Student Loan Paydown Advice
I'm a rising senior at university and have a SA stint this summer. My question is regarding a bad loan I had to take earlier in college. It's an $18,000 unsubsidized at a 4.75% rate. I'm currently paying $75 each month to maintain the current loan balance (whole $75 goes to bank as interest, no principal paydown). My question is regarding where I should allocate the money I plan to save from my internship. Should I continue paying the $75 each month to maintain my loan balance and and invest my saved money at 5%+ OR do I do everything in my power to pay down the $18k unsub loan. Or perhaps a mix of both?
Based on the most helpful WSO content, here are some insights to consider for your situation:
Interest Rate Comparison:
Debt Management:
Investment Returns:
Hybrid Approach:
Long-Term Financial Goals:
Emergency Fund:
In summary, weigh the guaranteed return of paying down the loan against the potential (but not guaranteed) higher returns from investing. A balanced approach might offer the best of both worlds, reducing your debt while also growing your investments.
Sources: UK Student loan advice - To pay or not to pay, The Last "what should I do with my money?" Thread (hopefully), The Last "what should I do with my money?" Thread (hopefully), What happens when you finish paying off your house?, Managing Your Money - Building a Personal Financial Model
Buddy, how much are you planning to save during that SA, 1k...2k... 3k? Even with a 5% return, that’s only 100-150 bucks. Meanwhile, you have debt charging you 4.75%, leaving you arbitraging a mere 0.25%, which is about 5 bucks. You should only invest what you can afford to lose, and right now, you can’t afford to lose any money. Paying off your debt should be your top priority!!! Put your savings into paying of yhe debt
I am sorry but if you are saving 1k from your summer analyst stint, you have a spending problem. You get roughly ~6.5k a month, I find it hard to believe you aren't saving at least 1-2k of that especially with roommates or doing student housing. Most meals are paid for by the firm due to seamless, so I don't really see where the spending is unless you ball out with drinks or something. You should save 1k or so purely from your singing bonus. Also of note : you end up getting a pretty big refund from the federal government after your SA stint, at which point your savings become even larger.
You really missed the point and just focused on the savings amount. I was speaking in £, but anyway, even if he saved 5k, what is the upside he's expecting from taking this investment risk? He's being charged 855 in interest a year! With 5k at 5%, he's making 250. After factoring in the 0.25% arbitrage, he's only profiting 12.50 pounds. He needs to be saving 17k at 5% to barely meet the interest payments. By throwing, let's say, 5k at the debt after the SA, he would save around 250 bucks in interest and no added risk. So A1 if you're in support of OP putting the money into investing, I hope I never get you to manage my money or advise me on anything financial.
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Alternate perspective - 4.75% is an extremely cheap piece of capital in this rate environment and there is no need to rush to prepay debt that is carrying a negative real rate. In general, throwing every dollar at your outstanding debt only makes sense if you a.) are carrying debt with a higher rate than your opportunity cost of capital (i.e., risk free rate + market risk premium) and b.) have enough liquid savings already that you could absorb a black swan event (e.g., losing your job). Further to the second point, beyond the simple calculus of cost of debt vs. opportunity cost of capital, there is incremental option value in fungibility, i.e., your liquid savings can be exchanged for goods and services, but you can’t tap your prepaid student loan balance for additional liquidity if you need / want. Lastly, $18k is a pretty small balance - if you stay in investment banking, that balance will quickly become de minimis as a factor of your overall income (in corporate finance terms, your leverage ratio will be extremely low / healthy). So, I would save the money and maybe enjoy some of it during school. The debt is cheap, there is value in building liquidity now, and your capacity to service that amount of leverage in the future will be more than ample.
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