Q.  Should I use my savings to pay off my student loans, or should I make monthly payments?

I am 23 years old and have $10,300 in student loan debt. I pay $400 per pay check ($10,400 annually) towards my student loans. Currently, I live with my parents and don’t pay rent. My only fixed expense is a $233 monthly car payment. I have been at my job for 1.5 years. There is very low turnover at my company so I consider my employment stable. My salary is $44,500. I contribute 25% of my pre-tax income to my 401(k) and make the maximum contribution to my Roth IRA. I have $10,000 in a savings account and am considering using $8,000 of it to put towards my student loans. My savings account is losing money because of inflation. My loans have a 3.6% interest rate. Should I use my savings to pay off my student loans immediately, or continue to make monthly payments?

 

A.  Congratulations on starting off your career and investing so successfully!

I would certainly recommending using up to $9,000 of your savings to pay off debt, either the car or the student loans.  Think of it this way: if you only had $1,300 in debt, would you borrow another $9,000 (total debt now $10,300 like your student loan balance) just to keep the money in a low-interest savings account?  Certainly not!  So why even consider NOT using your free cash to pay off debt.

Then I’d aggressively pay off the remaining debt while your cost of living so low.  Trust me, it will never be this low again!  Take advantage of it.  I’d even consider TEMPORARILY reducing the 401k savings to dedicate more money to debt elimination.  When all of the debts are paid, you can invest an even higher percentage of your income (if you’d like) with your new and improved “debt-free” cash flow.

Again, congratulations!  You’re doing great.

 

John is a CPA and personal finance coach.  Email your questions to john@60minutefinance.com.

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