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For some background info on myself, I just graduated college a bit over a year ago with a Comp Sci degree. I've saved up just enough to pay off my student loans in its entirety, however, I have delayed paying them off fully because I was saving money for a possible tech start up.

I'm guessing that best solution would involve me paying some of the debt and then saving some money on the side, but I don't know how much to pay off. Or perhaps I should just pay it all off?

**My current loans with fedloan servicing are :**  
Direct Sub Stafford Loan    $5,400.81  [3.4% fixed]  
Direct Unsub Stafford Loan  $2,179.29  [6.8% fixed]  
Direct Sub Stafford Loan    $5,309.79  [3.4% fixed]  
Direct Unsub Stafford Loan  $2,317.04  [6.8% fixed]  
Direct Sub Stafford Loan    $4,373.82  [4.5% fixed]  
Direct Unsub Stafford Loan  $2,455.55  [6.8% fixed]   

I'm thinking paying all the unsubsidized loans and maybe also the 4.5% interest loan as well. What kind of suggestions do you guys have? Is it better to pay off all the loans before attempting my own start up?

UPDATE WITH REPAYMENT PLAN

Total Monthly Payment   Due Date            Plan Type
$245.10                 18th of the month   Standard Repayment
  • 2
    How much total would your monthly payments be? I was tempted to agree with Ben and his answer below, but you're probably looking at what, $300 or less per month? My point, if you can begin your startup with the $22k or so you have saved, could you actually borrow that much money anywhere near the interest rate you have on your student loans? Why not begin paying them off slowly, use the saved money for your startup, and if it turns out successful, you can always pay the remaining balance off then. Plus, you get to deduct the interest on your taxes each year. I say go for the startup. – zanussi Apr 21 '15 at 4:41
  • @mikkel The monthly payment amount is currently at $245.10. Let me edit my above post to show the repayment plan scheduled by FedLoan servicing. – krikara Apr 21 '15 at 6:00
  • @mikkel If all my interest is completely tax deductible, then I am inclined to not pay off all the debt now. – krikara Apr 21 '15 at 6:14
  • Pay it off, and be done with it. Its like breaking up with a bad girl/boy friend...scary at first but refreshing a few days later. – Pete B. Apr 21 '15 at 14:21
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My advice is that if you've got the money now to pay off your student loans, do so. You've saved up all of that money in one year's time. If you pay it off now, you'll eliminate all of those monthly payments, you'll be done paying interest, and you should be able to save even more toward your business over the next year.

Over the next year, you can get started on your business part time, while still working full time to pile up cash toward your business. Neither you nor your business will be paying interest on anything, and you'll start out in a very strong position.

The interest on your student loans might be tax deductible, depending on your situation. However, this doesn't really matter a whole lot, in my opinion. You've got about $22k in debt, and the interest will cost you roughly $1k over the next year. Why pay $1k to the bank to gain maybe $250 in tax savings?

Starting a business is stressful. There will be good times and bad. How long will it take you to pay off your debt at $250 a month? 5 or 6 years, probably. By eliminating the debt now, you'll be able to save up capital for your business even faster. And when you experience some slow times in your business, your monthly expenses will be less.

  • Oh yeah, Mikkel reminded me of something I heard from somewhere. Are the payments towards interest tax deductible? – krikara Apr 21 '15 at 5:55
  • @krikara: In many cases, yes. See irs.gov/taxtopics/tc456.html – Nate Eldredge Apr 21 '15 at 6:16
  • @krikara I've expanded my answer to address the tax-deductibility of the debt interest and the monthly payment amount. – Ben Miller Apr 21 '15 at 12:58
4

Considering I'm in a nearly identical situation, I'll speak to my personal strategy and maybe there's some value for you as well.

You have ~$22k in loans, which you say you could pay off today. So, what I read is that you're sitting there with a $22k investment and want to know which investment to make: pay down debt, invest in yourself/start up, or some variation between those options. Any investor worth his salt will ask a couple of questions: what is my risk, and what is my gain? Paying off your student loans offers no financial risk at the cost of opportunity risk, and gains you returns of 3.4%, 6.8%, 3.4%, 4.5%, and 6.8%. Those percentage gains are guaranteed and the opportunity risk is unknown. Investing in a startup is inherently risky, with the potential for big payoffs. But with this investment, you are accepting a lot of risk for potentially some gain (it could be the next Apple, it could also fail). So, with your situation (like mine), I'd say it's best to accept the easy investment for now and fully vet out your tech start up idea in the meantime.

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Starting up a company is fun, stressful, and exciting. It's also often a lot harder than you expect. Income, revenue, and cash flow are big concerns, and you need to be able to eat while you're hunting down your first paying customers.

Don't pay off all the debt if that will leave you without any money for living expenses. Perhaps a compromise is in order? Pay off the high-interest loans first, and continue to make payments on the lower-interest loans while you start up. It doesn't have to be all or nothing.

protected by Community Jun 30 '15 at 22:19

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