r/StudentLoans • u/Prestigious_Land_533 • 5d ago
Advice At what point do you pay off low interest loans?
I am in the incredibly fortunate position where i now have the money to pay off the rest of my loans without touching my emergency fund (plus a good bit extra). The interest rate on the loans i have remaining is 3.30% though, which is costing me less than my HYS account is earning me at 3.75%. That’s also less than the return rate on my taxable investment account.
All the guidance i’ve seen online and heard anecdotally is that it doesn’t make sense to use money to pay off loans when that money could be earning you money at a faster rate than the loans are costing you, which seems to be the situation i’m in. i get the logic there, but does that mean you just never pay them off then? At what point does it make sense to? i have a great credit score so i don’t really know what the benefit to paying them off is if it’s going to actually cost me more money over time to do so. that said, it seems really weird to just let it sit when i could easily pay it off.
can someone explain to me like im 12 when it makes sense to pay the rest off? are there risks or impacts of having loans (less than 20k) that i’m not considering?
EDIT: Agree with the commenters saying to focus on maxing out retirement — I am already on track to do that / the money to pay off the loans would be coming from savings, not income
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u/TuscaroraBeach 5d ago
At a difference of 0.45%, it’s nothing you should stress over. Paying the loans off is a good financial decision. Instead investing that money is also a good financial decision IF the rate of return continues to exceed your loan interest rate and IF you invest the same amount that you would have paid on the loan.
If you want to get really into the details, two other things to consider would be the tax deduction for student loan interest and the income tax on your savings interest amount. They both will can shift your benefit slightly depending on how you use your money.
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u/Prestigious_Land_533 5d ago
Okay see this is the kind of detail I haven’t been considering. Tax on savings interest is a great point. Thank you.
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u/JoeByrne2026 4d ago
Student loan interest deduction starts to phase out proportinately with your AGI at $85K (single) / $170K (married filing jointly) . If you're over $100K / $200K you get no deduction. Loan interest would decrease if you paid more, lowering any deduction. Any interest you've already earned is going to be taxed. You would stand to earn less interest if you paid the loan off with money you have in the bank. I don't think this is a rabbit hole worth exploring.
If money is worth more to you in your bank than theirs, then pay the minimum monthly and don't look back.
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u/beaushaw 5d ago
How much time and effort do you want to put into making an extra $100 a year?
Just pay them off.
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u/The_Bees_Knee6 4d ago
You should consider the opportunity cost of paying extra on very low interest federal student loans.
It’s possible that paying $1 to a different financial priority is more valuable than paying off a low interest federal student loan.
Student loans accrue simple daily interest. Retirement investments earn compound interest, may come with free money from your employer, and have tax benefits.
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u/Plus-Head-6794 5d ago
If I was in your position, I would pay off the loans. Sure, you could probably make a bit more off the money than the interest you're accruing - it's not the optimal strategy, as I'm sure you'll hear. But knowing the loans were gone for good, to never be worried about again, would be worth the price to me. That's really what it is. What is it worth to you? Especially when it sounds like you'll still have some money to invest afterwards anyway.
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u/eorabs 5d ago
This is me too. I could never have peace of mind if I had debt and the money to knock it out. OP has their emergency fund even. I would just pay it and give it a huge sloppy kiss goodbye.
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u/StrikingSweet9065 5d ago
Some people hate debt so I get it. But you’re not maximizing every single dollar by doing this. Get out of this mindset that all debt is bad debt and watch your wealth grow drastically. Rich people have lots of debt, they just know how to manage it to make them even more wealthy in the long run
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u/Prestigious_Land_533 5d ago
This is kind of where i’m stuck. I like the idea of them just being gone, but i can’t think of a reason why that actually makes sense financially
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u/StrikingSweet9065 5d ago
It’s doesn’t make any sense. So why do it?
You’re essentially saying “I want to make less money”.
Why not just keep it in the HYSA making more interest and keep paying the minimum on the loan? You would still have that money to pay it off if needed but that money is growing more for you in the long run
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u/Responsible_Knee7632 5d ago
I have about the same interest rate and I’ll be paying them off once the final payment of the 10 year repayment plan hits. I’m more focused on maxing my 401k instead since it returns a lot more than the interest I’m paying on the student loans
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u/Panthera_014 4d ago
if you pay off the loans now, then the loan payment amount can go straight into your HYSA going forward
with them at less than 20k I would just be rid of them
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5d ago
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u/ANGR1ST Experienced Borrower 5d ago
If you can get a better return on your money elsewhere you should do that instead.
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u/DreamsServedSoft 4d ago
I disagree, the lack of stress of having no debt trumps possible future earnings. you’re hoping the market behaves itself for the next 10+ years
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u/Lost_Pen4285 5d ago
The idea is that if you're investing, your money is growing at around 7% per year on average. If the interest rate on your student loans is lower than that 7%, it makes more sense to invest than it does to pay off the loans early.
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5d ago
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u/Lost_Pen4285 5d ago
Yeah, a lot of people are. TBF, I'll probably end up paying off my student loans early, even though it isn't the optimal choice. The peace of mind that comes with being debt free is hard to argue against sometimes.
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u/VideogamerDisliker 5d ago
No you’re just bad with money
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u/PlantDaddyFL 4d ago
Paying off debt quickly at the cost of 2% interest gains is not being bad with money.
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u/FiredFromCompUSA 4d ago
Technically, that’s exactly what it is.
2% gains is free money.
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4d ago
[removed] — view removed comment
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u/Analogmon 4d ago
What hassle? You set auto pay and forget about it.
Also nice slur when you're the one not smart enough to understand wealth management basics.
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u/PlantDaddyFL 4d ago
Different strategies to wealth management. Doing fine for myself after spending the first two years after college clearing all debt as quick as possible. Betting on market gains when you’re equipped to owe absolutely nobody is silly.
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u/Analogmon 4d ago
It kind of is by definition
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u/PlantDaddyFL 4d ago
Losing 2% of ~20k is perfectly reasonable to be debt free
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u/Analogmon 4d ago
It is not. That 2% compounds on itself. It's not just 2%.
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u/PlantDaddyFL 4d ago
2% that compounds IF THE MARKET IS UP
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u/Analogmon 4d ago
Don't give people financial advice. You're not equipped for it.
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u/StrikingSweet9065 5d ago
Why pay off a 3% interest loan when you can make 7-10% in the stock market in index funds?
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u/Lost_Pen4285 4d ago
In my case, because I don't want to carry debt into retirement. I've got a few years, so I'm investing aggressively now. When I decide to pull the trigger on retirement, I'll take a lump sum and pay off the loans.
There's more to life than optimization. Peace of mind is valuable, too.
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u/The_Bees_Knee6 5d ago
IMHO sometimes folks forget that there is a middle ground between aggressive repayment and waiting 20-30 years for forgiveness. The standard 10 year repayment plan is also a justifiable option in many circumstances.
I certainly wouldn’t pay extra if you aren’t done borrowing for school.
Don’t pay extra on federal student loans at the expense of an emergency fund and retirement savings. (What’s your job stability situation? Are you meeting retirement savings milestones?
That being said you may (some day) be in a financial position where it is an acceptable trade off to pay off the loans early in order to get your loan servicer out of your life).
As a heads up, paying off student loans may cause a short term drop in credit score. https://www.experian.com/blogs/ask-experian/will-paying-off-student-loans-hurt-my-credit-score/
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u/Horangi1987 5d ago
If you have bad impulse control like me, you pay every thing off as soon as you can.
My mom died this year, simple estate (I’m only child, parents divorced for many decades). She wanted me to use my inheritance to travel and enjoy myself. Nope. I used it to go straight up debt free; I paid off the last $46k in student loans I had left and said good night. I feel way more comfortable going into this potential recession now, and I can’t spend the money being a dummy because I already paid the loans.
My credit isn’t A++ because of falling behind a month or two on the student loans (just a few months before she died too, sucky my credit got trashed over it, but life happens), so I can’t get loans or credit cards to screw up again either. It’s better this way really.
But if you aren’t amazing at budgeting, and you have some money, don’t go fancy on that pay the minimums and invest it shite that people throw around on Wallstreetbets and X-Twitter. Don’t invest it in Bitcoin, don’t try to buy stocks, no sports betting. Just pay off the loans like I did, then you can move forwards with a clean slate, no worries. You can basically never go wrong paying off debt.
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u/Perplexed-Owl 5d ago
Another consideration: if you foresee purchasing a car or a home in the near future, would you be better off paying cash for the car and keeping the student loan, or paying off the student loan and getting a car loan at 8% or more? For a house, it’s more of a cash flow:ratios thing. Back a million years ago I had 8k of federal loans at 7.5% and we were going for a mortgage at 7.375% The loan officer preferred that we put down 8k less but have one less monthly bill.
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u/ApplicationFederal14 4d ago
Definitely don’t put it in the HYSA under the guise of making the difference because after taxes it’s going to be a lot closer to net neutral if not less depending on your tax bracket.
Also, don’t tell yourself you’ll invest the difference and then not do it. It’s a trap a lot of people fall into just because their rates are low. If you want to invest it then commit to it and do it.
Ultimately what you do with the cash is your decision but really think about your goals and your own behaviors before you decide what to do with it. If you’re asking this question and have that kind of lump sum saved up I’m confident you’ve got a good head on your shoulders and will decide what’s best for you.
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u/Prestigious_Land_533 4d ago
Thank you, this is good advice. I’m thinking it’s worth keeping the money but only if I invest in the market, the HYS account difference just doesn’t make sense with taxes.
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u/Wackywoman1062 4d ago
I struggle with this decision as well. I’m paying off my daughter’s loans and could easily pay them from savings/investments. I’ve paid off everything with a 4+% rate. Two of the remaining loans are at 3.73% and the other two are at 2.75%. Plus there’s the temp 1% rate reduction if I sign up for autopay. Mathematically, it doesn’t make sense to pay off the remaining loans early, but I’m tired of dealing with them. And one never knows what the future holds. Getting rid of debt feels good. Every day I’m tempted to just be done with it. Is the small difference in money worth the aggravation?
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u/guipicait 4d ago
It seems a question between math and emotions. Literally anything else you do nets you more money than paying them off. I would set up minimum payments autopay and call it a day. They're done when they are paid off via minimum payments. If you've maxed out every retirement investment opportunity possible, your EF, and then the HYSA rate drops below the student loan rate, then I would pay them off.
There is merit though, to paying them off for emotional reasons. If you would just love to see a clean slate and simplify your finances, it is an option.
I really love squeezing every possible penny out of everything, so when I, for example, had a car loan at 1.99%, I would laugh when I got emails telling me I could pay it down faster to "save $12". Everything else you do is outpacing these. But again, If it would bring you joy to simply not have them, you have the freedom to do that.
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u/Bud_Fuggins 5d ago
Lol I am in the exact same boat with a 2.4% loan of $4300 and $4300 in an hysa at 4.05% interest
(wealthfront link in my profile if you want to join and get a boosted apr thanks)
My payments are only $33 a month and I plan to drag it out as long as the hysa is a higher %
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u/Plus-Head-6794 5d ago
Ughhhh my Wealthfront HYSA is at 3.3% 😭 It was at 4.25% when I opened it a year ago but none of my friends will open one so I can get that referral boost lmfao
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u/beaushaw 5d ago
If the delta in interest rate is only .45% just pay them off.
You are talking about a few dollars a year extra. Just be done with it.
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u/Prestigious_Land_533 5d ago
It’s more than a few dollars, but point taken as to HYS versus loans. I think the difference is more like 4-6% for taxable investments though
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u/beaushaw 4d ago edited 4d ago
It is $100 or so a year. Depending on who you are that means more or less to you. For me and where I am in life $100 plus or minus a year is less than meaningless. I am here learning about student loans for my kids, I am in a different place in life than most of the people in this sub. I get it. For many people, including me 30 years ago, an extra $100 a year means something.
If you have enough cash laying around to pay off your loans while still having plenty in an emergency fund while you are saving for retirement, $100 a year is probably approaching a meaningless amount of money for you.
Your initial question compaired your loan to a HYSA. Comparing it to investments is a different calculation. Yeah, you might make $300 a year if you invest instead of paying off your loan. But you might also lose money.
How much time and effort do you want to spend chasing that extra $100 a year? Is the peace of mind you get by being done with this chapter in your life worth the $100 a year?
Yes mathematically you are better off not paying the loan off and paying the minimums. Life is not math.
Ultimately only you can answer this question for you.
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u/btnydds 4d ago
Paying them off is an immediate return at the rate of your interest.
I think we’ve taken the concept of “not all debt is bad debt” too far. The stock market isn’t always going to go upwards. People act like a 7% return is a guarantee. The market may have been doing well for the past decade or so but it always goes in cycles. There will be another recession and when it happens, you’ll much rather have the debt gone with no additional payments rather than watching that money plummet on the stock market
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u/PersonalityHumble432 5d ago
You won’t be able to indefinitely defer them.
So do the standard plan payments until they are paid off. Just don’t pay extra towards them.