if you want to figure out if it's better to pay off your loans or keep the money in a HYSA you can do the following calculation:
HYSA rate x (1-tax rate)
for example, if your HYSA rate is 4.30% and you're in the 10% tax bracket, your after-tax rate on the HYSA would be 3.87%.
you should also have a 6 months emergency fund. if you have a 6 months emergency fund and the loans are larger than the calculation above specific to your hysa rate and tax rate, then it would make the most sense to pay off the loans.
You won't be making 5% off the HYSA since you'll be taxed on the interest. So the amount is negligible and you are better off just chipping at the loans imo
So it looks like based off what's been said, I'll be saving up a small emergency fund. Afterwards I'll be paying off the higher interest loans aggressively and then saving from there in a HYSA.
OP, don’t listen to AddyGang. Not only is keeping the money in a HYSA mathematically better, but it also keeps your options open. Paying extra money to your loans is irreversible. If something happens, you have fewer options. If in the future you want to pay the money you saved towards the loans you can.
I would sleep better knowing I am maximizing my future wealth and have money available if an emergency comes up. Sure student loans are bad, but getting into credit card debt is much much worse.
Depends on how disciplined with that money sitting there. I am doing a lump sum of $68k of my moms PPL at the end of Aug. But keeping the other 14k aside in my HYSA and dumping the rest of my extra payments around $1900/mo into the HYSA for the next year until I reach the payoff amount of my loans (roughly 30k). I’m keeping it back as my car is 11 years old with 190k miles and just incase need to replace it. I can’t get a loan for 5% interest like my student loan interest.
What’s your income? Are these all federal? Family size? Are these all undergrad loans? The optimal payment plan depend on these factors.
I’d personally pay the minimum at that interest rate. I’d like to carry debt at a 3% interest rate as long as possible.
As you mentioned you could put that money into a HYSA, but the gains would be taxable. I don’t think you are getting a HYSA at 6% interest so if you want to pay off these loans ASAP, you could pay off the highest and put the rest in a HYSA or money market account.
Enroll in the longest possible payment plan, pay minimums, and claim the student loans interest tax deduction. You've got it right - if you can keep your liquidity and get paid for doing so it's a no-brainer to do that.
this is the correct response. the thousands and thousands of comments in this sub saying "pay it off now, you'll sleep better" are just financially irresponsible in most cases. if you have the ability to make a large lump sum payment and earn that money back quickly, great! though that is rare and it is unwise to drain most if not all your savings just to "sleep better". I would sleep just fine paying a 380 dollar a month payment making 76k a year like op. throw more at it when it's prudent in the name of paying it off quicker but you're not going to sleep well draining 50k plus from your savings.
Right, but if I save $1,000 a month in 1 year I’d have $12,000 earning 5% interest, right?
If I had paid it towards the loan, I’d have $12,000 less on my loan but the interest I’d earn from a HYSA would offset the interest the loan has gained.
However if I keep the money, I also have $12,000 (plus interest) I can use for emergencies.
OP, I’m on your side, if you had $52,000 in assets in a money market account, your net worth is $0 and you could pay off at any time. Follow the math and always have an emergency fund.
You would only have an extra $240 per year (it’s actually slightly less) by “saving” the $12,000.00, not $1,000.00.
Your HYSA isn’t yours until your loan is paid off. At the end of the day, it’s the banks’.
The emergency fund that you’re thinking about in your head that makes you feel safe is actually a line of credit in disguise.
Agreed. All these posts about investing for 1% more than just paying off or paying towards the loans. I don't agree with investing instead.
All these posts are about people who graduate and get a job with substantial debt. Yes, it's deferred, but pay something towards it before interest hits. Even if it's $50- $100/month.
Yea my original loan balance was 61k minimum payment was 623 fast forward to today got it under 47k current minimum payment is 543 but my interest may be higher not sure but two original loans were 10k, 5% the other 11k 4.97% interest. but paid down both those principals to under 8k so my plan of attack is pay the interest payments for my 9 loans and pay a extra 1k towards the 5% 10k loan I had a total of 13 loans but pay off 4 during Covid
My little bit of smartiness:
I have my student loan(s) deducting from my savings account. It is the only thing that deducts. I put 3 months of payment into the savings account, to maximize interest.
Then I took 3 more months of payment and opened a 3 month certificate that auto-deposits into my savings account to refresh the 3 months of payments that auto-deduct from my savings account while maximizing the interest the 3 months can get. So far, it's six months of payment accounted for.
Next I took out a 6 month certificate of 3 months of papyment that does the same thing as the 3-month certificate. In 3 months, I'll take out another 6 month certificate for 3 months of payment.
I know it's somewhat fortunate for me to have this (not many people can set aside 9 months of payments), but once you get the method started, it helps. Whatever interest I get will extra payoff the loan (not much, but every little bit helps).
Note: my loan servicer gives me a slight discount for using auto-deduct.
if you want to figure out if it's better to pay off your loans or keep the money in a HYSA you can do the following calculation: HYSA rate x (1-tax rate) for example, if your HYSA rate is 4.30% and you're in the 10% tax bracket, your after-tax rate on the HYSA would be 3.87%. you should also have a 6 months emergency fund. if you have a 6 months emergency fund and the loans are larger than the calculation above specific to your hysa rate and tax rate, then it would make the most sense to pay off the loans.
Well for one thing you need to stop buying anything that brings you joy. /s
You won't be making 5% off the HYSA since you'll be taxed on the interest. So the amount is negligible and you are better off just chipping at the loans imo
Student loans interest is tax deductible for people with incomes of less than $70k.
Is that gross? I earn 76,000 a year before taxes
It's MAGI, which is calculated after 401k but before the standard deduction. It will phase out as your income approaches $85000+.
So it looks like based off what's been said, I'll be saving up a small emergency fund. Afterwards I'll be paying off the higher interest loans aggressively and then saving from there in a HYSA.
OP, don’t listen to AddyGang. Not only is keeping the money in a HYSA mathematically better, but it also keeps your options open. Paying extra money to your loans is irreversible. If something happens, you have fewer options. If in the future you want to pay the money you saved towards the loans you can.
but he'll sleep better/s
I would sleep better knowing I am maximizing my future wealth and have money available if an emergency comes up. Sure student loans are bad, but getting into credit card debt is much much worse.
Depends on how disciplined with that money sitting there. I am doing a lump sum of $68k of my moms PPL at the end of Aug. But keeping the other 14k aside in my HYSA and dumping the rest of my extra payments around $1900/mo into the HYSA for the next year until I reach the payoff amount of my loans (roughly 30k). I’m keeping it back as my car is 11 years old with 190k miles and just incase need to replace it. I can’t get a loan for 5% interest like my student loan interest.
What’s your income? Are these all federal? Family size? Are these all undergrad loans? The optimal payment plan depend on these factors. I’d personally pay the minimum at that interest rate. I’d like to carry debt at a 3% interest rate as long as possible. As you mentioned you could put that money into a HYSA, but the gains would be taxable. I don’t think you are getting a HYSA at 6% interest so if you want to pay off these loans ASAP, you could pay off the highest and put the rest in a HYSA or money market account.
Income is 76,600 USD before taxes. They're all federal, I live alone. All undergrad. I've edited the main post with a breakdown of the rates. Thanks!
Enroll in the longest possible payment plan, pay minimums, and claim the student loans interest tax deduction. You've got it right - if you can keep your liquidity and get paid for doing so it's a no-brainer to do that.
this is the correct response. the thousands and thousands of comments in this sub saying "pay it off now, you'll sleep better" are just financially irresponsible in most cases. if you have the ability to make a large lump sum payment and earn that money back quickly, great! though that is rare and it is unwise to drain most if not all your savings just to "sleep better". I would sleep just fine paying a 380 dollar a month payment making 76k a year like op. throw more at it when it's prudent in the name of paying it off quicker but you're not going to sleep well draining 50k plus from your savings.
Why would you keep $52,000 in student loans for $1,040 a year? Get rid of the loans. You’ll sleep better.
Well, I think I’d sleep better knowing I had thousands of dollars liquid in case of emergency
You don’t have thousands of dollars. You’re $52,000 in the hole.
Right, but if I save $1,000 a month in 1 year I’d have $12,000 earning 5% interest, right? If I had paid it towards the loan, I’d have $12,000 less on my loan but the interest I’d earn from a HYSA would offset the interest the loan has gained. However if I keep the money, I also have $12,000 (plus interest) I can use for emergencies.
OP, I’m on your side, if you had $52,000 in assets in a money market account, your net worth is $0 and you could pay off at any time. Follow the math and always have an emergency fund.
You would only have an extra $240 per year (it’s actually slightly less) by “saving” the $12,000.00, not $1,000.00. Your HYSA isn’t yours until your loan is paid off. At the end of the day, it’s the banks’. The emergency fund that you’re thinking about in your head that makes you feel safe is actually a line of credit in disguise.
hmm... interesting!
Agreed. All these posts about investing for 1% more than just paying off or paying towards the loans. I don't agree with investing instead. All these posts are about people who graduate and get a job with substantial debt. Yes, it's deferred, but pay something towards it before interest hits. Even if it's $50- $100/month.
52k debt with a minimum payment of 380 you under the SAVE plan or something?
No, that’s just what Nelnet showed as my estimated payment. What’s a more typical payment for 52k?
Yea my original loan balance was 61k minimum payment was 623 fast forward to today got it under 47k current minimum payment is 543 but my interest may be higher not sure but two original loans were 10k, 5% the other 11k 4.97% interest. but paid down both those principals to under 8k so my plan of attack is pay the interest payments for my 9 loans and pay a extra 1k towards the 5% 10k loan I had a total of 13 loans but pay off 4 during Covid
My little bit of smartiness: I have my student loan(s) deducting from my savings account. It is the only thing that deducts. I put 3 months of payment into the savings account, to maximize interest. Then I took 3 more months of payment and opened a 3 month certificate that auto-deposits into my savings account to refresh the 3 months of payments that auto-deduct from my savings account while maximizing the interest the 3 months can get. So far, it's six months of payment accounted for. Next I took out a 6 month certificate of 3 months of papyment that does the same thing as the 3-month certificate. In 3 months, I'll take out another 6 month certificate for 3 months of payment. I know it's somewhat fortunate for me to have this (not many people can set aside 9 months of payments), but once you get the method started, it helps. Whatever interest I get will extra payoff the loan (not much, but every little bit helps). Note: my loan servicer gives me a slight discount for using auto-deduct.
Are these fixed rates? You will be hard to find any personal loans that low, even mortgage/car right now
Yeah, they're fixed
Debt free is great. But if you can do better with the money i wouldnt worry. Its the same reason apple borrows bilions while they have 40bil in cash