If you follow me on twitter, you know I’ve been thinking a lot about paying off my student loans. I already have my loans set to auto-pay every month, and, while that was slowly whittling away at the total amount, I felt like it was going to take FOREVER to pay it all off. One of my loans had recently been sold off to Sallie Mae, and when I logged into their site, it showed the daily accrued interest. Seeing that every day I left these debts unpaid meant more I had to pay in the long run made this really hit home. I knew in my head that I was paying interest, but seeing it accrue gave me the kick in the pants I needed. At one point I was going to pay all of one loan off, then I went to half of that one loan, then I was afraid to do anything.
My final decision: Pay $4,000 towards a loan currently at 3.5% interest.
I still have $4,584.34 to pay off on that 3.5% interest loan, and $30,330.61 total on a group of loans at 2.75%.
I headed over to the What’s The Cost’s snowball calculator to see how long it would take me to pay off these loans. If I keep paying the minimum that is auto-paid every month, I’ll finally be free of these student loans by March 2018 (assuming that when I finish paying off the 3.5% loan, I’d use that money to pay down the remainder of the 2.75% loans). That is WAY too long. I don’t want to wait that long. That’s a lot of extra interest accruing. And with interest rates on savings accounts now below 1% for pretty much every account I know of, it would make more sense to pay down the loans more quickly. So, I went back in to the snowball calculator, and tried to figure out how much I’d have to pay if I wanted to be rid of the debt by the end of 2012 (a wild goal I considered making after I felt so good paying the $4k). Turns out I’d have to pay around $3k PER MONTH to get rid of all my debt within the year.
Here’s the thing: I have a lot of money in savings. Possibly too much, considering other things I could have done, like pay down my loans more quickly, or put more in my 401(k). I’m basically like the people on Hoarders, but with money. I’ve got a solid emergency fund, plus I’m saving up for a down payment and maybe eventually a wedding. But those are still a long way ahead of me.
So the question is: should I use my savings to pay off my loans? In the long run, networth-wise, I should just get rid of my debt. Granted, I was more keen on getting rid of it back when I graduated, with it being at 8.5% on $70k or so. Most people would be willing to do almost anything for a 3.5% interest rate on a loan. Part of me really just wants to get rid of that debt. And if I draw from my savings, I think I can do it. But I should keep an emergency fund. You know, for emergencies.
I think my best bet is to just set an amount that I will pay every month beyond the minimum. I’m thinking $500-$1000 extra per month. I think it can be done.
For now, I’m really glad that I made a big dent in my loans. And that meant I met my first goal that I set on Payoff.com (and earned the First Goal Complete badge!). And I earned 4000 credits on SaveUp. So, besides lowering my debts, I got a few virtual rewards 🙂
So, would you pull money out of savings to pay low-interest debts? Is there an amount or an interest rate that would make you change your mind?