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Should I Pay Off My Low Rate Student Loans?

Posted: 11/14/2013 2:27 pm

Huffington Post Reader Question

Dear Steve,

I have about $19,000 in government-backed student loans at 2.25%. When I graduated, I was advised to NOT pay off the full debt right away and "take advantage" of the low interest rate. So, I have been paying slightly more than the minimum each month ($100) and have only knocked the principal down about $1000 since graduating in 2005. This is the only debt I have. I always assumed I would continue my education someday and add to this debt, but now I am uncertain of what the smart financial choice might be.

1) Should I start making bigger payments to pay this loan off?

2) I hoped to attend a private art school that does not participate in loan programs. I can't seem to find rate comparisons for private loans. Will they be less than my credit card (8%)?

Sarah

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Dear Sarah,

Well there is an interesting situation.

The only reason it would have made sense to not pay off the student loan as quickly as possible would have been if you had limited monthly funds and were instead focusing on paying off a higher interest rate debt.

Debt is debt. There is no good and bad debt. This debt is just a liability which you have to repay with future labor. So in essence it is just $19,000 worth of disposable income that is already spoken for. And yes, the interest.

So in a perfect world I would urge you to pay off this debt, along with every other debt you can possible eliminate.

And why should you do that? Well if you have no debt then what you gain is flexibility. With lower monthly obligations you can devote more time to the life you want to live rather than the life you have to live to service your debt.

Imagine if you had jumped on the ten year repayment plan when you graduated. If you had your loans would be paid off in less than two years. And the luxury of not paying them off has cost you about $10,000 in interest payments.

I'm no fan of private student loans. They are a trap. Unlike federal loans, private student loans make no allowances for life and once you sign for them prepare to be trapped without many good alternatives if you run into financial trouble.

Want to know the best way to deal with private student loans, don't get them. Seriously, they are a trap.



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