“I’m showing that I would be a net positive of $30,000 after 25 years of lower repayment longer term vs larger shorter after continuously investing”: I’m torn between repaying my student loans faster or investing for the long term. How should I proceed to maximize my financial growth?

Hi Money Minder,

So, I just went on a little adventure looking through my retirement savings plan, and I stumbled upon this idea that I wanted to run by you. I’m not really clueless about finances, but I just want to make sure I’m not overlooking anything important.

I’m 28 and I’ve got around $40k in student loans (still have about 8 years left to pay off with the standard fixed payment plan of 10 years). The loans have different rates – $12.5k at 2.5%, $5k at 3.5%, $14k at 4.2%, $3.5k at 4.8%, and $5k at 5%. Thankfully, I make enough money to comfortably cover the standard payments, save a bit, and enjoy life (plus I’m maxing out my 401k contributions).

My question to you is this – should I stick with the 10-year plan I’m on now, or switch to a 25-year graduated repayment plan/fixed payment option based on the interest rates?

I did some rough calculations comparing the amount saved/invested over a 25-year period (with no savings until year 9 for the 10-year plan, then the full payment amount saved annually) vs. the difference in “savings” from reduced payments and investing that money instead over 25 years (assuming 7% growth for S&P – inflation).

My current payment is $453 per month. The graduated plan would start at $132 per month and increase to $379 per month by year 24, or a fixed payment of $212 per month over 25 years. In the first year, by my calculations, the standard plan has $0 saved (assuming a baseline), the 25-year graduated plan has $3852 saved, and the 25-year fixed plan has $2892 saved.

According to my quick math, I would end up with a net positive of $30,000 after 25 years with the lower repayment over a longer period compared to a larger repayment over a shorter period, while continuously investing with a 7% annual growth rate.

My net for the current plan would be $165k (no savings until year 9, then investing $453 monthly until year 25), the 25-year graduated plan would be $190k, and the 25-year fixed plan would be $183k.

Do you think I’m missing something here, or is the math really that clear that I should make a change now?

Thanks for any help you can provide!

Cheers,
Savvy Saver

Response from THE MONEY MINDER:

Hello There,

Hello there! It sounds like you’ve put a lot of thought into your retirement savings plan and how it aligns with your current student loan situation. Your detailed analysis of the different repayment options is commendable, as it shows that you are proactive about managing your finances.

Based on the information you provided, it seems like you are considering shifting from your current 10-year standard repayment plan to a 25-year graduated or fixed payment plan in order to free up more money for investing over the long term. Your calculations show that by opting for a longer repayment period with lower monthly payments, you could potentially end up with more savings after 25 years due to investing the difference.

While your math seems to make sense on the surface, there are a few factors you may want to consider before making a decision. First, the longer you take to repay your student loans, the more interest you will end up paying in the long run. It’s important to weigh the benefits of investing extra money now versus potentially saving on interest by paying off your loans sooner.

Additionally, consider the impact of carrying student loan debt for an extended period on your overall financial well-being. Having student loans can affect your ability to qualify for other types of credit or loans in the future, such as a mortgage, so it’s essential to weigh the pros and cons of extending your repayment timeline.

In this situation, it might be helpful to consult with a financial advisor who can provide personalized guidance based on your individual circumstances. They can help you create a comprehensive financial plan that takes into account your student loans, retirement savings, and other financial goals.

Ultimately, the decision to switch repayment plans should align with your broader financial strategy and goals. Whether you decide to stick with your current repayment plan or explore alternative options, remember that financial planning is a journey, and it’s essential to adapt and adjust your strategies as needed.

All the best from THE MONEY MINDER, and good luck with your financial decisions!