me heat, but I was just so indoctrinated about not being in debt (pay off credit cards every month, buy a car straight cash, etc) and being fiscally responsible that when I had a $42,000 debt cloud hanging over me, especially with such an uncertain job future (My undergrad and grad degrees are in Film Production) it just really stressed me out. It's much more manageable now, my monthly loan repayments are under $300/mo.

[evilbau]

I just used your spreadsheet (which is cool btw thank you) and basically it shows what i'm trying to say better than i've said it.

People don't have the mindset of, i can pay 400 a month or 200 a month and bank the other 200. They think ok i can pay 400 a month or pay 200 a month and have an extra 200 to do whatever with.

Your statement about mindset is 100% correct. Investing the extra money in a savings account rather than paying off the loan faster only works if you don't actually spend the money. Granted if an emergency arises, having the money there is useful and usually far better an option than taking out another loan when you need it. But if you don't have the financial mindset to actually save the money in the first place then the entire plan falls apart.

Yeah, i'm sorry, I just sort of assumed that. Kind of like when I mentioned about getting more credit/credit cards, the assumption is that you won't carry a balance (pay in full every month). For people who are unable to control their spending, there are the Suze Ormons of the world to turn to for advice. To offset this, I usually put the money in something that won't be tapped easily, like my brokerage account. I'm sure if it were in my checking acct I would be much more likely to dip into it for impulse buying.