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I have two loans: Unsub Consolidation Loan and Subsidized Consolidation Loan, both at a 6.5% fixed rate. However, I've paid all the accrued interest. Therefore, if I were to "start fresh" today; would this loan basically be at a 0% interest rate?

I'm very curious, because I have finally paid off my high interest credit cards and would like to start investing. However, if I'm still accruing 6.5% interest on 10K, I would much rather pay that off.

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You paid all the accrued interest until now, but do you still have balance? If so, I expect it continues to accrue interest, doesn't it? –  littleadv Jan 3 '13 at 1:04
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As long as a principal balance exists and you're not in a grace period, interest is accruing on some time period. If you pay off the interest that you owe every pay period, what that means is that the principal isn't being reduced while you're paying on the interest. Therefore, by paying on the accrued interest, that is the interest rate you owe on. –  YaReally Jan 3 '13 at 1:05
    
That makes a lot of sense...unfortunately. Seems like if those student loans were worth it I could have figured that out! Thank you @YaReally –  Joe Jan 3 '13 at 2:37
    
@Joe You're welcome Joe. –  YaReally Jan 3 '13 at 2:55
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up vote 5 down vote accepted

If you have paid all the interest accrued till today, you owe no interest as of today. But after one month, you will owe $10K times 0.065/12 or approximately $54.17 in interest. If you pay that off, then at the end of the next month, you will again owe $54.17. For the lender, this is "a gift that keeps on giving" month after month until some day you decide to pay more than the accrued interest and thereby reduce the principal amount owed.

So, now that you have paid off your high interest credit cards (and hopefully are keeping those balances current, faithfully paying each month's statement balance in full), and are looking around for investment opportunities, I would suggest paying down the principal on the student loans first. You don't have to do it all in one swell foop; you can do it over months, or years, but get rid of them first. As Joe Taxpayer said here, 6.5% interest is too high, and it is unlikely that you will make that kind of money off your investments. Your money is better put to use paying off those student loans first.

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