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I had a government college loan at 3.5% that I absolutely should not have paid off early. Why? You knew of a better opportunity to make a risk-free 3.5% (less

by mhb 4y ago

I had a government college loan at 3.5% that I absolutely should not have paid off early. Why? You knew of a better opportunity to make a risk-free 3.5% (less any tax deduction)?

fnfjfk 4y ago
Any decent index fund? “Risk free” is too high a bar for any investment, compare the expected outcome instead.
- mhb 4y ago
  Paying off the loan is risk-free. Expected value of an index fund is not obviously better. But you knew that.
  - fnfjfk 4y ago
    https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp https://www.investopedia.com/ask/answers/042415/what-average... Sure, if you have exactly zero risk tolerance, pay off a low interest rate loan. But based on history, you will almost certainly lose over the long term of a decade or more.
    - mhb 4y ago
      I don't really disagree, but it's not as obvious as it seems in hindsight. 3.5% (which OP says became 4%) isn't a low interest rate when inflation and other low risk options (e.g., CDs) are <1%. Also, your article says: "Adjusted for inflation, the historical average annual return is only around 8.5%. There is an additional problem posed by the question of whether that inflation-adjusted average is accurate since the adjustment is made using the inflation figures from the Consumer Price Index (CPI), the index which some analysts believe vastly understates the true inflation rate." So maybe the stock index average to use is more like 2x the loan interest.
tedunangst 4y ago
If you have subsequent expenses that require credit card debt, or a car loan, it's better to have cash savings available to reduce that. You can't unpay a 3.5% loan to get back money to pay off a 20% loan.
specialp 4y ago
Yes it is called inflation. That 3.5% loan principle and payment has become 2% less valuable most years, and recently it has become 9% less valuable. So if that money was put into buying assets that the OP needed, that would be risk free gain. Also the tax deduction you point out is nullified by paying off the loan. The deduction is on student loan interest. So now that is lost every year. If someone qualifies for that deduction and inflation is normal/high it is pretty hard for 3.5% to be worth paying off early.
- mhb 4y ago
  Right. If only it were as easy to predict when the government was going to start printing money and trigger inflation before they actually did it. Yes. Nullified. You don't get the deduction if you pay off the loan. That probably doesn't amount to much in the income bracket under consideration.

by mhb 4y ago

I had a government college loan at 3.5% that I absolutely should not have paid off early. Why? You knew of a better opportunity to make a risk-free 3.5% (less any tax deduction)?

fnfjfk 4y ago

Any decent index fund? “Risk free” is too high a bar for any investment, compare the expected outcome instead.

mhb 4y ago
Paying off the loan is risk-free. Expected value of an index fund is not obviously better. But you knew that.
- fnfjfk 4y ago
  https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp https://www.investopedia.com/ask/answers/042415/what-average... Sure, if you have exactly zero risk tolerance, pay off a low interest rate loan. But based on history, you will almost certainly lose over the long term of a decade or more.
  - mhb 4y ago
    I don't really disagree, but it's not as obvious as it seems in hindsight. 3.5% (which OP says became 4%) isn't a low interest rate when inflation and other low risk options (e.g., CDs) are <1%. Also, your article says: "Adjusted for inflation, the historical average annual return is only around 8.5%. There is an additional problem posed by the question of whether that inflation-adjusted average is accurate since the adjustment is made using the inflation figures from the Consumer Price Index (CPI), the index which some analysts believe vastly understates the true inflation rate." So maybe the stock index average to use is more like 2x the loan interest.

tedunangst 4y ago

If you have subsequent expenses that require credit card debt, or a car loan, it's better to have cash savings available to reduce that. You can't unpay a 3.5% loan to get back money to pay off a 20% loan.

specialp 4y ago

Yes it is called inflation. That 3.5% loan principle and payment has become 2% less valuable most years, and recently it has become 9% less valuable. So if that money was put into buying assets that the OP needed, that would be risk free gain. Also the tax deduction you point out is nullified by paying off the loan. The deduction is on student loan interest. So now that is lost every year. If someone qualifies for that deduction and inflation is normal/high it is pretty hard for 3.5% to be worth paying off early.

mhb 4y ago
Right. If only it were as easy to predict when the government was going to start printing money and trigger inflation before they actually did it. Yes. Nullified. You don't get the deduction if you pay off the loan. That probably doesn't amount to much in the income bracket under consideration.