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Student Loans
Question: A few weeks ago you advised a woman with a college-age daughter that there was not a big advantage to paying off her student loan early. I have a related question.
I recently went back to graduate school and had three separate loans for about $18,000 each, one for each year I was in school. I consolidated the first two years into one loan at an interest rate of about 3.5% but didn't consolidate for the final year because that year's interest rate was already getting very high. So I now have two repayments of about $250/month, one for the first two years, one for the final year by itself. I was considering an early repayment of that final year's loan which is currently at about 5.5%, higher than the average savings account interest, and which I assume will go higher.
But your earlier advice made me wonder if that was wise in my case, or did it only apply to college loans? Thanks! Becca
Answer: Every situation is slightly different. If I remember the earlier question right, it involved a short-term trade-off between husbanding savings and paying down debt. In your case, my impression from your question is that it's a savvy move to get rid of the higher interest rate student loans. As you know, it's always a relief to get rid of debt.
This past Sept a new law passed called the College Cost Reduction and Access Act of 2007. It lower rates for both current students and past grads. (See Money Mag Dec 2007, pg 28) While it is always good to lower debt it's a matter of trade-offs. If you can use the money so that it returns more than the cost of a loan then you are using the bank's money and making a profit. While it's the American Dream to own a house, there are always surpises with a house. This or that breaks or needs to be replaced. I'd have at least 6-9 months of your take-home pay in a rainy day-fund first otherwise keep paying rent. Look into this new law as it allows loans to be forgiven and repayment rates to be lowered. You might call your loan servicer and with lower rates consider a consolidation of both loans.
Love the site,
I also have 35,000 in student debt wrapped into one loan at 4%. I don't have any other debt, no car payment or house payment. Is it better to pay off the student loan at 4%, or live with the payment and purchase a house. Renting is OK for me but wanted to buy a house in 2008. Soooo, buy house or pay off loan?
I earn $5000 a month.
Thanks
