Should I pay off my student loans or keep it in the bank? [duplicate]

Question

The interest on my student loans are ~ 2%, should I take the money that I have in my savings and pay more than my monthly payments? I have enough to pay off one loan and still have a nice safety cushion

Should I pay off that loan?

Answer 1

Many years ago I heard a multi-level marketing pitch that pointed out how many doctors don't get out of debt until they are well into their 50's. The selling point was that you can get rich quick, as rich as a doctor, with nothing more then a bit of elbow grease. Of course the pitch failed to mention that most doctors, buy the things doctors buy, when they get that first big job. The big house, expensive cars nerf the income that they receive and they are probably stuck with years of student loan payments.

I assume that you are one of the "lucky" ones that have graduated college with a well paying job. By lucky I mean you concentrated on obtaining a skill for which the marketplace has a need. Why not continue to live like a college student for a few more months and pay off all of your student loans ASAP?

Get rid of them like you were purging the phone number of that high maintenance girl you dated during a short time of insanity.

Answer 2

Basically you have 4 options:

1. Use your cash to pay off the student loans.

2. Put your cash in an interest-bearing savings account.

3. Invest your cash, for example in the stock market.

4. Spend your cash on fun stuff you want right now.

The more you can avoid #4 the better it will be for you in the long term. But you're apparently wise enough that that wasn't included as an option in your question.

To decide between 1, 2, and 3, the key questions are:

1. What interest are you paying on the loan versus what return could you get on savings or investment?

2. How much risk are you willing to take?

3. How much cash do you need to keep on hand for unexpected expenses?

4. What are the tax implications?

Basically, if you are paying 2% interest on a loan, and you can get 3% interest on a savings account, then it makes sense to put the cash in a savings account rather than pay off the loan. You'll make more on the interest from the savings account than you'll pay on interest on the loan. If the best return you can get on a savings account is less than 2%, then you are better off to pay off the loan.

However, you probably want to keep some cash reserve in case your car breaks down or you have a sudden large medical bill, etc. How much cash you keep depends on your lifestyle and how much risk you are comfortable with.

I don't know what country you live in. At least here in the U.S., a savings account is extremely safe: even the bank goes bankrupt your money should be insured. You can probably get a much better return on your money by investing in the stock market, but then your returns are not guaranteed. You may even lose money. Personally I don't have a savings account. I put all my savings into fairly safe stocks, because savings accounts around here tend to pay about 1%, which is hardly worth even bothering.

You also should consider tax implications. If you're a new grad maybe your income is low enough that your tax rates are low and this is a minor factor. But if you are in, say, a 25% marginal tax bracket, then the effective interest rate on the student loan would be more like 1.5%. That is, if you pay $20 in interest, the government will then take 25% of that off your taxes, so it's the equivalent of paying $15 in interest. Similarly a place to put your money that gives non-taxable interest -- like municipal bonds -- gives a better real rate of return than something with the same nominal rate but where the interest is taxable.