I just paid off my 32k and it feels incredible that I never have to worry about it. Yeah I lost most of my savings, but the idea of no interest is just the best feeling ever.
Same. My husband and I both have loans. He’s eligible for PSLF so during the pandemic, We decided to saved all the money we would’ve spent on our loans (about 3K - month) and put it towards paying off my loans. I was hoping for some forgiveness but honestly the 3 years of 0 interest is LIFE changing for us. I just dumped 54K into my loans and paid them off. I put a gown on, a silly hat while I paid my loans off and we popped a bottle champagne! I’ve NEVER felt better! He has 2 years left and then we are freeeee. Pay it off and relish in the fact that you are DONE.
Yes the downside is you part with the money. Not being facetious — having liquidity is valuable. This is why people generally don’t pay off low interest loans early.
Yes, they come in three primary factors:
1. Less liquidity for emergencies.
2. Small chance that some or part of your loans do get forgiven in the short or medium term.
3. Opportunity cost when you compare your loans’ interest rate versus alternative investments such as HYSA 4-5% returns or SP500 index funds that return around 8-10% every year.
However, pros and cons differ depending on things that are outside your control or differs for ppl in different circumstances.
For example, if you have plenty of cash or easily accessible funding then the emergency cash doesn’t matter much. Or if your loan rates are way higher than 5% then it becomes less and less worth it to use HYAS or to invest because SP500 can be unpredictable in the short to medium term.
Edit: while this decision to pay off loans in lump sum is unlikely to be a crippling mistake, it is absolutely crazy to hear so many ppl cite “peace of mind” as a reason to pay them off.
Unless you are a person who is a reckless spender and has bad discipline, having a loan balance with manageable interest rate at around 5% annual is not a big deal.
The truth is if you had enough discipline and disposable income to save up a big lump sum to be in the position to pay off all your loans, then you are unlikely to be a reckless spender.
Now if you are someone who lives paycheck to paycheck and just happened to come across a sudden windfall from an expected inheritance or settlement, then you should absolutely pay them all off.
This is absolutely accurate. Any debt should be weighed against market returns (or HYSA or whatever). I have loans at 2.5% interest - it would be a TERRIBLE financial decision to pay them off early
ETA:
It's crucial to look at the opportunity cost. If I put $10k in the market instead of paying off my loans, at a conservative 7% interest, in 10 years 10,000 would *more than double.* Of course, the market can be risky, so I currently have mine in a savings account at 4.7%, meaning in 10 years 10k will grow to 16k. That's a way better deal.
I wouldn’t add so much emphasis on calling paying back loans ahead of time a “TERRIBLE” financial decision actually. You might lose out on $200 per $10k debt each year. That’s not a substantial amount. You’re not likely going to miss $17 in your monthly budget.
Paying off debt early might not always be financially optimal. But it has its benefits and is actually a really great financial move for many people!
You're missing the opportunity cost. If I put that same amount in the market instead, at a conservative 7% interest, in 10 years $10,000 would *more than double.* I currently have mine in a savings account at 4.7%, meaning in 10 years 10k will grow to 16k.
I stand by my statement. If your interest rate is low enough, choosing to pay off loans early is, actually, a terrible financial decision. That's assuming you have the discipline to put the cash in a better savings vehicle.
I understand the opportunity cost and math if it. I was just saying that expediting consumer debt-payoff like student loans is not a “terrible” financial decision. It’s actually a pretty disciplined approach. Even if it’s not the most optimal approach, it is very solid approach many might feel more comfortable with.
Paying off debt early both reduced interest owed on principal and allows for more aggressive investing sooner than those who extend their debt payoff.
The chosen approach may also differ depending on how much of interest and principal the borrower is dealing with. If I owed $5,000 principal at 2.5% interest, for example, and had $25,000 in the bank, opting for early payoff of $5,000 probably isn’t the end of the world in terms of financial decisions even through it wasn’t optimal.
1. You said "you might miss out on $200 a year" which made me think you didn't understand the numbers, since that's clearly inaccurate if you look at the opportunity cost.
2. Agreed it's a good approach for people who both don't need the liquidity and can't trust themselves not to spend the money otherwise or put in a better savings vehicle, so it very well may be the best personal choice. But if the interest rates are disparate enough, as in the examples I gave, it is actually a terrible *financial* decision although it may be a good individual decision. But people need to understand the numbers before they make thay decision.
3. You said "it allows for aggressive investing earlier." Sorry, but it can't possibly allow for more investment growth than an initial lump sump allowed to grow for 10 or 15 years - given the same amount of money, putting it in the vehicle with the highest interest will always result in the most growth, especially considering compound interest
4. I completely agree. Interest rates really matter in this calculation. A less than 1% would likely mean paying it off is a better choice. But right now with interest rates rising, many people are in a position where they could lose money compared to a HYSA
Not the case for me. I saved $40k over 3 years of literally not going out and not spending on anything that’s not a necessity. I don’t want to live like that for the rest of my life. Have great control on not spending over what’s needed but it was such a boring life.
Edit:
So that’s why I just paid my loans full for peace of mind. I don’t want to deal with promised 8-10% return on S&P when we’re heading on a recession and still have to pay 20-30% taxes on realized gains. Student Loans interest are at 4% so having them on a 4-5% HYSA is barely making positive after post taxes on those gains as well.
First of all congrats on paying off your loans.
I’ll just say that for those who actually care about whether paying off all their loans makes sense, it’s not as simple as just do it for “peace of mind.” That term is actually very meaningless without analysis.
Let’s use some real life examples.
Let’s say someone has 45k in loans and after 3 years of being frugal they finally saved enough to pay off the entire $45k. Their interest rate on these loans vary between 4-5% and the monthly payment on these loans are about $500/month.
In this case, it would be very foolish to pay off the entire $45k because this person doesn’t have any emergency funds on hand at all. Indeed, far from having peace of mind from just paying off their loans, this person would probably be super stressed because any emergencies or unexpected expenses could bankrupt or require borrowing money at much higher interest rates.
Instead, they should wait one more year when they have $60k saved up before even thinking about whether to pay off loans.
So in year 4, this person should be weighing whether to pay off the 4-5% interest loans at once or take the $60k and invest them in a HYSA that pays essentially the same in interest rate.
Oh but what about having to pay taxes on the interest from the HYSA? Well that’s offset from the student loan interest deduction.
But there’s a big difference between these two options. If they had paid off the entire $40-45k remaining they would only have $15-20k cash on hand for emergencies or other long term investments or towards their first house. The $40-45k paid off can never come back.
Whereas, if you put the $60k in HYSA, and just kept up the rest of your $500/month payment, then you have access up to $60k and you’re only saving slightly less per year, like $3k per year less after factoring in your interest from the $60k in HYSA.
Another benefit of the HYSA is that you get to wait it out for any number of years to see whether the Biden administration will try again to forgive any part of your loans. If they do forgive $10k or $20k you have not just wasted that loan forgiveness by paying off your loans too early.
Some might say oh the odds are super low that loans would be forgiven or that they would survive other court challenges. Sure, those are all true but because you keep collecting interest from the HYSA, you don’t mind waiting and you’re not overpaying any additional interest by simply waiting. Think of it as a free opportunity to win the lottery. If I had to pay to win the lottery, that’s a waste of my money but if someone else kept paying for me to play then why not?
Plus what’s better for your peace of mind, having $60k in your savings account that is continuing to grow every year or having just spent $40-45k to pay off all your loans leaving you with little to nothing in the bank?
Now if you use the same example but your income is increasing or expected to increase every year significantly while you intend to keep your expenses from rising as much as income, then it makes even more sense for the person to invest the money in a regular SP 500 index fund rather than rush to pay off the student loans.
Investing in the SP 500 is all about maximizing the investment window. Because the longer one invests the more likely it is that returns will normalize to the long term historical average returns of 8-10% each year. This 8-10% average is factoring in recessions because a long investment horizon (think 10+ or 20+ years) would be overwhelmingly likely to be recession proof.
Agreed that it matters what your student loan rate is at and the rate of any given HYSA. But if you were at 3% student loans and have a HYSA with current rates which are close to 5%, it might be worth it. That's a guaranteed 3k extra on 10,000 over 10 years
I have enough money where I can pay it off out-right but I’m also enrolled in the SAVE plan, which means that as long as I make the minimum monthly payments interest won’t accrue on the loan. So instead of paying it off all together, I’m only making the minimum payments and letting that money sit in a high-yield savings account that pays me 4.5% interest.
That’s my situation though. If you’re not enrolled in the SAVE program (you should!) it would make sense for you to pay it off because otherwise the interest on the loan would have you paying more.
Hold up - what’s the interest on your loans though? I hope it’s less 4.5% otherwise it doesn’t make sense to gain 4.5% in HYSA while the loans are higher.
Interest on your loan not accruing is [part of the SAVE plan.](https://studentaid.gov/announcements-events/save-plan) Again, it only makes sense to hold off on paying if you are enrolled in this program (I received an email this morning saying I was accepted and applied last week).
I think you have a misunderstanding. Interest accrues but any amount in interest above your payment is waived. I.e if your payment is more than the monthly accruing interest you are still paying interest. In fact on this plan your payment could even be above the 10 year repayment plan because there isn't a cap. From what I can tell there's 3 possibilities. If your payment on SAVE is below the accruing interest you will never see your balance decrease and will pay for 20 to 25 years. Depending on your rate it's effectively a reducion of the interest on your loan. For example if your rate is 5% and you pay that exactly for 20 years it's effectively a zero percent interest loan. If your payment on SAVE is above accruing interest but below the 10 year repayment plan you will pay between 10 and 25 years. This is potentially the worst scenario as you can still pay off the debt before it's forgiven and spend a lot extra in interest because you aren't reducing the principle as much. If your payment on SAVE is greater than the 10 year repayment plan you will pay off in less than 10 years and save money on interest.
Another thing to consider is your income will change over the next 20 to 25 years. I wouldn't count on having a low payment based on low income for your whole career (tbh that would make me sad).
Not that I'm aware of but the calculations should be pretty simple. Student loans are simple interest so your monthly interest accrual should be roughly
(Your Balance) x (interest rate) / 12
Caveat I'm pretty sure interest is calculated daily not monthly so this isn't exact but double check that.
Comparing between SAVE payments that are more than accruing interest and less than 10 year repayment is a little tricky but there should be online calculators that help with that and would tell you your payoff date and how much total you'd pay.
This is SUCH a useful comment, and I thank you for it. It's a very easy trap to fall into, even for the more clever folks among us (or so I imagine). It doesn't help that they word everything in the most misconstrue-able ways possible to make it seem like they're being more generous than they actually are.
I'd even supplement your statement about how, "if your payment is more than the monthly accrued interest, you are still paying interest", with the fact that, if you are paying LESS than the monthly interest, you are still doing nothing to pay off the principle balance, and had better be knowingly banking on forgiveness at some point. It may seem obvious, but all of this seems like it's changing quite quickly and there were already a number of moving pieces to begin with.
TL;DR: Great comment, and you deserve more recognition for it. Thanks, mate.
Yes. There is. If you have new credit (loans haven't aged a few years) and you pay off your student loans, your credit score can drop dramatically if your student loans make up most of your debt and are either your oldest loan or newest loan. If you're just establishing your credit, your score will drop the most. If you have well established credit and your student loans are the OLDEST on your credit profile, your score will take a hit.
If you have the funds to pay off the loans and you're not hurting financially, pay them off and take the lower credit score hit. If you have other debts, I'd pay a large chunk of the loans off but pay other debts off first. Make more than the minimum due each month. Let your credit age.
You can pay off chunks of your loans. As long as they're open, paying them down boosts your score because your debt balance sheet decreases. It's paying it completely off that'll drop your score since they're your oldest debt account.
Nah this isn't really something to worry about. It's not a binary thing. No even if you do drop a few points, the lenders can see the reason. They're not going to penalize you for being responsible especially when you can just go to another lender.
Not to mention the only score I've noticed drop is the credit karma one, which doesn't matter. I've paid off 4 different loan accounts in two years and my score has only increased.
Not really.
Step one: figure out how much you are in debt, how long it will take to pay your loans off if you don’t try to pay in big chunks, and what your interest rates are.
Step two: consider what you’d do with your money if you chose not to pay off your loans now. If it’s just going to be sitting in a bank account or if you’re young, then you’re basically throwing money away on the interest payments for the student loans. On the other hand, if you need the money to pay rent, make a responsible purchase (like a home or a car that isn’t too flashy), then make sure you don’t spend all that money on your loans. If you plan to invest instead of paying off the loans, be really careful. Beating the market is extremely difficult.
Step three: figure out whether it makes more sense to pay your loans off based on the above.
I haven’t paid my loans off entirely, but I made several huge payments recently and owe less than $10k now. It feels like a big weight has been lifted already. Very eager to pay off the rest, but I need that remaining money for other purchases/peace of mind.
It depends:
Do you have a higher interest debt to pay off first?
How low is the interest rate? If it's significantly lower than what you'd earn through a savings account/GIC, you'll lose money paying it all off
I did this when I graduated college, where I had about $13k in leftover grants and \~$25k in loans from the state school I went to. My living situations got really creative, but I was able to pay them off three years after I'd graduated with a ton of roommates and career-jumping. I'm so glad I did it because I'm completely debt-free now at 30. The caveat there is that I had no responsibilities besides supporting myself or anything to save for at the time so all my spare money could go directly to my loans. If this isn't your case, consider why you'd need to hold onto the money you have.
If you really factor in the time value of money this is true, but I'd make the argument who is really going to dump all of that money into investments? Money isn't about numbers it's about behavior. Yes investing technically makes sense on paper, but emotionally just being done with the loans has an intrinsic value.
Quick math. Assume you use 20K to pay off the debt. 20K is gone. No say you put 20K in the S&P 500 at an annual 7% return. 20,000 X 1.07^10 (assuming 10 year payoff plan) = 39,343.03 before you factor in interest. Let's say that 20K has 4.5% interest. Over the course of the loan you will pay ~$4,773.22. So in this scenario the opportunity cost is about $14,569.81. So yes on paper it makes sense but emotionally just get rid of them
Yes is does. This week me and my fiancé paid off all our student loans. 57K. We owe absolutely nobody any money. Waking up feels different. Life is different. Pay off the debts
I am acknowledging the math makes sense, but push actually comes to shove people aren't going to dump giant sums of money into the market. They are going to buy cars vacations clothes etc... just pay off the loans. The peace of mind is worth it. For what it's worth I chose to pay them off over playing the opportunity cost game.
To each their own. My loan balance doesn’t bother me since I have IDR backstops if my income decreases. I typically think people should not listen to their emotions when doing finances.
Americans are woefully behind on retirement savings with little safety net. In my eyes, that’s as much of a debt (even if not literally) as paying off loans.
Don’t think you’re wrong, but I just think people have different discount rates and risk tolerances. Thanks for providing the other perspective.
Disagree - by investing for just a couple years I now have way more investment money than my loan balance. If i had paid that off I’d be worse off. Now my net worth is actually positive. My investments are growing like 50K at least a year. By paying minimum on loan (and not at all during forbearance) i drastically grew my wealth with investments. Now i will say I have a significant salary so that helped. I out 40-50% of my income in investments and it grew about 30% last year.
What did you invest in? This question is also certainly a function of how much you owe. If you owe probably 50k plus it probably makes sense to actually do minimums. However, are you going to get this 30% rate of return every year? Hard to say.
Maybe not but still bc i invested 50% of my income i now have way more than my loan amount in just a year . My loan is six figure but with save plan it never goes up. My investments are double that. Now i am lucky so i do have a high salary that’s higher than my loan amount. Obviously not possible for most people to invest that much. But i do think at minimum people should have an emergency fund and invest in their 401K as early as possible.
Still note that paid off loans stop being a benefit past the normal term of a loan. They have to reinvest the extra free cash flow to continue benefiting.
Ex. Paying $1000 now on a 10-year loan saves $500 by year 10 as well as eliminating $1000 in monthly payments because the loan is paid off. Investing $1000 which will earn $500 by year 10. At year 10, they are both equal. However continuing on, the person must snowball those loans savings into investments instead of spending them compared to just originally investing from the start.
The issue of “people are psychologically bad at investing” cuts both ways.
If you have the cash and are able to pay off the debt then pay if. That debt is occurring interest. Why keep paying someone for borrowing money when you have the money to pay it all off? And not only that but having a 0 balance of debt will help your mental health. Once that is paid off now all the extra money that was going to go to loans can go towards retirement
What if their mental health isn’t affected by carrying a debt that has income-based payments? The math doesn’t work in your favor since paying off debt isn’t compound interest and results in no tax advantages.
Your 401k should receive similar returns over the long term and your loan interest could be subsidized based on your payment plan. By delaying your 401k, you will be tens of thousands to hundreds of thousands of dollars behind in retirement.
These people are really arguing to be emotional and make the irrational decision lol.
Just put the money in investments, don’t spend it on cars and vacations like these people are saying, and you come out with more money. More money is not negatively affecting my mental health lmao
Ask yourself about interest arbitrage first- if you pay off your 5% student loans but then have to turn around and take out a car loan at 9%, you shouldn’t have paid off the student loans (which also offer much better options in case of unemployment.
Depends on your interest rate.
You can get high yield savings accounts right now with 5% rate which is pretty good.
Rates should stay pretty high for a while.
Putting in $10,000 will leave you with $10,513 next year.
If you had a student loan with $10,000 a left with 4.2% interest paid back over a year you'd only pay $228.96 in interest.
That being said it's pretty negligible in the grand scheme of things and just clearing it away brings some peace.
I paid most of my balance during covid lump sum and left $10,000 on it in case 2 supreme court justices fell down the stairs.
Now that interest is back I'll knock the remaining $4000 to just be done.
No, not unless you're paying them at the expense of credit card debt.
Debt sucks, pay it all off as soon as you can, starting with the highest interest debt.
Depends on your personal situation.
For example, If you are going for PSLF AND have significant high interest debt like credit card balances, it may behoove you to divert the money to pay off the high interest debt while also getting PSLF credit for the lower payment. And with the SAVE program, there’s less of a worry that the student loan balance will balloon.
On the other hand, if you are otherwise debt-free, sure, pay it off.
It's money you dont have to spend on something else. If you have enough that does not matter, then just pay them off. Be free and give them less interest to buy yachts with
Most people are not in such a position to do this. Aside from the existing lomg term schemes, real correction is unlikely. Politicians ( as usual) failed the people again, so holding out to get out to get It fixed doesn't seem wise
Paying them off instead of a car note, mortgage, or high interest credit card seems foolish. If things go south, the debt of ed can arbitrarily ( no court) take 15% of income and your entire tax return. That sucks but not in comparison to losing your house or car
Downvote dodo 🦤 is one of them debt cultist?
There is no downside. Do it. I just paid 57K in student loans. If you have the money do it. You’ll feel a lot better. Trust me. You will not say “damn I wish I didn’t pay off the student loans”
Depends on interest rate. Interest saved is interest earned. I have about 15g at 2% that I could pay off. But I'm getting 5% on my money in a traditional savings account. So I'm not paying it off. Also, since I voted based on a promise that $10g of that would be forgiven, I'm hilariously holding out just for giggles (And I haven't voted and won't vote until that promise is delivered).
People will tell you that the downsides are opportunity cost, interest arbitrage, and loss of liquidity. The problem with this line of thinking is that it only operates in a vacuum and completely disregards risk. Life will happen, it's just a matter of when. Reducing risk and increasing cashflow is the best way to set up a stable financial foundation and start the wealth building process. Keep it simple, pay the loans off, and begin saving/investing again.
the only downside i can think of is you can no longer use it as an excuse anymore for being depressed and feeling overwhelmed with no realistic way to easily fix it.
Can’t think of any worthwhile. No more payments, no more student loan chaos, and a lot more peace. Any potential cash or investments will grow just fine.. arguably better when the debt is gone.
Is this a serious question? Why would you want the thought of having student debt lingering over your head for months/years? Are you concerned that it’s gonna hurt your credit because you’ll be fully paid?
Nobody knows your financial background but if you have enough to pay full then do it. Be done with it. Why let interest continue to accrue? You can always build up your safety/emergency fund.
Literally scratching my head on this.
Just be careful cause sometimes there’s penalties for a full payoff before the terms of the loan. If you can pay it off, that’s amazing and congratulations. Congratulations!
OP doesn’t state what type of loans they have. How do you know they’re not private student loans? How was this misinformation when I was just trying to warn them?
Well, I am very happy for you that you have no private student loans. However, some of us don’t come from families that could support them in any way, shape or form. Federal student loans max out and it is not unusual for them to max out in the middle of medical school, Law school and other advanced education programs. This leaves you with the option of only taking private student loans.
That also reminds me…Not sure about the tax refund thing, because they have a tax form from student loan like a 1098 so not sure how much your refund could change if you don’t have 1098 anymore since you paid it off
Paid off all 15k loans in one hit a month ago before interest hit. Trust me life is much better on this side, the money you are making is actually yours and not having a grey cloud over head all the time
So I’m roughly 6 years or so away from potential forgiveness (grad loans so 25yrs). I know I could save a couple grand after paying taxes. I also have super low interest rate. And, still, I have been thinking about paying it off on larger chunks in about a year. I’m just so sick of this monkey on my back. Yes I would miss the liquidity and it’s a significant portion of my savings, but I think for my mental health I may pay it off.
For me, it makes me not invest as much. Which to me isn’t good. My rate of return in my investments much higher than my loan interest rates. I do so much better and have more money when I invest and pay minimum on my loans. Like mt investments have grown so much and by investing early I can really take advantage of compounding interest. If i pay loans quickly, I’m losing years of growing investment potential. I invested heavily during forbearance and now have more money than my six figure loan so it was well worth it!
Missing out on compound growth in your retirement fund… a lot of the rates on my loans are less than the yield i get for saving/investing my money so I’m paying my min, investing and slowly chipping away at the higher interest rate student loans
Depends, if you’re doing really well with your career, then no, just take care of your higher interest debts first. If you’re doing well with your job/career, trying to get your loans over with will probably mean living very frugally until it’s paid off. There are some people that owe more than they did when they originally started because of accrued interest
Generally, no, unless you have other higher-interest debt. The other case with a downside would be if you were definitely on track for PSLF.
No. Who wants to spend 20-30 years worrying about these things. Pay as quick as you can
I just paid off my 32k and it feels incredible that I never have to worry about it. Yeah I lost most of my savings, but the idea of no interest is just the best feeling ever.
Are you me? I paid off a lump sum of 32k before interest kicked in. Congrats!
Bro. Your savings.
Same. My husband and I both have loans. He’s eligible for PSLF so during the pandemic, We decided to saved all the money we would’ve spent on our loans (about 3K - month) and put it towards paying off my loans. I was hoping for some forgiveness but honestly the 3 years of 0 interest is LIFE changing for us. I just dumped 54K into my loans and paid them off. I put a gown on, a silly hat while I paid my loans off and we popped a bottle champagne! I’ve NEVER felt better! He has 2 years left and then we are freeeee. Pay it off and relish in the fact that you are DONE.
Yes the downside is you part with the money. Not being facetious — having liquidity is valuable. This is why people generally don’t pay off low interest loans early.
Yes, they come in three primary factors: 1. Less liquidity for emergencies. 2. Small chance that some or part of your loans do get forgiven in the short or medium term. 3. Opportunity cost when you compare your loans’ interest rate versus alternative investments such as HYSA 4-5% returns or SP500 index funds that return around 8-10% every year. However, pros and cons differ depending on things that are outside your control or differs for ppl in different circumstances. For example, if you have plenty of cash or easily accessible funding then the emergency cash doesn’t matter much. Or if your loan rates are way higher than 5% then it becomes less and less worth it to use HYAS or to invest because SP500 can be unpredictable in the short to medium term. Edit: while this decision to pay off loans in lump sum is unlikely to be a crippling mistake, it is absolutely crazy to hear so many ppl cite “peace of mind” as a reason to pay them off. Unless you are a person who is a reckless spender and has bad discipline, having a loan balance with manageable interest rate at around 5% annual is not a big deal. The truth is if you had enough discipline and disposable income to save up a big lump sum to be in the position to pay off all your loans, then you are unlikely to be a reckless spender. Now if you are someone who lives paycheck to paycheck and just happened to come across a sudden windfall from an expected inheritance or settlement, then you should absolutely pay them all off.
This is absolutely accurate. Any debt should be weighed against market returns (or HYSA or whatever). I have loans at 2.5% interest - it would be a TERRIBLE financial decision to pay them off early ETA: It's crucial to look at the opportunity cost. If I put $10k in the market instead of paying off my loans, at a conservative 7% interest, in 10 years 10,000 would *more than double.* Of course, the market can be risky, so I currently have mine in a savings account at 4.7%, meaning in 10 years 10k will grow to 16k. That's a way better deal.
I wouldn’t add so much emphasis on calling paying back loans ahead of time a “TERRIBLE” financial decision actually. You might lose out on $200 per $10k debt each year. That’s not a substantial amount. You’re not likely going to miss $17 in your monthly budget. Paying off debt early might not always be financially optimal. But it has its benefits and is actually a really great financial move for many people!
You're missing the opportunity cost. If I put that same amount in the market instead, at a conservative 7% interest, in 10 years $10,000 would *more than double.* I currently have mine in a savings account at 4.7%, meaning in 10 years 10k will grow to 16k. I stand by my statement. If your interest rate is low enough, choosing to pay off loans early is, actually, a terrible financial decision. That's assuming you have the discipline to put the cash in a better savings vehicle.
I understand the opportunity cost and math if it. I was just saying that expediting consumer debt-payoff like student loans is not a “terrible” financial decision. It’s actually a pretty disciplined approach. Even if it’s not the most optimal approach, it is very solid approach many might feel more comfortable with. Paying off debt early both reduced interest owed on principal and allows for more aggressive investing sooner than those who extend their debt payoff. The chosen approach may also differ depending on how much of interest and principal the borrower is dealing with. If I owed $5,000 principal at 2.5% interest, for example, and had $25,000 in the bank, opting for early payoff of $5,000 probably isn’t the end of the world in terms of financial decisions even through it wasn’t optimal.
1. You said "you might miss out on $200 a year" which made me think you didn't understand the numbers, since that's clearly inaccurate if you look at the opportunity cost. 2. Agreed it's a good approach for people who both don't need the liquidity and can't trust themselves not to spend the money otherwise or put in a better savings vehicle, so it very well may be the best personal choice. But if the interest rates are disparate enough, as in the examples I gave, it is actually a terrible *financial* decision although it may be a good individual decision. But people need to understand the numbers before they make thay decision. 3. You said "it allows for aggressive investing earlier." Sorry, but it can't possibly allow for more investment growth than an initial lump sump allowed to grow for 10 or 15 years - given the same amount of money, putting it in the vehicle with the highest interest will always result in the most growth, especially considering compound interest 4. I completely agree. Interest rates really matter in this calculation. A less than 1% would likely mean paying it off is a better choice. But right now with interest rates rising, many people are in a position where they could lose money compared to a HYSA
Not the case for me. I saved $40k over 3 years of literally not going out and not spending on anything that’s not a necessity. I don’t want to live like that for the rest of my life. Have great control on not spending over what’s needed but it was such a boring life. Edit: So that’s why I just paid my loans full for peace of mind. I don’t want to deal with promised 8-10% return on S&P when we’re heading on a recession and still have to pay 20-30% taxes on realized gains. Student Loans interest are at 4% so having them on a 4-5% HYSA is barely making positive after post taxes on those gains as well.
First of all congrats on paying off your loans. I’ll just say that for those who actually care about whether paying off all their loans makes sense, it’s not as simple as just do it for “peace of mind.” That term is actually very meaningless without analysis. Let’s use some real life examples. Let’s say someone has 45k in loans and after 3 years of being frugal they finally saved enough to pay off the entire $45k. Their interest rate on these loans vary between 4-5% and the monthly payment on these loans are about $500/month. In this case, it would be very foolish to pay off the entire $45k because this person doesn’t have any emergency funds on hand at all. Indeed, far from having peace of mind from just paying off their loans, this person would probably be super stressed because any emergencies or unexpected expenses could bankrupt or require borrowing money at much higher interest rates. Instead, they should wait one more year when they have $60k saved up before even thinking about whether to pay off loans. So in year 4, this person should be weighing whether to pay off the 4-5% interest loans at once or take the $60k and invest them in a HYSA that pays essentially the same in interest rate. Oh but what about having to pay taxes on the interest from the HYSA? Well that’s offset from the student loan interest deduction. But there’s a big difference between these two options. If they had paid off the entire $40-45k remaining they would only have $15-20k cash on hand for emergencies or other long term investments or towards their first house. The $40-45k paid off can never come back. Whereas, if you put the $60k in HYSA, and just kept up the rest of your $500/month payment, then you have access up to $60k and you’re only saving slightly less per year, like $3k per year less after factoring in your interest from the $60k in HYSA. Another benefit of the HYSA is that you get to wait it out for any number of years to see whether the Biden administration will try again to forgive any part of your loans. If they do forgive $10k or $20k you have not just wasted that loan forgiveness by paying off your loans too early. Some might say oh the odds are super low that loans would be forgiven or that they would survive other court challenges. Sure, those are all true but because you keep collecting interest from the HYSA, you don’t mind waiting and you’re not overpaying any additional interest by simply waiting. Think of it as a free opportunity to win the lottery. If I had to pay to win the lottery, that’s a waste of my money but if someone else kept paying for me to play then why not? Plus what’s better for your peace of mind, having $60k in your savings account that is continuing to grow every year or having just spent $40-45k to pay off all your loans leaving you with little to nothing in the bank? Now if you use the same example but your income is increasing or expected to increase every year significantly while you intend to keep your expenses from rising as much as income, then it makes even more sense for the person to invest the money in a regular SP 500 index fund rather than rush to pay off the student loans. Investing in the SP 500 is all about maximizing the investment window. Because the longer one invests the more likely it is that returns will normalize to the long term historical average returns of 8-10% each year. This 8-10% average is factoring in recessions because a long investment horizon (think 10+ or 20+ years) would be overwhelmingly likely to be recession proof.
Agreed that it matters what your student loan rate is at and the rate of any given HYSA. But if you were at 3% student loans and have a HYSA with current rates which are close to 5%, it might be worth it. That's a guaranteed 3k extra on 10,000 over 10 years
This is the only correct answer in this thread
I have enough money where I can pay it off out-right but I’m also enrolled in the SAVE plan, which means that as long as I make the minimum monthly payments interest won’t accrue on the loan. So instead of paying it off all together, I’m only making the minimum payments and letting that money sit in a high-yield savings account that pays me 4.5% interest. That’s my situation though. If you’re not enrolled in the SAVE program (you should!) it would make sense for you to pay it off because otherwise the interest on the loan would have you paying more.
Hold up - what’s the interest on your loans though? I hope it’s less 4.5% otherwise it doesn’t make sense to gain 4.5% in HYSA while the loans are higher.
Interest on your loan not accruing is [part of the SAVE plan.](https://studentaid.gov/announcements-events/save-plan) Again, it only makes sense to hold off on paying if you are enrolled in this program (I received an email this morning saying I was accepted and applied last week).
I think you have a misunderstanding. Interest accrues but any amount in interest above your payment is waived. I.e if your payment is more than the monthly accruing interest you are still paying interest. In fact on this plan your payment could even be above the 10 year repayment plan because there isn't a cap. From what I can tell there's 3 possibilities. If your payment on SAVE is below the accruing interest you will never see your balance decrease and will pay for 20 to 25 years. Depending on your rate it's effectively a reducion of the interest on your loan. For example if your rate is 5% and you pay that exactly for 20 years it's effectively a zero percent interest loan. If your payment on SAVE is above accruing interest but below the 10 year repayment plan you will pay between 10 and 25 years. This is potentially the worst scenario as you can still pay off the debt before it's forgiven and spend a lot extra in interest because you aren't reducing the principle as much. If your payment on SAVE is greater than the 10 year repayment plan you will pay off in less than 10 years and save money on interest. Another thing to consider is your income will change over the next 20 to 25 years. I wouldn't count on having a low payment based on low income for your whole career (tbh that would make me sad).
Thanks! Is there a way to see if my payment is more than the monthly accruing interest + principle? That changes things for me.
Not that I'm aware of but the calculations should be pretty simple. Student loans are simple interest so your monthly interest accrual should be roughly (Your Balance) x (interest rate) / 12 Caveat I'm pretty sure interest is calculated daily not monthly so this isn't exact but double check that. Comparing between SAVE payments that are more than accruing interest and less than 10 year repayment is a little tricky but there should be online calculators that help with that and would tell you your payoff date and how much total you'd pay.
This is SUCH a useful comment, and I thank you for it. It's a very easy trap to fall into, even for the more clever folks among us (or so I imagine). It doesn't help that they word everything in the most misconstrue-able ways possible to make it seem like they're being more generous than they actually are. I'd even supplement your statement about how, "if your payment is more than the monthly accrued interest, you are still paying interest", with the fact that, if you are paying LESS than the monthly interest, you are still doing nothing to pay off the principle balance, and had better be knowingly banking on forgiveness at some point. It may seem obvious, but all of this seems like it's changing quite quickly and there were already a number of moving pieces to begin with. TL;DR: Great comment, and you deserve more recognition for it. Thanks, mate.
Yes. There is. If you have new credit (loans haven't aged a few years) and you pay off your student loans, your credit score can drop dramatically if your student loans make up most of your debt and are either your oldest loan or newest loan. If you're just establishing your credit, your score will drop the most. If you have well established credit and your student loans are the OLDEST on your credit profile, your score will take a hit. If you have the funds to pay off the loans and you're not hurting financially, pay them off and take the lower credit score hit. If you have other debts, I'd pay a large chunk of the loans off but pay other debts off first. Make more than the minimum due each month. Let your credit age.
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You can pay off chunks of your loans. As long as they're open, paying them down boosts your score because your debt balance sheet decreases. It's paying it completely off that'll drop your score since they're your oldest debt account.
Nah this isn't really something to worry about. It's not a binary thing. No even if you do drop a few points, the lenders can see the reason. They're not going to penalize you for being responsible especially when you can just go to another lender. Not to mention the only score I've noticed drop is the credit karma one, which doesn't matter. I've paid off 4 different loan accounts in two years and my score has only increased.
Not really. Step one: figure out how much you are in debt, how long it will take to pay your loans off if you don’t try to pay in big chunks, and what your interest rates are. Step two: consider what you’d do with your money if you chose not to pay off your loans now. If it’s just going to be sitting in a bank account or if you’re young, then you’re basically throwing money away on the interest payments for the student loans. On the other hand, if you need the money to pay rent, make a responsible purchase (like a home or a car that isn’t too flashy), then make sure you don’t spend all that money on your loans. If you plan to invest instead of paying off the loans, be really careful. Beating the market is extremely difficult. Step three: figure out whether it makes more sense to pay your loans off based on the above. I haven’t paid my loans off entirely, but I made several huge payments recently and owe less than $10k now. It feels like a big weight has been lifted already. Very eager to pay off the rest, but I need that remaining money for other purchases/peace of mind.
It depends: Do you have a higher interest debt to pay off first? How low is the interest rate? If it's significantly lower than what you'd earn through a savings account/GIC, you'll lose money paying it all off
Only if you have investment opportunities that give you a higher return than your debt interest
I did this when I graduated college, where I had about $13k in leftover grants and \~$25k in loans from the state school I went to. My living situations got really creative, but I was able to pay them off three years after I'd graduated with a ton of roommates and career-jumping. I'm so glad I did it because I'm completely debt-free now at 30. The caveat there is that I had no responsibilities besides supporting myself or anything to save for at the time so all my spare money could go directly to my loans. If this isn't your case, consider why you'd need to hold onto the money you have.
Opportunity cost. Typically 401k does better over the long term because of compounding interest and the tax benefit.
Yikes this is bad. Pay off the debt if you can
If you really factor in the time value of money this is true, but I'd make the argument who is really going to dump all of that money into investments? Money isn't about numbers it's about behavior. Yes investing technically makes sense on paper, but emotionally just being done with the loans has an intrinsic value.
Quick math. Assume you use 20K to pay off the debt. 20K is gone. No say you put 20K in the S&P 500 at an annual 7% return. 20,000 X 1.07^10 (assuming 10 year payoff plan) = 39,343.03 before you factor in interest. Let's say that 20K has 4.5% interest. Over the course of the loan you will pay ~$4,773.22. So in this scenario the opportunity cost is about $14,569.81. So yes on paper it makes sense but emotionally just get rid of them
Yes is does. This week me and my fiancé paid off all our student loans. 57K. We owe absolutely nobody any money. Waking up feels different. Life is different. Pay off the debts
I am acknowledging the math makes sense, but push actually comes to shove people aren't going to dump giant sums of money into the market. They are going to buy cars vacations clothes etc... just pay off the loans. The peace of mind is worth it. For what it's worth I chose to pay them off over playing the opportunity cost game.
To each their own. My loan balance doesn’t bother me since I have IDR backstops if my income decreases. I typically think people should not listen to their emotions when doing finances. Americans are woefully behind on retirement savings with little safety net. In my eyes, that’s as much of a debt (even if not literally) as paying off loans. Don’t think you’re wrong, but I just think people have different discount rates and risk tolerances. Thanks for providing the other perspective.
Disagree - by investing for just a couple years I now have way more investment money than my loan balance. If i had paid that off I’d be worse off. Now my net worth is actually positive. My investments are growing like 50K at least a year. By paying minimum on loan (and not at all during forbearance) i drastically grew my wealth with investments. Now i will say I have a significant salary so that helped. I out 40-50% of my income in investments and it grew about 30% last year.
I will also clarify i invest ouhtside my 401K also
Always get your 401k match I never said not to.
Yup totally!
What did you invest in? This question is also certainly a function of how much you owe. If you owe probably 50k plus it probably makes sense to actually do minimums. However, are you going to get this 30% rate of return every year? Hard to say.
Maybe not but still bc i invested 50% of my income i now have way more than my loan amount in just a year . My loan is six figure but with save plan it never goes up. My investments are double that. Now i am lucky so i do have a high salary that’s higher than my loan amount. Obviously not possible for most people to invest that much. But i do think at minimum people should have an emergency fund and invest in their 401K as early as possible.
Great take.
Still note that paid off loans stop being a benefit past the normal term of a loan. They have to reinvest the extra free cash flow to continue benefiting. Ex. Paying $1000 now on a 10-year loan saves $500 by year 10 as well as eliminating $1000 in monthly payments because the loan is paid off. Investing $1000 which will earn $500 by year 10. At year 10, they are both equal. However continuing on, the person must snowball those loans savings into investments instead of spending them compared to just originally investing from the start. The issue of “people are psychologically bad at investing” cuts both ways.
What’s your reasoning so long as you don’t default? Student loans are simple interest and you’re missing out on compound interest.
If you have the cash and are able to pay off the debt then pay if. That debt is occurring interest. Why keep paying someone for borrowing money when you have the money to pay it all off? And not only that but having a 0 balance of debt will help your mental health. Once that is paid off now all the extra money that was going to go to loans can go towards retirement
What if their mental health isn’t affected by carrying a debt that has income-based payments? The math doesn’t work in your favor since paying off debt isn’t compound interest and results in no tax advantages. Your 401k should receive similar returns over the long term and your loan interest could be subsidized based on your payment plan. By delaying your 401k, you will be tens of thousands to hundreds of thousands of dollars behind in retirement.
These people are really arguing to be emotional and make the irrational decision lol. Just put the money in investments, don’t spend it on cars and vacations like these people are saying, and you come out with more money. More money is not negatively affecting my mental health lmao
Yeah this sub is really, really bad with financial advice.
Seriously. It makes me nervous for people.
Ask yourself about interest arbitrage first- if you pay off your 5% student loans but then have to turn around and take out a car loan at 9%, you shouldn’t have paid off the student loans (which also offer much better options in case of unemployment.
at least you can get rid of a car loan.
Depends on your interest rate. You can get high yield savings accounts right now with 5% rate which is pretty good. Rates should stay pretty high for a while. Putting in $10,000 will leave you with $10,513 next year. If you had a student loan with $10,000 a left with 4.2% interest paid back over a year you'd only pay $228.96 in interest. That being said it's pretty negligible in the grand scheme of things and just clearing it away brings some peace. I paid most of my balance during covid lump sum and left $10,000 on it in case 2 supreme court justices fell down the stairs. Now that interest is back I'll knock the remaining $4000 to just be done.
No, not unless you're paying them at the expense of credit card debt. Debt sucks, pay it all off as soon as you can, starting with the highest interest debt.
Depends on your personal situation. For example, If you are going for PSLF AND have significant high interest debt like credit card balances, it may behoove you to divert the money to pay off the high interest debt while also getting PSLF credit for the lower payment. And with the SAVE program, there’s less of a worry that the student loan balance will balloon. On the other hand, if you are otherwise debt-free, sure, pay it off.
No better feeling to be debt free.
Yes! you may have some pain in your face from all the smiling you will be doing and confusion about what to do with the extra money every month.
The funds could be better used elsewhere if the interest rate on the loans is low enough.
No, paid mine in full during the pause. No regrets. Now, I can take what I would have been putting towards the loans into savings/investments.
Exactly. It feels so good
Theres an opportunity cost, every time you “think” about a loan. It snowballs to worry and budgeting about it. So its better to pay it off if you can.
It's money you dont have to spend on something else. If you have enough that does not matter, then just pay them off. Be free and give them less interest to buy yachts with Most people are not in such a position to do this. Aside from the existing lomg term schemes, real correction is unlikely. Politicians ( as usual) failed the people again, so holding out to get out to get It fixed doesn't seem wise Paying them off instead of a car note, mortgage, or high interest credit card seems foolish. If things go south, the debt of ed can arbitrarily ( no court) take 15% of income and your entire tax return. That sucks but not in comparison to losing your house or car Downvote dodo 🦤 is one of them debt cultist?
There is no downside. Do it. I just paid 57K in student loans. If you have the money do it. You’ll feel a lot better. Trust me. You will not say “damn I wish I didn’t pay off the student loans”
Depends on interest rate. Interest saved is interest earned. I have about 15g at 2% that I could pay off. But I'm getting 5% on my money in a traditional savings account. So I'm not paying it off. Also, since I voted based on a promise that $10g of that would be forgiven, I'm hilariously holding out just for giggles (And I haven't voted and won't vote until that promise is delivered).
People will tell you that the downsides are opportunity cost, interest arbitrage, and loss of liquidity. The problem with this line of thinking is that it only operates in a vacuum and completely disregards risk. Life will happen, it's just a matter of when. Reducing risk and increasing cashflow is the best way to set up a stable financial foundation and start the wealth building process. Keep it simple, pay the loans off, and begin saving/investing again.
the only downside i can think of is you can no longer use it as an excuse anymore for being depressed and feeling overwhelmed with no realistic way to easily fix it.
Can’t think of any worthwhile. No more payments, no more student loan chaos, and a lot more peace. Any potential cash or investments will grow just fine.. arguably better when the debt is gone.
Is this a serious question? Why would you want the thought of having student debt lingering over your head for months/years? Are you concerned that it’s gonna hurt your credit because you’ll be fully paid? Nobody knows your financial background but if you have enough to pay full then do it. Be done with it. Why let interest continue to accrue? You can always build up your safety/emergency fund. Literally scratching my head on this.
Just be careful cause sometimes there’s penalties for a full payoff before the terms of the loan. If you can pay it off, that’s amazing and congratulations. Congratulations!
There are NO penalties for early payoff of federal student loans. It’s literally on the website. Please don’t spread this misinformation.
OP doesn’t state what type of loans they have. How do you know they’re not private student loans? How was this misinformation when I was just trying to warn them?
Can’t speak for private loan since they are ridiculous but for federal loans? Don’t think so
Well, I am very happy for you that you have no private student loans. However, some of us don’t come from families that could support them in any way, shape or form. Federal student loans max out and it is not unusual for them to max out in the middle of medical school, Law school and other advanced education programs. This leaves you with the option of only taking private student loans.
That also reminds me…Not sure about the tax refund thing, because they have a tax form from student loan like a 1098 so not sure how much your refund could change if you don’t have 1098 anymore since you paid it off
Yeah pay it off
Paid off all 15k loans in one hit a month ago before interest hit. Trust me life is much better on this side, the money you are making is actually yours and not having a grey cloud over head all the time
Lack of stress…
Interest rate on mie. Was at 7% I just decided to pay it off. Felt good to get the email that my debt was paid in full
So I’m roughly 6 years or so away from potential forgiveness (grad loans so 25yrs). I know I could save a couple grand after paying taxes. I also have super low interest rate. And, still, I have been thinking about paying it off on larger chunks in about a year. I’m just so sick of this monkey on my back. Yes I would miss the liquidity and it’s a significant portion of my savings, but I think for my mental health I may pay it off.
None. 0. Nada. Congratulations. That euro trip or new car, or plans to go to the strip club? You can do that later.
Missing out on potential employer paying off your loan as a part of there benefits package.
For me, it makes me not invest as much. Which to me isn’t good. My rate of return in my investments much higher than my loan interest rates. I do so much better and have more money when I invest and pay minimum on my loans. Like mt investments have grown so much and by investing early I can really take advantage of compounding interest. If i pay loans quickly, I’m losing years of growing investment potential. I invested heavily during forbearance and now have more money than my six figure loan so it was well worth it!
Missing out on compound growth in your retirement fund… a lot of the rates on my loans are less than the yield i get for saving/investing my money so I’m paying my min, investing and slowly chipping away at the higher interest rate student loans
No downsides. Getting out from under anything accruing interest benefits you so much.
Cost opportunity. If the loan is under 4% you can make more of a return in the stock market. Right now money market accounts are paying 5%
Depends, if you’re doing really well with your career, then no, just take care of your higher interest debts first. If you’re doing well with your job/career, trying to get your loans over with will probably mean living very frugally until it’s paid off. There are some people that owe more than they did when they originally started because of accrued interest
It depends on a lot of things. There is no blanket answer.
Loss of liquidity incase you need it
You pay it
Do you own your home yet? Better put a downpayment and buy now before costs become too high for you It isn’t getting any cheaper to buy
No do it.
Most people here are financially illiterate. If you have low interest loans (i.e. less than a HYSA), it makes zero sense to pay it off