Thursday, January 18, 2007

the $10k question

The question for the festival of under 30 finances is what would you do with $10k if you were 25 years old and had $25k in student loans? Retirement, savings, home down payment, student loans, or college for your child? The rate of return is the same as the interest on the student loan. Also would you answer change if it was $25k instead of $10k?

I guess it's an interesting question. I'm not sure what I would do, because it depends mostly on income and circumstances. But since it's personal, I'll personalize it and say that for us we're DINKS so I'm ruling out college. Second since we have a house with 20% DP, I'm ruling out saving for a house. Third, we save for retirement the maximum allowed in appropriate retirement vehicles, so that's out as well. I guess that leaves me with paying off the student loans.

I like the idea of paying off my student loans because being debt free, except for the mortgage means one less fixed payment and lower need for monthly income. Second, the question said the rate of return is the same as the student loan. So it really is not necessarily beneficial to save it. Also because the rate of return is the same, and the investing would have to be done in a taxable account, any income/dividends would be taxed at my bracket 25% + 5% state tax, so I'd rather pay off my student loan.

Now if I were able to use the money for other options such as paying for our current school etc, then I would might do that. But for now my option would be paying off the student loan.

Would my answer change personally if it were $25k instead of $10k? No, but I'd be a lot happier to get that much more.

My advice to a 25 year old in that situation would be to pay off half $5k to the student loan and $5k to a savings account as an EF. This would prevent the person from having to use CC in case of emergency. Also if the person go $25k, I would still do a half and half pay off so they can save a bit for a house/EF and get faster out of debt.

No comments: