So ppl may have different views. Im in the industry for 6-7 months now. 2014 grad, So Heres the situation:
$15k student debt to be paid over 10 year period at an annual interest rate of 5%
The payment schedule is sth like $450 per quarter which I have done for 2 quarters.
So heres my dilemma in regards to 2 option/
1) Wit the bonus I got recently I can pay off this debt in one swoop and also bypass the associated interest payments saving around $3k in nominal terms for a 10 year period. But more importantly the whole mental burden that I am in debt will be removed
2) Keep the loan repayment according to the max schedule and pay it quarter by quarter as stipulated. The advantage here is that in the future (lets say 2-3 years) the quarterly payment will become smaller and smaller as a percentage of my income to the point that it may feel insignificant
Whats is the smarter option and what would you guys do. Please share your views and your experiences
I value the relief of being debt free probably higher than a rational person would. Pay it off - you can argue that financially it might not be the "smart" thing to do with a low rate, but don't underestimate the value of putting it behind you.
It depends what the alternative is.... If your going to blow your bonus on useless shit, then pay your loans. If your going to start an emergency savings account because you currently have no savings, then I'd save it.
anyone else has an opinion?
I would pay off the entire loan, then your paychecks after that can go to be purposed for a down payment on a house. .
Depends on if you have a safety net or not.
I'd pay off the whole thing, but assuming you're on your own, just pay half, put the other half in the bank. Use your normal paycheck to pay more per year and pay the rest off next year. You'll save a ton assuming you don't wait the entire 10-15 years to pay the debt off.
As others have said, your first priority should be to set aside an emergency fund equal to 3 months living expenses. Given how over valued everything feels at the moment I would pay off at least half and lock in that 5% return. I would use the other proceeds for my 401-k assuming I received a company match. Anything left over I would use to begin building a diversified stock portfolio allocating a significant portion to low cost index or ETFs while picking a handful of names that I found interesting.
Ok lets put this disclaimer into the post:
I intend to go to B-School in 3 years.
Does that change the advice given?
Depends, if you are paying for B-school out of pocket based on that. But in general I would just pay off your loans now, like people said, it would feel good to have it behind you. You can then take what you normally pay per month and set it aside in a savings account you can use for B-school, and as an emergency fund until then. Same out of pocket per month but then you are paying yourself. You will then have 3 years of bonuses to use for basically whatever you want then. If you do need a buffer pay off a good chunk of it, and then you can save like $5 grand for an emergency fund. You will then pay off the loan within a few years unless you pay off a larger portion of it per month instead of quarterly.
Looking at it purely mathematically, you have a guaranteed 5% annual return on the payoff of the principal balance. Since it's guaranteed, to me it's like a risk-free investment, which is equivalent to a federal Treasury note; the 10-year Treasury is something like 2% today. So, mathematically, it makes sense to payoff your loan. Obviously, you could use the money to invest into higher risk, higher return pursuits, but I don't think that's really an apples to apples comparison. Risk free to risk free return is the true apples to apples comparison.
Ultimately, I think the decision comes down to your own cash flow and savings. Subjectively, a 5% return isn't worth it if it erases your liquidity. Agreed with the others that you need cash liquidity for unforeseen circumstances. Assuming you don't blow your money on worthless junk and the money is set aside or used to pay your student debt, to me your future MBA costs are irrelevant to the decision. If you opt to not payoff your debt and prefer to save $15,000 (not spend it), then you're simply funding your savings with a 5% annual cost. Really not that bad overall.
If you are certain of business school I would pay the minimum so you don't live like a pauper in business school and also because your post MBA salary will make the extra interest irrelevant.
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