Looking to pay off $15k of student loan debt of my partner. It’s something we could wipe out with cash on hand if we wanted to relatively quickly. But one of the loans is 4.5%. Am I better off just riding that out but keeping the cash in for that loan in a HY savings account or keep reinvesting it in short term CD’s that have a 5% return and to have more liquidity?
There’s a part of me that used to really enjoy the piece of mind of being debt free when I paid off my student loans. But now that I’m more financially established and disciplined, I’m wondering if it’s better to pay it off slowly.
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The difference is too minor in my opinion, in addition if interests rates begin to drop, that .5% gain may turn negative. I say focus on paying off the loan, while ensuring you have sufficient savings. As others have said, you will also have to pay taxes on what you gain if you stored your money so the .5% is basically nothing
You’re correct that it would be better to pay it off slowly. Keep your money where it will make you the most money.
But like you said, there is value in the peace of mind of not having that hang over your head.
Don’t forget, you have to pay taxes on all income, including interest. So your 5% APY is not 5% cash in hand. I would recommend that you pay off the loans
Thanks. I didn’t even consider tax implications.
In the future, your can compare options with Fidelity’s Tax Equivalent bond calculator. For reference:
- Certificate of Deposit - bank CDs and savings accounts, federally and state taxable
- Treasury - federally taxable, state tax free
- in-state municipal - federal and state tax free
The number is the return you’d need for each type of bond to be equivalent after taxes. Your loan is a tax free return, so consider it as a Treasury bond.