this post was submitted on 31 Aug 2023
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should I pay off my student loans in full before intrest kicks in? (lemm.ee)
submitted 1 year ago by giantofthenorth@lemm.ee to c/personalfinance@lemmy.ml
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General financials:

I can afford to pay them off in full and have plenty left over for general life needs

The interest rates on them should be 4.53% according to their chart of when it was awarded.

If I do hold onto the money and pay off monthly I can put everything into a CD but I'll still be losing .03% if I lock in the student loan money maybe I'll beat but .07-.43% so not a ton of upside unless there's sudden political will to actually follow through on student loan forgiveness.

Is there anything else I'm missing when considering this? I am leaning towards just pay off as I've been planning for this, but I want to make sure there isn't something else to do.

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[–] blueskycorporation@lemmy.world 1 points 1 year ago

With a 0.03% difference, it doesn't make a lot of difference. That being said, it depends on your financial situation. Some things to consider:

  • Repaying the loan early or investing the money into cds such that the cash flow from the cds matches the cash flow to the loan repayment is almost equivalent. In the corporate world, this would probably even qualify for accounting defeasance, which would allow you to keep the debt but removing it from your balance sheet. This is just an illustration of how accounting wise, both situations are pretty equivalent
  • keeping the loan outstanding and the cash invested vs repaying early gives you option. If you do the former, you always have the options to do the latter later. Whereas if you repay the loan early, it is a definitive action. So there is an advantage to not repay early. You can always wait and see. If you invested in bonds instead of CDs, you could even potentially benefit from movements in interest rates.
  • your return on investments might be 5% at your current level of assets, but your marginal return might be different. As an example, someone with only 10k to invest might not be able to bear much risk and only be limited to bonds. 100k and it opens the door to a diversified portfolio of stocks and bonds. At 1M they are qualified investors and have access to more options. So even though your whole portfolio might give 5% return now, every dollar you add on top opens the door for potentially more returns. If you use money to repay loans, you are shaving off the dollars that would have brought you the highest expected marginal return.