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Low Interest Loan Repayment or CD/HY Savings (self.personalfinance)

submitted 10 months ago by Copernican to c/[email protected]

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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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[–] [email protected] 6 points 10 months ago

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.

[–] [email protected] 4 points 10 months ago

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

[–] [email protected] 3 points 10 months ago (1 children)

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

[–] Copernican 3 points 10 months ago (2 children)

Thanks. I didn't even consider tax implications.

[–] [email protected] 4 points 10 months ago* (last edited 10 months ago)

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.

[–] sevan 1 points 10 months ago

I agree with this recommendation. After taxes, paying off the loan is probably slightly more profitable and improves your monthly cash flow.

[–] [email protected] 2 points 10 months ago

It's a pure math equation. You know you'll have more money at the end of the day if you keep as much as you can in a HYSA.

So do the math on exactly how much more.

Is that amount worth your peace of mind over that long a time period? Is your partner someone you want to spend that much money on right now?

These are simple questions to ask: maybe harder to answer. But once you have them, just make a choice and be happy with it.

[–] Fleamo 1 points 10 months ago

Assuming legally married or sufficient confidence to not have a break-up be a risk factor here. Gotta say that part.

To me, 4.5% and 5% (taxed) is not sufficiently different to be worth the mind space. If the world was perfect, you should do the CD thing. In real life, there could be a glitch or a mistake of timing that causes an issue with payment of a loan or an auto draft or something, you have to think about it and make sure it's still paying and your CD is re-upping at a high enough interest rate etc. Not worth it in the slightest to me.