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Financial ? Re: paying off balance of a large loan

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Financial ? Re: paying off balance of a large loan

Old 01-21-08, 07:54 PM
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Financial ? Re: paying off balance of a large loan

I'm pretty sure I already know the answer to this, but I'm asking just in case I'm wrong. I have enough $$ in my bank account to pay off the balance of my student loan, which otherwise would take me several more years to pay off if I keep making my current payments of around $300 a month. Is there ANY reason NOT to do this? It's probably a dumb question, as I'll end up saving hundreds or probably thousands in interest if I do this, but I've also heard it's good for a credit rating to show you can make monthly payments on time (which sounds like bullshit to me, as I think it would reflect better if you don't have debts to pay off in the first place).

Last edited by bdshort; 01-21-08 at 07:56 PM.
Old 01-21-08, 08:12 PM
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I've heard the same as you - that it improves your credit rating to keep making those monthly payments - BUT - if I were you I'd pay it off anyway. Making monthly credit card payments, monthly phone bill payments, monthly electric payments is nearly as good (from what I have heard). Like you, I feel that it would be ridiculous to pay the extra money in interest from your student loan just for the 0.001% better credit rating.
Old 01-21-08, 08:16 PM
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The fact that you paid off the loan doesn't disappear from your credit file, so you still get "credit" for it. The only reasons I can think of not to pay off a student loan are (1) you can get a higher return from a high-yield savings account than the loan costs you in interest and (2) you want to have more cash available for your family in case the worst happens, since in the event of your death government secured student loans are discharged.
Old 01-21-08, 08:21 PM
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Well the reasons I will NOT be paying off my student loans even 1 day early (even though I currently have the cash to):

1. Interest rate is less than 2%
2. Get a higher rate of return elsewhere by not paying it off.
3. The interest portion of the payments is tax deductible.
Old 01-21-08, 08:22 PM
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if you only have a few years left, then i doubt there is much interest left to pay

some simple math should tell you that. and with the media crying recession it might be a good idea to keep the cash in the bank in case you lose your job
Old 01-21-08, 08:43 PM
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Originally Posted by briank
Well the reasons I will NOT be paying off my student loans even 1 day early (even though I currently have the cash to):

1. Interest rate is less than 2%
2. Get a higher rate of return elsewhere by not paying it off.
3. The interest portion of the payments is tax deductible.
Really?!? I have never seen a student loan interest rate that low. Are you talking about the Bank of Mom or something? The way the stock market is bouncing around, getting a higher rate of return than what such loans actually cost might not be so easy either (and few people fresh out of college make enough to itemize).

In answer the the OP's questions. If you have a suitable safety net of money, pay them off. You get points for paying off any loans and you'll probably find plenty of other ways to increase your credit score more effectively. Depending on how many years you are away from the end of the loans, you could save a fair amount of money too but reducing your monthly expenses by $300 is a good way to increase your liquidity too. Debt isn't a bad thing in all cases, it's how most people finance their big ticket items like homes, but a lack of debt allows you to save/invest/live a better lifestyle.
Old 01-21-08, 09:01 PM
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yeah you should have an emergency fund, something like 3-6 months worth of salary if possible. You should apply for a 0% credit card if your credit is good and transfer the balance to that.
Old 01-21-08, 09:23 PM
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Originally Posted by Houstondon
Really?!? I have never seen a student loan interest rate that low. Are you talking about the Bank of Mom or something? The way the stock market is bouncing around, getting a higher rate of return than what such loans actually cost might not be so easy either (and few people fresh out of college make enough to itemize).
My wife has a student loan with a comparable rate to the OPs. I think it's approx $30K at 2.50% amortized over 16 years. We are NOT paying that baby off, since (a) we can claim an above-the-line deduction for her student loan interest (1040 Line 33), which makes the actual out-of-pocket rate for this loan something stupidly low (like less than 1.9%), and (b) we can beat the crap out of that rate in fixed return things like bonds and online savings accounts.

If we paid it off right now, it would cost us $30K. Instead, we've got

Last edited by kenbuzz; 01-21-08 at 09:25 PM.
Old 01-21-08, 09:30 PM
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We can make this pretty simple:

X = Student Loan Interest

Y = Interest Bearing Account the Money is Presently in.

If Y is greater than X, no.
Old 01-21-08, 10:02 PM
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Originally Posted by Houstondon
Really?!? I have never seen a student loan interest rate that low. Are you talking about the Bank of Mom or something? The way the stock market is bouncing around, getting a higher rate of return than what such loans actually cost might not be so easy either (and few people fresh out of college make enough to itemize).

In answer the the OP's questions. If you have a suitable safety net of money, pay them off. You get points for paying off any loans and you'll probably find plenty of other ways to increase your credit score more effectively. Depending on how many years you are away from the end of the loans, you could save a fair amount of money too but reducing your monthly expenses by $300 is a good way to increase your liquidity too. Debt isn't a bad thing in all cases, it's how most people finance their big ticket items like homes, but a lack of debt allows you to save/invest/live a better lifestyle.
back around 2002 and 2003 they were that low
Old 01-21-08, 10:07 PM
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Originally Posted by Houstondon
Really?!? I have never seen a student loan interest rate that low. Are you talking about the Bank of Mom or something?
My student loans are now at 2.5%. I refinanced to 3.5%, but got a 1% credit for making 24 automatic payments. This is with Great Lakes and financed through US Bank.

I have the money, but no way am I paying it off.
Old 01-21-08, 10:20 PM
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Boy, times sure have changed since I went to school so long ago. Granted, the cost of going to school has been rising so fast that it would wipe out most of those savings, but I'd have loved to have such low interest rated (especially when double digit inflation was around; something I suspect most of you never got to experience as adults). In general though, if the interest rate is that low (pre or post tax) and you have substantially better financial opportunities to invest in, by all means use it like the government giveaway program it seems to have become.
Old 01-21-08, 10:57 PM
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Yeah, our loan is about 2%... We locked in around 2003. It actually just dropped more because we made on time payments for the past 3 years.
Old 01-21-08, 11:08 PM
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Originally Posted by Houstondon
Really?!? I have never seen a student loan interest rate that low. Are you talking about the Bank of Mom or something?
Yes as a few others stated. Consolidated in early 2004, I think the rates were 2.875% from July 2003 - July 2004 if I'm not mistaken.

Then the plan I was under, I received a 1% interest reduction after 36 ontime payments. This is good for the remaining 22 years.

Then I believe (have to double check) I get .25% rate reduction for automatic payment withdrawl from the bank.

So it's either at 1.625 or 1.875 for the next 22 years.
Old 01-21-08, 11:35 PM
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Yeah, student interest rates are the suck now! Somewhere around the 6% range.
Old 01-22-08, 01:12 AM
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I made the mistake of not consolidating way back when the rates were really good, so I guess I'm literally paying for it... it's pretty high but I'm not sure what it is. I guess I should see what the rates are now if I lock in... though I'm sure it wouldn't be less than even a high interest rate savings account (hadn't even thought about doing that... sure would have been nice!)... thanks for the input, and I have learned it's not as straightforward as I thought.

FWIW, I don't have any dependents and am in a fairly secure job right now, and probably have 7 years or so left on the loan.

Last edited by bdshort; 01-22-08 at 02:25 AM.
Old 01-22-08, 02:42 AM
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2%? Fuck man, you're screwing the bank. Enjoy it!
Old 01-22-08, 03:52 AM
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Originally Posted by Shazam
2%? Fuck man, you're screwing the bank. Enjoy it!
Hint: those loans are subsidized so it isn't the bank that is being screwed...
Old 01-22-08, 10:44 AM
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Originally Posted by Houstondon
Hint: those loans are subsidized so it isn't the bank that is being screwed...
Damn, now it's the taxpayers being screwed!
Old 01-29-08, 11:09 AM
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Originally Posted by Shazam
Damn, now it's the taxpayers being screwed!
Yeah, but we're screwed in so many other ways by government subsidies that this is a relatively minor "screwing" by comparison.

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