Why pay off student loans?

[FrugalMuscle]

Think of any loan with an interest rate as a GUARANTEED negative return. A loan of 4% is guaranteed to cost you at least 4% of the principal just in interest. You can try to invest in the stock market or real estate but that will NOT guarantee you have a ROI of over 4%

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[Plastikos]

Think of any loan with an interest rate as a GUARANTEED negative return. A loan of 4% is guaranteed to cost you at least 4% of the principal just in interest. You can try to invest in the stock market or real estate but that will NOT guarantee you have a ROI of over 4%

This was gone over ad nauseam. That is a zero order way of looking at and not mathematically complete. Depends on the time frame, but with an index fund like spy you could practically guarantee a ROI over 4% on a TR basis. Historical 20 yr rolling periods of TR on the s&p 500 range from 7-17%.

Also, as was beaten to death in the thread, 4% simple is not the same as 4% compound. Loans and equity are not the same. If you want an easier hurdle to clear for investing just overpay your loans until the effective rate seems easy enough to make it worthwhile.

 

[jacksparrow82]

This debate always comes down to personal choice. The math can clearly work in your favor if you have a low interest rate and get lucky with good returns in the stock market. FWIW, I have a 104k in student loans at 2.6% that are stretched out over a 25 year term. The payments are 488/month. It doesn't bother me one bit to look at it and therefore I'm going to focus on saving and investing instead of worrying about getting rid of that loan. Getting my portfolio as big as possible now would make me feel better than getting rid of a 488/month payment. My 4% mortgage bothers me more than my student loan. However, I don't want to pay that off any faster because I don't know if I'm going to stay in my current house for more than a few more years. If I downsize (which we kind of want to do), we'll have enough equity to pay off that student loan and buy another house with a smaller mortgage. So, in this scenario, it makes no sense in my mind to throw any additional cash at my debt.

 

[Plastikos]

This debate always comes down to personal choice. The math can clearly work in your favor if you have a low interest rate and get lucky with good returns in the stock market. FWIW, I have a 104k in student loans at 2.6% that are stretched out over a 25 year term. The payments are 488/month. It doesn't bother me one bit to look at it and therefore I'm going to focus on saving and investing instead of worrying about getting rid of that loan. Getting my portfolio as big as possible now would make me feel better than getting rid of a 488/month payment. My 4% mortgage bothers me more than my student loan. However, I don't want to pay that off any faster because I don't know if I'm going to stay in my current house for more than a few more years. If I downsize (which we kind of want to do), we'll have enough equity to pay off that student loan and buy another house with a smaller mortgage. So, in this scenario, it makes no sense in my mind to throw any additional cash at my debt.

You're absolutely correct with the mortgage. It wouldnt be a big deal if there wasnt such a large transactional cost to getting that money back if you sold sometime soon, but that cost is of course massive.