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Pay off low rate refinanced loans or taxable IRA?

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  • #16


    I am attending making good income. I have 72,000 student loan debt refinanced at 2.95%. No other debt.

    Question is should I pay off my debt as quickly as possible? Or should I be investing extra income into taxable investment account? 529 for kids?

    I already plan to max out the employer 401k and Roth IRA. Question is what to do with left over income – pay off loans quickly or taxable investment account? My hesitation in paying off the debt quickly is the rate is currently low and may be advantageous to keep this relatively cheap debt around longer.

    Thanks for your advice.
    Click to expand...

    I'm in a similar boat as you except I don't have as much cash on hand and I already own a home so I don't have to worry about saving for a down payment, but I have 101k of student loans left at 2.6% fixed for like 23 years (payment is only 488/month).  I am working a lot of extra shifts right now earning good money (and fairly easy) and I expect to easily have enough to pay this balance off in 6-7 months.  I'm still kind of torn about whether I should pay it all off over the next 6-7 months or stick it all in my taxable account and let it start growing.  Some days I want to be done with it and be able to say I'm "debt free except the mortgage" and other days I think I'd be just fine with knowing I have more than enough in my taxable account to pay it off any time I want.  The more I go over each scenario the more I realize that in the long run it probably won't make much difference.  Paying it off in 6 months means I save 30k in interest over the life of the loan.  But, I lose approximately 1 year of interest earning potential if I were to invest it instead (6-7 months to pay it off and another 6-7 months to save up 100k again).  That one year of lost growth probably won't matter all that much, but might negate the money saved in paying off the loans early.  It's impossible to accurately predict which scenario will cost me more...paying off the loan slowly and paying 30k in interest costs or paying off the loan quickly and losing a year of investment growth.  Either way, the loan is going to cost me money in interest. One kicker for my scenario is that I don't know how much longer this easy money will be available to me, so I kind of feel like holding on to it because it might come harder in the future.

    I agree with WCI that it probably doesn't matter much other than you need to decide when you want to be out of debt.  It's kind of a personal choice I guess.

    But, if I had as much cash on hand as you already have, I'd just get rid of the 72k student debt and be done with it.  You don't need to put 200k down on a house as Zaphod mentioned.  You're fortunate because you can pay it off now and start investing immediately.  You'll forget about this whole conversation in no time.

    **Also, don't put the money in a traditional IRA (as your title suggests) because then you can't do a back door ROTH each year.  Put the money in a brokerage account (there's a difference and it does matter).


    • #17
      Great advice ... very good point/correction on putting the money in a brokerage account rather than IRA