Should you pay off your student loans right away?

These days unless you’re going to the University of Phoenix, most people end up with about $25k in student loans after graduating. Tack on credit card, car payments, and living expenses, and you’re staring down the barrel of endless debt and very little saving. With comp day right around the corner, that little voice of reason might be telling you to pay off your student loan in its entirety. But before you do, take a second, should you really pay off your student loans quickly? Well that depends...

Before I continue, let me preface this by saying that I am Hispanic and went to an Ivy league school and graduated with less than 10k in student loans (affirmative action!). I have yet to pay this off, and heres why, it is the cheapest debt I have. My loan interest rate hovers around 5% and making payments that are more than the monthly minimum without my killing my bank account is just enough for me to pay it off in a reasonable amount of time. Besides I have more pressing things to pay off (insert jokes in the comment section about my being mexican and having 50 kids).

Based on my conversations with other people, my case is rare, and most people graduate with at least 25k in debt which would stress even the most chill bro out. So here are a few things to think about when considering paying off your loans:

Federal vs Private loans
Always pay off your private loans frst. THese typically have hirer, variable interest rates that you do not want to leave waiting around. Federal loans are more lenient with around 5% interest and grace periods

Credit Cards / Car notes / mortagages
If you have any serious long term, high interest rate debt, student loans should not be at the top of your debt list. Especially, with credit card debt. It is the most expensive and damaging form of debt so if you have it, definitely take care of that before tackling any other debt.

Early withdrawal from your IRA
The simple answer is NO. The long answer is: Don’t do an early withdrawal from your retirement account. You might be tempted. Its “free” money, that you could use to easily clear out some debt. But, it doesn’t make financial sense. WIth all the early withdrawal fees you pay and the long term loss of compiled interest on the original balance in the account far outweighs, the immediate short-term gains you’d get.

Smaller Contributions to your 401k
Again, the simple answer here is NO. The long answer is don’t reduce your 401k contributions. Especially if your company is matching your contributions. Max this out early on while you can afford to. Later on when you have a family and a home, you will likely have to scale this back so don’t start now.

The main takeaway is If you’re serious about getting rid of debt, the key is to carefully look at where your money is going. You don’t have to get fancy and put together a budget plan. Use something mike mint.com to show you where your money is going. Even putting aside an extra $50 bucks a week will help. Oce you get into the habit of saving and getting rid of unnecessary expenses, it won’t seem like a burden anymore and you’ll be better able to manage your debt. Maybe I should take my own advice and pay off my last 6k...

 

$61K in student loans, $235K mortgage, and 10K in CC debt. At least my car is owned free and clear.

I contribute 9% to my 401-K (50/50 Traditional / Roth) and my company kicks in 5% plus a 2-4% extra for profit sharing. In 2012 I will make about $110K and I pretty much live pay check to pay check. However, I will have about $30K in my 401-K at the end of the year so I would rather stack that up than retire my student loans (which are at 7% - I can get a higher return on my 401-K). Next year I will be at approx $140K but will just increase my 401K contributions.

Ive learned to deal with the fact Ill be paying my student loans forever. At least they are a write-off. Combine that with trying to max out my 401-K and my mortgage interest greatly reduces my tax liability.

 
Best Response
gregt14:
$61K in student loans, $235K mortgage, and 10K in CC debt. At least my car is owned free and clear.

I contribute 9% to my 401-K (50/50 Traditional / Roth) and my company kicks in 5% plus a 2-4% extra for profit sharing. In 2012 I will make about $110K and I pretty much live pay check to pay check. However, I will have about $30K in my 401-K at the end of the year so I would rather stack that up than retire my student loans (which are at 7% - I can get a higher return on my 401-K). Next year I will be at approx $140K but will just increase my 401K contributions.

Ive learned to deal with the fact Ill be paying my student loans forever. At least they are a write-off. Combine that with trying to max out my 401-K and my mortgage interest greatly reduces my tax liability.

You should really stop contributing so much to your retirement account until you get that CC paid off.

 
gregt14:
My federal income tax will be less than 78K based on deductions I have - for this year anyway (bought a house, etc). Going forward, it will probably not be.

I hope you realize that the calculation for deductibility for student loan interest is based off of your AGI. Deductions like mortgage interest, state and local taxes you paid, or any other itemized deduction is not taken off AGI for the phaseout limit. So unless your AGI is under 60k (it's completely phased out at 75k), you're not going to get the whole $2,500. Oh, there's that too. 61k at 7% (assuming monthly compounding) is roughly $4,400 in interest, which means you're paying about $1,900 more than you can deduct. If you're in the 25% tax bracket, that means only a $625 tax benefit on $4,400 dollars interest paid.

Personally, I would be paying more towards the principal of the loan to pay down the balance so that the money I do pay isn't going to waste. Hopefully you got a good rate on your mortgage.

 

It doesn't take a rocket scientist to figure this out, same goes for all debt. Don't really see why this needed an elaborate post:

1) Make minimum payments then, if you still have more money 2) Pay off highest APY debt first unless other risk-free opportunities pay more I.E. if interest rates rise so that CDs yield 6% and you still have student loan debt @ 5% put money in the CD and make minimum payments on the loan

 

I'm a senior and have about $50K in student debt already accumulated. I just took out an $18K private loan with an int. rate currently at 10.25% (not locked) to study abroad. Should I have chosen the 12.25% locked rate instead? After taking 15 years to repay it I will be paying over $13K in interest. I figure I might as well travel Europe when I'm young and am able to for a long period of time but I know I will definitely be paying for that later. Was this a smart move? I guess on the bright side the only other debt I have is about $700 in CC.

Traps
 
traps:
I'm a senior and have about $50K in student debt already accumulated. I just took out an $18K private loan with an int. rate currently at 10.25% (not locked) to study abroad. Should I have chosen the 12.25% locked rate instead? After taking 15 years to repay it I will be paying over $13K in interest. I figure I might as well travel Europe when I'm young and am able to for a long period of time but I know I will definitely be paying for that later. Was this a smart move? I guess on the bright side the only other debt I have is about $700 in CC.

That private loan is going to merk you

This to all my hatin' folks seeing me getting guac right now..
 
Cruncharoo:
traps:
I'm a senior and have about $50K in student debt already accumulated. I just took out an $18K private loan with an int. rate currently at 10.25% (not locked) to study abroad. Should I have chosen the 12.25% locked rate instead? After taking 15 years to repay it I will be paying over $13K in interest. I figure I might as well travel Europe when I'm young and am able to for a long period of time but I know I will definitely be paying for that later. Was this a smart move? I guess on the bright side the only other debt I have is about $700 in CC.

That private loan is going to merk you

If I wanted to study abroad it was the only option I had. It sucks big time but I hope it will all be worth it!

Traps
 

Any advice for me?

I'm graduating in 2 months. I have around 11k in loans. I have a vehicle paid off free and clear and will be able to live in a relatively low cost of living area (850ish rent for a studio apartment, low food costs, high fuel costs, but only a 3 mile commute)

I currently have around 500 in the 401k account from my part time job(the employer made contributions independent of my work). I will have a few thousand(2-4k) in my checking account upon graduation depending on what luxuries I take and the length of the vacation I take prior to starting. I also believe that I have around 10k in a savings account that was bequest upon me. I have no other debts or assets worth noting.

Starting offer after bonus will be around 70-100ish depending on hours worked (comfy internal consulting role within the engineering department of an f500 firm, baseline hours worked would be 40 and I'm eligible for overtime)

I was thinking of making the minimum payment to my loans. From what I understand they're at approximately 3.5% which is basically inflation. I assume that the F500 will make around 4% above inflation so it would be wise to maximize that.

My current budget places my yearly expenditures at just over 20k. I'm going to be a realist and say that I expect such expenditures to exceed that by about 5k. This would leave me with around 25k in savings after taxes.

I intend to eventually get a master's degree of some sort(MBA, MSF, M. Finn, M.A. International Relations)

 
xelink:
Any advice for me?

I have around 11k in loans. I have a vehicle paid off free and clear and will be able to live in a relatively low cost of living area (850ish rent for a studio apartment, low food costs, high fuel costs, but only a 3 mile commute)

Starting offer after bonus will be around 70-100ish depending on hours worked (comfy internal consulting role within the engineering department of an f500 firm, baseline hours worked would be 40 and I'm eligible for overtime)

I was thinking of making the minimum payment to my loans. From what I understand they're at approximately 3.5% which is basically inflation. I assume that the F500 will make around 4% above inflation so it would be wise to maximize that.

My current budget places my yearly expenditures at just over 20k. I'm going to be a realist and say that I expect such expenditures to exceed that by about 5k. This would leave me with around 25k in savings after taxes.

I intend to eventually get a master's degree of some sort(MBA, MSF, M. Finn, M.A. International Relations)

If I were in the same fortunate position as you, I'd spend another 5k each year on random things like going out and traveling and save the rest of the 20k for going back to school. 3 years from now assuming grad school tuition prices don't inflate like undergrad does, 60k + decent financial age package should set you really comfortably for full time master's pretty much everywhere you go.

Although I am curious about your budget for 25k budget for a whole year, mind breaking that down and a comparable city/location you live at? Another thing you could also is set yourself a fixed budget like 30k, and anything you spend below that budget goes directly to your loans?

 

I'm a pretty boring person. As a nerd, the internet provides ample entertainment. If it fails to do so, then I rely on women for the rest. I only date women who pay for their own shit(exception, I'll buy food if they cook it).

The bulk of my savings are being earmarked towards a Master's degree/savings of some sort. I'll also admit that my budget is ONLY for living expenses and not savings.

850 – rent 300 – food 100 - auto insurance 50 - fuel 50 – health/dental insurance 50 – cell 30 – internet 50 – misc 600 – stupidity/overhead(mostly food)

The area I intend to go would be Playa Del Rey http://en.wikipedia.org/wiki/Playa_del_Rey,_Los_Angeles I don't know what other areas would offer comparable living expenses. I fully intend to splurge a little. I have a $2500ish computer build(including three monitors) planned out but that will mostly come from the stupidity/overhead budget.

even if rent is $1k higher, I don't see how so many people have a hard time envisioning themselves on LESS than 30k a year. What do "normal" people waste their money on? This is a serious question. I'm cheaper than my cheap Asian friends.

 
xelink:
Any advice for me?

I'm graduating in 2 months. I have around 11k in loans. I have a vehicle paid off free and clear and will be able to live in a relatively low cost of living area (850ish rent for a studio apartment, low food costs, high fuel costs, but only a 3 mile commute)

I currently have around 500 in the 401k account from my part time job(the employer made contributions independent of my work). I will have a few thousand(2-4k) in my checking account upon graduation depending on what luxuries I take and the length of the vacation I take prior to starting. I also believe that I have around 10k in a savings account that was bequest upon me. I have no other debts or assets worth noting.

Starting offer after bonus will be around 70-100ish depending on hours worked (comfy internal consulting role within the engineering department of an f500 firm, baseline hours worked would be 40 and I'm eligible for overtime)

I was thinking of making the minimum payment to my loans. From what I understand they're at approximately 3.5% which is basically inflation. I assume that the F500 will make around 4% above inflation so it would be wise to maximize that.

My current budget places my yearly expenditures at just over 20k. I'm going to be a realist and say that I expect such expenditures to exceed that by about 5k. This would leave me with around 25k in savings after taxes.

I intend to eventually get a master's degree of some sort(MBA, MSF, M. Finn, M.A. International Relations)

Dude, you are on easy street.Good job getting to where you are at. What are the terms on your loan?

Because your amount is so low I'd probably try to get it paid off in 3 years or so. Some really like to take advantage of interest rate differentials but we're in a 0% inflation environment recently.

 

Thanks. That's the plan. The interest rates on those loans are too good to be true in my opinion. I don't really believe that we're in a 0 inflation environment. It depends on what product classes we're looking at. I come from a very frugal, albeit wealthy, background. Bread and butter products such as milk and wheat thins have been going up considerably the past few years(5% a year or so) and the only thing really suppressing the inflation rate would be the decline in the price of luxury goods such as consumer electronics. Rents appear to be raising at around 5% per year as well, albeit the cap rates haven't been keeping pace.

Asatar:
How the hell are you all in so much non-school related debt.... This is why the Western world is fucked. I have around $30k in student loans at 0% interest and NO other debt. Credit cards? Mortgages? Debt to go travelling in Europe? Don't come crying when that bites you in the ass.

Agreed. Taking on CC debt is financial suicide since rates for even a decent credit are 25-30%. I had to take on student debt to finish school and plan to pay it off as quickly as possible. Having 25-30k working for you instead of against you over 40 years makes a big difference.

 

The only debt I had is my student loan. I started paying it off when I was still in college. Minimum payment from what I have earned, while at school. Paid only the interest not the principal. Therefore after graduation, with a full time salary, it took less to pay it off. NEVER pay with a loan for consumption. Expecially travelling, except if you have some entrepenerial mindset, and want to start a start-up, and you need inspiration....that could justify, but I wouldn't do that.

 

Corporis sequi ipsa molestiae deserunt sit minus. Nulla voluptatum aut aspernatur vitae deserunt. Quod est porro aperiam saepe. Est unde laboriosam minima officia quis ex. Voluptatem earum ratione nemo sit doloribus. Aut exercitationem perspiciatis voluptatem facere in autem vel qui. Dolores eligendi facere aut.

Veniam incidunt nisi porro et commodi laborum sit quas. Cupiditate corrupti quidem dolores delectus velit assumenda nihil. Dignissimos omnis modi voluptatem numquam aut molestias. Est non ex explicabo repudiandae.

Molestiae eligendi quia est est. Quia et odio unde recusandae consequatur velit. Natus doloribus rerum doloribus assumenda consequatur ut. Asperiores earum doloremque vitae recusandae vitae.

 

Rerum ipsa ad omnis officiis ipsum ipsam cupiditate odit. Dignissimos perspiciatis totam aliquid. Ducimus sed ipsum ad facere iusto. Ipsam voluptates ea corrupti assumenda et aut. Placeat quia beatae eos eius aut cupiditate.

Dolor eos hic sunt doloremque voluptas repudiandae. Odio quod atque quia autem aut. Et itaque eum quos repellat aut adipisci omnis. Dolorem ab rerum suscipit. Ratione iste consequatur eum nostrum.

“There is only one corner of the universe you can be certain of improving, and that's your own self.” --Aldous Huxley

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
BankonBanking's picture
BankonBanking
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
Secyh62's picture
Secyh62
99.0
5
kanon's picture
kanon
98.9
6
DrApeman's picture
DrApeman
98.9
7
dosk17's picture
dosk17
98.9
8
GameTheory's picture
GameTheory
98.9
9
CompBanker's picture
CompBanker
98.9
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”