Pay of loans now, or wait until I finish grad school?

[euges116]

Here's a financial question I can't seem to answer for myself. I have about $25,000 in student loans from my undergraduate years. I'm currently in a Ph.D. program (1st year), and so the 25k are deferred until I graduate and I don't pay any interest until then. Oh, I went to the U.S. for my undergrad (so, US$), but now am in Canada. I'm wondering if I should start paying (some of) the loans back now (like, a few hundred a month), with the US$ = CA$ (pretty much), or should I wait until I graduate, save money (and accrue interest, whether in stocks or something less risky like a high interest savings account or deposit), and then pay it off? Note that, however, in 4 years time, the dollar disparity might go back down to .70 US = $1 CA or so, making any savings in the interim negligible. What would you suggest?

[rising_star]

Could you save the money in a US savings account?

[euges116]

Could you save the money in a US savings account?

Ah... never thought of that! Good idea! Convert my funds into US$ and into a US$ savings account, grow interest, and voila!

[winwinwin]

Here's a financial question I can't seem to answer for myself. I have about $25,000 in student loans from my undergraduate years. I'm currently in a Ph.D. program (1st year), and so the 25k are deferred until I graduate and I don't pay any interest until then. Oh, I went to the U.S. for my undergrad (so, US$), but now am in Canada. I'm wondering if I should start paying (some of) the loans back now (like, a few hundred a month), with the US$ = CA$ (pretty much), or should I wait until I graduate, save money (and accrue interest, whether in stocks or something less risky like a high interest savings account or deposit), and then pay it off? Note that, however, in 4 years time, the dollar disparity might go back down to .70 US = $1 CA or so, making any savings in the interim negligible. What would you suggest?

Pay them off now.

[euges116]

Pay them off now.

Any particular reason?

[BioTurboNick]

I can't think of any good reason to actually start paying them off now, assuming these are subsidized loans and not just payment-deferred. If, however, payment is deferred but you're still accumulating interest, then it wouldn't be a bad idea to start paying them down.

But if the former was true, just pay whatever you would have paid to them into a high-interest U.S. savings account (like Ally Bank, HSBC, ING Direct, etc.) or even start a couple CD accounts when you've accumulated enough for that to make sense. You definitely shouldn't be using stocks or other non-guaranteed investments for such a short repayment time (<6 years).

The other advantage to saving the money now is that its still available to you in case you have an emergency and need it back.

Edited April 5, 2010 by BioTurboNick

[pea-jay]

If the loan is truly not accumulating interest while in deferment then it really doesn't make much sense to pay them off. Not only can you put away money to save and potentially earn even a small rate of return, 4 years of inflation will lower the real dollar value of that debt. Inflation has been low of late, but any revival in the economy coupled with the US fiscal situation will drive inflation upwards. Not saying scary or hyper inflation but 3-6% per annum over four years would push that real dollar value of the original loan downward, especially if you are not accruing interest.

[Jae B.]

I would always save some money for emergencies, but I'd start paying down the debt now, personally. The more you pay down now, the better for later when interest starts accruing again. If you seriously pay a few hundred dollars a month toward this for four years, less than half will be left! If you only save your money without reducing your debt, you never know what'll come up four years from now that might stop you from plunking it down on those old loans. I'd just take advantage of this opportunity to chop 'em in half and worry about the rest later.

That said, I'm all about debt avoidance.

Edited April 5, 2010 by Jae B.

[iLikeTrees]

I would always save some money for emergencies, but I'd start paying down the debt now, personally. The more you pay down now, the better for later when interest starts accruing again. If you seriously pay a few hundred dollars a month toward this for four years, less than half will be left! If you only save your money without reducing your debt, you never know what'll come up four years from now that might stop you from plunking it down on those old loans. I'd just take advantage of this opportunity to chop 'em in half and worry about the rest later.

That said, I'm all about debt avoidance.

Personally, I agree with Jae B. I don't like debt and think that the less of it you have when you finish grad school, the better since you will likely have other debt-inducing events (buying a house?) and other concerns after that point. If you have the means to start chipping away at it now, I would say go for it! Just a little bit a month will reduce the burden of what you have to pay when you finish your PhD and are struggling to get other parts of your life in order. I think that a little work and paying now will make things easier in the long run.

[confusedChicken]

Jae B., on 05 April 2010 - 05:36 AM, said:

I would always save some money for emergencies, but I'd start paying down the debt now, personally. The more you pay down now, the better for later when interest starts accruing again. If you seriously pay a few hundred dollars a month toward this for four years, less than half will be left! If you only save your money without reducing your debt, you never know what'll come up four years from now that might stop you from plunking it down on those old loans. I'd just take advantage of this opportunity to chop 'em in half and worry about the rest later.

That said, I'm all about debt avoidance.

Personally, I agree with Jae B. I don't like debt and think that the less of it you have when you finish grad school, the better since you will likely have other debt-inducing events (buying a house?) and other concerns after that point. If you have the means to start chipping away at it now, I would say go for it! Just a little bit a month will reduce the burden of what you have to pay when you finish your PhD and are struggling to get other parts of your life in order. I think that a little work and paying now will make things easier in the long run.

I agree on this as well--think about it. If you're not accumulating interest but you're still paying down your principle balance, then after 4-6 years for grad school your principle balance will be *much* lower, even if you're only putting a small amount towards your loans each month. Ultimately, this could save you a bundle in the long run (for you, on the order of thousands in interest alone). It also means that, as iLikeTrees pointed out, that you'll have more flexibility when other big expenses (inevitably) come up.

[Phalène]

I would pay them off as soon as possible. I hate being in debt!

[pea-jay]

I still have to disagree. Student loan debt is one of the best types of debt out there. Debt that isnt accruing interest is even better. By pursuing a disciplined savings regimen during that same time frame you have the option of putting a large chunk down when repayment begins, but now you have additional options to work with: an emergency fund during school (instead of credit cards). Moving/transitional funds for relocation after youre done at the university. Flexibility to make that minimum payment from your savings account should you not line up the job you were hoping for upon graduation. If you make those payments now, you give up your flexibility in the future for no real financial gain but potentially serious ramifications if something goes wrong.

Debt isnt a stigma nor should it be avoided at all costs. Getting rid of credit card debt is an excellent idea. Trying to dispatch with an effectively interest free student loan, not so much.

Think carefully about this

[meesh]

I agree with pea-jay. School debt is seen as a personal investment and viewed very differently than credit card debt by creditors. If you look at your loan payments as a percentage of your income right now, you are paying a lot "more" than you would be later on when you are gainfully employed (knock on wood). And if you aren't employed- that is even more of a reason to have a nest egg from high-interest savings accounts or a mutual fund.