Should I pay my student loan as much as possible or keep my money in the bank?

Question

My student loan is the only debt I have. The return from the bank is 4.45% and I also have a CD account at 5%. The interest for the loan is lower than that. What should I do?

Thanks so much for all the answers; I have a lot to think about. Can you please help me choose the best answer?

Answer 1

That depends on what rate you're paying on your student loan. If you're loan payment is higher than the 5-5.5% you can get from the bank or CD, then you're losing money on the spread. In other words, the loan is costing you money. On the other hand, if you had your money invested in something that gave you an average annual return that exceeded the loan rate, then I would advocate keeping the loan because you're making money on the spread.

The other issue is whether your student loan is fixed or adjustable. Student loan rates will be going up about 1.5% in the next few months. If that affects you then it may be even more motivation to go ahead and pay it off. Ultimately, you just have to decide if you can invest the money for more than the loan payment with a reasonable low risk (based on what you're saying your risk factors are) because if not, then paying on the loan while you make less from the bank doesn't make sense.

Answer 2

Keep your money in the bank up to the amount that will give you a reserve of 3 to 6 months of living expenses.

Be sure to fund your retirement also. You should at least do the max ROTH IRA and enough to get any 401k match.

If you have some extra income after these savings and want to retire your debt early, then make slightly larger payments. However if you would likely get a car loan when you buy a car, then you are probably better off saving cash, so that you can lower your loan amount that would probably be at a higher interest rate.

Answer 3

Normally this is a matter of preference. If you don't mind carrying debt, then you are better off not paying off your student loan early. Just be sure you are comfortable with the fact that you will be carrying debt for some time (10 - 30 years!).

On the other hand, you may have the type of personality that prefers to be as debt free as possible. Even though you are making money by carrying the debt (since your bank and CD returns are greater than the loan interest rate), pay it off as soon as possible if you will sleep easier.

Answer 4

if the numbers cant make the decision easy for you then its a personal choice

some people dont mind debt others cant sleep at night knowing they owe money to someone else

you should pay off the loan at a reasonable rate to allow yourself money to live on

also the interest you are getting on the investments is being eaten up by the interest incurred on your debt

so you really arent going anywhere fast
however that being said, everyone has debt and loans these days
and you can just incorporate it into your house loan

a few questions for you to consider are
do you have enough to money to do both invest and pay off your debt AND live comfortably

since it is a school loan and they are usually for quite a bit of money the main determining factor is the length of time that you are paying off the loan for if it is going to take you 10 years or more to pay off the large amount of debt and you have it locked in at a small amount of interest like you do...
I would invest and not lose out on those ten good years of investing time if you are still young you can afford to do this

You will have more debt in the future so maybe saving this money for a rainy day downpayment on something is a smart idea

From my personall experience I never received enough interest from my investments to make an income while working to pay off my debt but my loan was at 9% and I found through trial and errror what type of investor I was my risk tolerance was lower than I thought. I cashed in my money and put it all on my loan.
Then aggressively payed off my loan and lived very frugally for a year to pay it off. Now that i am debt free I can invest as much as I can and have only lost one year. Thats my story

Yours is a bit different so its really up to you...

But be cautioned no investment is guarunteed, bank fees suck, and owing money is inevitable, even for the rich
The world of business is a game its all numbers and no reality
make hay while the sunshines but someday its gonna rain!

Answer 5

Since the interest rate is lower than what you are earning from the bank, in my opinion keep it in the bank and earn a little more on your money along with the student interest deduction on your tax return. However, keep in mind that your student loan may be a variable rate, therefore it may go up, which most interest rates are going up. Therefore, I would consolidate your loans now, before July 1, 2006. Then you can reevaluate your situation. Hope this helps.

Answer 6

It doesn't matter how little interest you are paying on the student loan - it is taking money away from what you are earning in savings. Pay off the student loan, then put what you were paying them into a 401(k), Roth, CD, or other investment vehicle.

Just make sure you keep aside $500-1000 in savings for emergencies.

Answer 7

any time you can make more money than you pay out in interest you are on the postive side. but like a CD if you need that money sooner than the maturity date you will pay penaltys..usually 3 months worth of interest or a set fee Depending on the amount owed to the amount saved (Bank,CD) is also a factor.. find a personal FINANCIAL ADVISER.. not PLANNER advisers do not charge to help you set up a plan they make there money off of the services or products that you use.... it seems like a simple question . but to get a simple answer an adviser needs to know all the facts and variables....

Answer 8

You need to compare the actual income you get from your bank on a monthly basis with the cost of the interest on your student loan. This should answer your question.

Answer 9

Safe a bit of money for a rainy day but I would pay off the loan. Once the loan is paid off then all your money is yours. Just think FINANCIAL FREEDOM. I became Financially free about 5 years ago and it great. Good Luck!

Answer 10

If it were me, and the interest I was paying on the debt is lower than the interest I'm earning on investments - I'd use my money for investments and not pay the loan early.