Comments on: Student Loans: How to Pay Them Off and Build Wealth

By: Vic

Vic — Wed, 18 Nov 2009 08:02:26 +0000

Can this be right?

=Joe over 10 years=
Expense: $302/month * 72 months = $21,744
Earnings: $16,728
Balance: $5,016

=Jane over 10 years=
Expense: $202/month * 120 months = $24,240
Earnings: $21,700
Balance: $2,540

So Joe ends up with almost twice as much money as Jane.

It seems like this leads to the opposite conclusion of this blog post, doesn’t it? Aren’t Jane’s higher investment returns more than offset by the extra interest she pays on the loan in this case? Or am I missing something?

By: Kris

Kris — Thu, 12 Nov 2009 00:30:36 +0000

I started out with $220,000 in loans. There is light at the end of the tunnel! I paid extra toward my high-interest private loan when the (variable) rate was high, and now I pay the minimum as the rate is low again. I have finally gotten to where I’m paying mostly principal and very little interest!!!

When the option exists, always pay down principal (to the one asking which to put money on while in deferrment) But that may not be allowed. The big thing to know is that the unpaid interest acrued during deferment likely capitalizes, meaning gets added to the principal.

All the other comments are correct about the certainty of your investment vs interest expense saved.

My biggest piece of advice is don’t take out new debt!!!

By: Pam Palmore

Pam Palmore — Mon, 28 Sep 2009 12:31:37 +0000

I have been approved for a hardship deferment. I can afford to pay some on my loan. Should I request that my payment be applied to the principle or the interest?

By: Tracy Shannon

Tracy Shannon — Thu, 18 Jun 2009 22:53:57 +0000

Joe paid off his loan sooner thus in the end paid less for the loan, while jane paid for more. I paid a total of 1500 last year. 750 went to the pricipal of the loan and 750 went to interest alone. I cant see how it is beneifical not to pay off the loan ASAP!

By: Greg

Greg — Mon, 27 Apr 2009 19:36:33 +0000

My wife has a student loan of $16700 at 4.125% interest. The monthly payments are $147 for the next 12 years. The interest will total more than $5000 if we take that method. We have decided to pay $500 a month on them which will reduce it to three years and save us $4000 in interest. We already have an emergency fund w/ 6 months and max out our Roth IRAs each year. Neither of us have a 401K or that would be a priority. If we just put the difference in an online savings account @ 1.7% interest that means we are still losing 2.45%. And tax deductible? Who cares, I’d rather not have to pay interest to begin with! While our money is earning less interest, it is less valuable so we might as well seize the opportunity to tear into the loan. If we were making more like 8% then this would be another story.

By: Patrick

Patrick — Fri, 26 Dec 2008 22:33:33 +0000

I how this article emphasizes that the decision to pay extra or save really depends on your situation. I think the heart of this issue is involves the concept of “Opportunity Cost”.

I am sure I am oversimplifying and butchering the terminology, but here is an example: You can either keep $1000 in you checking account, or put it in a savings account with 5% APY. The “cost” of NOT placing that money in the savings account is $50 per year. This is the same as if your checking account charged a $50 annual fee. (i.e. making a decision that results in you NOT earning $50 is the SAME as losing $50).

This might seem obvious but in practice this is not the way a lot of people think. I graduated with similar amounts of student loans as a few of my friends- we were fortunate enough to lock them in at < 3%. There are plenty of 100% guaranteed savings options that beat that %, some of which that don’t even restrict access to your money (like an online savings account). Despite all this some of my friends chose to pay off their loans early instead of saving at a higher rate. This decision cost them money overall- even though they will pay less interest on their student loans then if they saved. They basically paid a fee to pay off their loans early.

BTW- notice I said 100% guaranteed options- understanding the risk associated with your decisions is extremely important.

By: lisa

lisa — Fri, 10 Oct 2008 15:10:41 +0000

Even though the math for total interest paid isn’t applicable to this situation (the total deficit for each individual is $302 per month, regardless of where it goes – loan payoff or investment), here are the numbers for the curious:

Joe: $2,529.10
Jane: $4,298.84

By: Audrey

Audrey — Tue, 29 Jul 2008 14:09:17 +0000

I read your article on student loans and it was the best I’ve read. Maybe you can help me, I’m trying to locate a bank or a finance facility having low interest rates for paying off student loans. I’ve been checking in my area, Hercules, Ca and the interest rates are pretty high. I’m doing this for my niece and she presently owes $50,000 and is being charged 10% interest on a monthly basis and the $amount she is paying is about to wipe she and her husband out. Her husband is in the military and getting ready to go over sea’s and the combination of the two is really getting to her. Any subjestions will be appreaciated.

By: Nancy

Nancy — Sun, 20 Jul 2008 14:35:14 +0000

I agree that the minimum payment plan is flawed because of the amount that interest adds to the loans. My loan is 27K and the amount I will pay after interest over the 20 yr course of my loan is 47K! I Have been paying for over a year and have yet to have even a single dollar go towards the principal.
This year I plan on sending an extra $100 a month and as my salary goes up, so will the extra payment amount.
The concept is interesting, but the omission in total amounts paid with interest makes it inaccurate.

By: Missy

Missy — Fri, 11 Jul 2008 02:59:14 +0000

This artical is stupid. Who the hell has to money to pay these stupid loans??!!? A college degree is about the equivalent of a high school dipola these days…basically, the degree isn’t worth the paper that it is printed on. For someone who works hard, full time and struggles to pay just the minimum payment and only pays off $10 on their loans EVERY TWO YEARS…this plan is rediculous. Give me something I can really use.