Which is the best? To pay off loans ASAP or make payments and save money?

Question

Should I pay off my student loans over a 3 or 4 year period or should I save that money and make the minumum payments on the loans for fifteen years?

The loans will be about $100,000 total and the extra income per year that I am asking about will be about $30,000.

I would appreciate answers from people who actually know the answer. No guesses, please. Thank you.

In case you are like the first person who answered and you can not read or you do not pay attention to what is being said, let me repeat myself. The $30,000 per year IS GOING TO BE EXTRA! That is not my total earnings!

Answer 1

you should be compairing interest rates. if you are paying at 3% interest and you can get a savings account at more than 3% then just pay minimum on the loans and put money in saving. but if you are paying at 8% and a savings account will get you less than 8% you are better off paying the loans off as quickly as possible.

Answer 2

You have to compare the interest rate on the loans to the rate of return you would receive if you use the money otherwise. So the issue is, what will you be doing with the money. Assuming your student loans are at 5%, think of the following examples:

Example 1: If you simply put the money in a saving account at 3% interest, you are better off paying off your student loans.

Example 2: If you invest in mutual funds with an average annual rate of return of 8%, you may consider investing rather than paying off your student loans. You major consideration is the risk of losing money, or making less money, in the short run if you invest.

Example 3: If you buy a home and get a mortgage at 6.75%, you are better off putting more money down on the home and continuing to make payments on your student loans.

Example 4: If you buy a car and the interest on the auto loan is 2.5%, pay down the student loans because the auto loan is cheaper.

Bottom line: Pay off the lowest rate loans last. Consider investing if the interest you will receive is greater than the rate you are paying on the loan, but weight the risk of losing money in your investment into making your decision (i.e. savings accounts are 0 risk, stocks are high risk, most other investments are somewhere in between).

Answer 3

I'm an accountant. Good question. It's always best to pay off debt first, then start to save because the interest rate you pay on a loan is ALWAYS higher than the interest rate you earn on any savings. That's how banks make their money. For example, I have a mortgage at 6.25%. If I make the minimum payment every month and buy a CD at say 4%, I'm actually losing 2 1/4 % on my money...and the savings are even more dramatic with credit cards. No one tells you this because no one has a vested interest in you paying off your debts. Hope this helps.

Answer 4

Well I am sure you know that student loan interest rates went up again this past July 1st. Regardless, pay it off ASAP. The longer you pay the loan, the more money you pay in interest expense and unless you signed some magic contract that locks in your current interest rate for 15 years, you're guaranteed to pay higher interest rates from now until 2021. You will never get a high enough "paid interest credit" on your income taxes to offset the total interest expense you're going to incur.

If you're projecting a $100,000 student loan then it is possible to say the interest rate you will pay it a complete unknown. You may know the standard loan rate TODAY, but what will it be when you get out of school and begin paying it back??

My example here will apply to simple calcualtor math. We don't have the time to figure out weekly deposits and compunding interest vs. the declining balance of your student loan with minimal payments...BUT...let's say you have the 100,000 loan at 6% and you take you're discretionary cash of $30,000 a year and invest. 100K x 6% = 6K in accrued interest. What will you invest the 30K in to totally offset the 6% you're losing on a 100K loan? The day you have to pay your student loans at 6%, you will need to immediatly deposit the entire 30K into an investment vehicle that guarantees a 20% return for 12 months just to offset the accrued interest. What a releif though, at year 2, you will only have to take the 60K in extra cash and immediatly invest into something at 10% to offset the (hopefully) still 6% interest rate on the loan. Even if you could do that and your total minimum payment will apply to the loan, how much damage do you seriously think you'd do to the 100K loan? That's right...the minimum amount of damage.

You're also poorly utilizing the "opportunity cost" of your money. Unless your weekly deposits of your 30K a year discretionary cash can guarantee a positive cash flow situation at the end of 12 months, you're primed for losing potential investment money for the next 15 years. Pay off the loan in 3-4 years, save the money you'd end up paying just in interest for the remaining 11 years and invest invest invest.

On top of that, every month you heavily overpay your loan, you'll better your credit score because there is less debt attached to you. How about this scenario: living at home for 3-4 years and pay off your debt, real estate continues it's downward slope and at the end of year #5 a nice house/condo for $150,000 hit the market...at the end of year #5 you've saved $30K or more, qualify for the 20% down easily and purchase the house at a nice interest rate becasue you don't have an extra $100K over your head AND a great payment record. Hm?

Answer 5

It is never cheaper top make payments when you can pay it off as in paying it off early most of the interest would be eliminated. Interest usually account for a majority iof the loans. Ask your friendly bank loan office to give you the amount of the savings as mos tof them have a calculator handy, and will do it over the phone.
If you pay it off early you will not see the savings in actual cash left in your account, but you make payments you would see the money coming out of your checking account every month. The savings will reflect in your total over all cost.Level
for example in a 15 year 100,000 loan at 8.6% starting in 2007.
every year: $990.61 $178309.81



Graduated

first 4 years: $716.67 $34400.00

remainder: $1174.10 $154981.17 so you can see that your total interest is over 100,000 for a 15 yr period.
paying this loan off totally in 4 years would reduce your cost by at least 3/4
; you may check out a bank loan on realestate if you own property as the rates would eb down in the 6.25 and up range.

Answer 6

If you can answer the questions below, you'll sure know exactly what to do with your financial.

1/ How much interest are you paying on those student loans?

2/ How much interest is your saving account giving you ?

3/ Do you own a House, or are you planning to buy a House soon?

4/ Do you have enough money in your saving for a "rainny day" or unexpected events?


Good luck.

Answer 7

student loans are usually at a low interest rate. If your money can make more somewhere else, it makes sense to only pay the minimum. If it was a high interest credit card or something I would say get the principle down!

Answer 8

Make the payments, and save money/ invest...I would suggest start learning how to invest for yourself, and pay off your loans.
If you wait to invest, you will wait 5/6 years or however long it takes to start building up your nest egg...so start today!

Answer 9

That depends on the interest rate that you are paying on the loans vs. the interest your money could earn for you if you kept it. That's the trade-off, you just gotta do the math.

Answer 10

You are earning 3% and the loan costs you most. At todays interest rates it is questionable that you will save money.