I have a rather large amount of student loans, around 40k euro. The rate is set for 5 year time periods. I have to pay 0.01% interest over them until 2020. Historically, it has rarely been higher than 0.2%.

I have to pay them back over the course of 15 years as a maximum. That involves paying off around 300 euro per month. I can pay off far more, but it seems putting into a savings account and/or investing whatever else I can miss is a far better strategy.

The main downside to this seems to be that the amount of money I can take as a mortage for a house increases in larger increments by paying off student loans than the size of the payments, but I would also need savings to buy a house. That said, I do not want to buy a house in the forseeable future, as I am considering a career elsewhere.

Would saving instead of paying off my student loans as fast as I can make sense? Am I missing something?

Update: I provided a self-answer based on information I received from a financial advisor. I also recommend reading the accepted answer, as it contains interesting information.

  • "Am I missing something?" Maybe not, but also maybe yes. What happens if you miss your regular monthly payments? – RonJohn Apr 26 '18 at 13:59
  • @RonJohn I'm not sure. It's a government loan, though, not from a money-grabbing institution. – Belle-Sophie Apr 26 '18 at 14:02
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    Other questions? Can they be discharged in bankruptcy? (In the US they cannot) What can they do if you default? Can they take money out of your paycheck like the IRS can in the US? Those would make getting rid of the loans a higher priority than saving or investing. – D Stanley Apr 26 '18 at 14:04
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    The government doesn't grab money? LOL – RonJohn Apr 26 '18 at 14:12
  • Is that .01% the annual interest rate, or perhaps weekly / daily? Even a monthly rate of .01% is effectively zero interest. – Grade 'Eh' Bacon Apr 26 '18 at 15:22

Generally, it makes sense to pay off high-interest loans first. You are not in this situation.

Your math looks correct. As long as you have income and can easily afford your lifestyle, savings, and loan payments, it does not make financial sense to pay off the loan early.

The interest rate is so low that the loan costs you almost nothing in interest. You are much better off in the long run investing the money and getting a greater return.

In the United States, for example, people with home mortgages often are in a similar situation. Because mortgage rates are relatively low and the interest payments are a tax-deduction, it often does not make sense to pay off a mortgage early because extra money will earn more invested elsewhere.

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    Should probably be noted that for a good chunk of U.S. households with mortgages, the changes in the standard deduction for the 2018 tax year shifted that equation a decent amount. Many fewer people will be deducting their mortgage interest this year. – R. Hamilton Apr 27 '18 at 13:42

I did more research and spoke with a financial advisor: I should stick with the minimum payments and prioritize saving over paying off this debt at least until I start to have to pay taxes over my savings. At that point I can re-evaluate. There are a few things I need to keep in mind.

  • Since this is a pre-2015 Dutch government student debt, it is not registered with the BKR. This means it does not affect my credit rating or my ability to get a mortgage, should I want to get one. As a result, paying off this debt faster does not increase my credit rating.
  • Monthly terms are what is required to pay off the debt in time, or what I can afford based on my income, whichever amount is lower. If there is any remaining debt after 15 years, it gets wiped. If I make extra payments and lose my job later on, I'd effectively lose my savings.
  • When I start accumulating a larger amount of savings, I'll have to start paying tax over my savings. If I cannot deduct my debt from my savings, it may be a good idea to pay off extra at that point. That point is pretty far away, at 70,000 euro before it becomes relevant, though, so I have time to research this more.
  • Should the interest amounts change, it may be a good idea re-evaluate my payments. I heard that in the 90s, it was 10% yearly interest. At those rates, it would make sense paying more.
  • Actually point 3 is wrong. While you may be taxed.... as long as the contrary interest rate on the debt is 0.01% you are pretty much guaranteed to make more than that even after taxes. Also, are you sure about the 50k€? I know Ducht is a little crazy and tries to keep the citizens poor (I was offered a job there once, and my tax for my assets alone would ahve been higher than the gross pay they offered me, no way i ever move there), but 50k sounds like a ridiculous low limit. – TomTom Jun 20 '18 at 12:43
  • @TomTom you're correct, I had the numbers mixed up. I have to pay 1.3% tax over my savings over 70k. Under that it's negligible. It really depends on what kind of returns I'll be getting. My last investment (of 3k, though) had only a 1.2% return over a year. And the interest may go up. So it all depends really. But for the foreseeable future, it is not worth paying off more. – Belle-Sophie Jun 20 '18 at 13:30

It will depend much on your investments and on the amount you are going to invest.

A possible rule of thumb is that if your alternative investment gives you a higher yield than paying off your student loan you should do that. An even better solution is to find investments (e.g. high yield funds, dividend stocks) which could contribute to your monthly cashflow. That could also be a solution.

And of course you have to do an evaluation of your risk profile. The safest bet, is to pay off debt first then invest. Or you could do both. Knowing the market you're considering investing in is a key to considering the risk of your investments, and it also reduces the risk.

Deepening on the rates of your bank accounts, at least in my country, that’s not an option at the moment, when with inflation the yield is "eaten" up by the inflation.

  • Yield is a problematic word. If it's from a CD or MM account, it's Total Return. If from a dividend stock, it's not and if non sheltered, a tax bite may result in a negative return. Monthly cash flow could just as easily be derived from selling off non dividend shares and most likely, incurring less of a tax bite. If this is effectively a no interest loan as stated by the OP, there is no risk involved. I was in the same situation in 1980 with a 3% school loan, earning over 15% from Jimmy Carter MM rates. A simple brainer to pay the minimum on the loan. – Bob Baerker Apr 26 '18 at 21:45
  • Your tax discussion depends largerly on the country you're located in. – Erik Apr 27 '18 at 6:33

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