Low-interest debt...should it ALWAYS be a priority?

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elasticdog
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Low-interest debt...should it ALWAYS be a priority?

Postby elasticdog » Wed May 02, 2007 2:15 pm

Yes, it's another student loan related question. I'm still in school right now, but luckily won't ever have to take more loan money since I work at the university and get an awesome discount by which I can afford to pay off tuition on my own. I do however have student loans that I've acquired previous to this job and am trying to come up with a long-term plan for their repayment. I have a total of $14,500 in loans, most of which has been consolidated:

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$3,500  @ 6.54%
$11,000 @ 2.875% (consolidated)

About $640 of that is from interest thus far, and now that I've paid off all of my other liabilities over the past year (credit cards, car, etc.), and the student loans are all that's left, I'll be starting to make payments early to start cutting that down.

My question is this...there's no question that I'd like to pay off that $3,500 amount at the higher interest rate ASAP, but is it a bad idea to just wait on the rest and make minimum payments once I'm out of school and invest the extra money I would have sent toward it? I would assume that I can certainly beat the 2.875% interest rate by investing, but it is another creditor that I would owe. I know from what I've read on everyone's opinions that the debt should be my first priority, but would you all agree even with that low of a rate?

Fillanzea
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Postby Fillanzea » Wed May 02, 2007 3:41 pm

I would either pay the minimum payments, or pay the minimum plus 10-15%. It depends on the repayment period; I'd get depressed thinking that ten years later I'd still have the debt hanging over my head. But at that low a rate, I don't think there's any point in attacking the debt too quickly.

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Postby emlombardo » Wed May 02, 2007 5:03 pm

I think it comes down to a matter of discipline. If you will save or invest the money instead of paying down the debt then you will come out ahead. The math is certainly in your favor!

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Postby consultantjournal » Wed May 02, 2007 5:21 pm

I'd work on the one with the higher interest rate and make minimum payments on the other one. In the meantime, start building an emergency fund, savings for a downpayment, savings for a car, etc.
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plonkee
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Postby plonkee » Thu May 03, 2007 1:00 am

I have a slightly more debt with an interest rate pegged at inflation. I pay the absolute minimum and accept that it will take 15-20 years to pay it off. If you can make more money saving and investing, you can always save up until you have enough money to pay off the balance and then pay it off in one fell swoop and you should do this faster than if you paid off the more than the minimum.

If however, psychologically it bothers you to have debt then by all means pay it off quickly. Just because some expert or non-expert suggests one method doesn't mean you have to follow it.
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JerichoHill
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Postby JerichoHill » Thu May 03, 2007 6:44 am

THe interest rate on the 11K is lower than inflation. Knock out the higher interest debt, then the lower interest debt in one fell swoop
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tinyhands
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Postby tinyhands » Thu May 03, 2007 7:15 am

Does interest accrue on the 6.54% now, or does it start accruing from the date you leave school?
If interest is accruing now you should be paying it off as JerichoHill stated. If the interest charges are deferred, that makes it a 0% loan (for now) and I'd wait until you're out of school.
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Postby jgs9455 » Thu May 03, 2007 1:31 pm

I didn't see it mentioned, but don't forget student loan interest can also be tax deductible.

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Postby elasticdog » Thu May 03, 2007 3:21 pm

They are unsubsidized, and thus accruing interest right now. I remember hearing that student loan interest is tax deductible, I'll have to keep an eye on that once I've started repayment. Thanks for all the advice! I think I'll stick with the plan of paying off the higher rate amount as soon as possible, then paying minimums until I've saved/invested enough to pay off the rest all at once.


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