Pay off 6.375% student loan first?

[CompoundInterestFan]

Okay, so I've heard the arguments for paying off debt first if the interest rate is higher than what you can reasonably expect to make elsewhere. But, I gotta admit, it just doesn't feel right. The student loan is my wife's, and I believe we still have about 20 some years to pay on it if we make the minimum payments. Even if we pay extra on the loan, the earliest we'd be able to pay it off is 10 years. I can't justify waiting 10 years to start investing heavily in other areas while we're paying off the loan. We're not even at the point where we can max out our Roth or 401k (although I am getting the full employer match). Should I at least wait until I'm maxing those out before I start paying extra on the loan?

 

[Brat]

I would max out IRAs first before I would pay more than the minimum on the student loan. If it would make you feel better pay a small sum extra on the student loan, even $10/mo can make a difference.

 

[free4now]

If you don't already have it, save 6 months of expenses in liquid assets as an emergency fund before prepaying any loans. I actually think a Roth IRA is a reasonable vehicle for doing this because you can withdraw the principal (not interest) at any time with no penalty if you get in a jam.

6.375 is a kind of middle rate... if it were higher or lower by a few percentage points it would be clear whether it made sense to pay it off. But because it's right around the amount you can get from other investments (adjusted for risk) I think you should do what makes sense for you.

 

[Craig]

I agree with free4now ... a fixed rate, reasonable interest rate loan with terms like that has value.

You need liquidity, just in case ... 6 mos, at least, depending on your occupation ... some jobs take longer to replace.

How much is the principal (including any accumulated, unpaid interest)?

 

[Brat]

Concur with the Roth IRA vs regular IRA.

 

[CompoundInterestFan]

How much is the principal (including any accumulated, unpaid interest)?

Principal is about $50k.

I currently have about 3 months emergency buffer, but I'm working on building that up as well. Although, as another poster suggested, if I factor my Roth into the emergency fund, then I'd probably have about 6 months.

 

[Payin-the-Toll]

Line 33 on this year's 1040 is the 'Student loan interest deduction'. On page 33 of the 1040 instructions, when you go to do the calculations, they say don't put down anything over $2500.00, so make sure not to pay off an amount that will contain more than $2500.00 in interest, or you're leaving money on the table. I also concur with maxing the I.R.A. stuff and doing an emergency fund.

 

[JustCurious]

The interest on the student loans may be tax deductible, up to a limit, depending on your income. If the interest is tax deductible, it's one more reason why you should invest rather than pay it off early, at least to the extent that the interest is tax deductible. To the extent that you pay interest above the tax deductible limit, then you should pay down the balance until your interest is below the tax deductible limit.

 

[CompoundInterestFan]

The interest on the student loans may be tax deductible, up to a limit, depending on your income. If the interest is tax deductible, it's one more reason why you should invest rather than pay it off early, at least to the extent that the interest is tax deductible. To the extent that you pay interest above the tax deductible limit, then you should pay down the balance until your interest is below the tax deductible limit.

That's a good idea (thanks also to Payin-the-Toll for suggesting this). We have been taking the deduction, but we're currently paying more than $2500 in interest. So I'll work on paying it down until we get below this.