Does It Make Sense To Pay Off My Student Loan If I Have The Same Amount in Savings as I do in Student Loan Debt?

6 Nov

Money. Photo by Aaron Patterson

Money. Photo by Aaron Patterson


 
Here’s the question on my mind:

Does it make sense to pay off my student loan debt if I have the same amount in savings as I do in student loan debt?

Here’s the deal:
I have $6756 in savings currently, and approximately $16,000 in student loan debt.

Each month my goal is to increase my savings by $1,000. At the same time, my student loan payment is automatically set and deducted from my checking account at $250. (Which at that rate would take slightly over 5 years to pay off.)

Looking ahead it doesn’t take too long to see where these two lines – savings and student loan debt – shall cross in the future.

That being the case, does it make sense for me to take my savings and pay off my student loans once I am able to?

Of course, say I had $16,000 and savings right now and used it all up to pay off my student loan debt, that would mean I have zero debt AND zero savings. That sounds nice in the former but not latter.

My current thinking is to set a certain amount of savings – we’ll call this X – and once I get past X, all my money left over after expenses goes into paying off my student loan. This means I’d not increase my savings for some time, but that I’d pay off my student loan faster than normal while not depleting my savings.

Another similar question is this:

Does it make sense to be saving $1,000 a month and only paying $250 to my student loans when I could afford to save less and pay off more of my student loan?

There is something nice and zen-like about balancing the two by adjusting to saving $500 a month and paying off $500 of a debt a month.

(These two questions are really just variations of the same question really.)

What Do You Think?

I’d be really curious to hear your thoughts on this.

One point to consider is that my monthly living expenses is about $1,000. If I removed my student loan, then my monthly living expenses is reduced by 25%! And how awesome would that be.

Your thoughts?

   Photo by Aaron Patterson.

3 Responses to “Does It Make Sense To Pay Off My Student Loan If I Have The Same Amount in Savings as I do in Student Loan Debt?”

  1. Karen Stopford November 6, 2010 at 11:38 am #

    I have been living for the past 1 1/2 years off my savings because I am going back to school for a career change. This was made possible by keeping debts low and savings fairly high. I would not be in a rush to cut your living expenses by paying off the loan all at once because, as you know, life changes moment by moment and a new unanticipated expense may arise and throw you off balance. But I would advocate paying an extra $50-$100 per installment on your student loan. This would allow you to still save substantial amounts but would get you out of debt faster. Then, if something comes up chances are you will have the savings to cover it without turning your life upside down.

  2. Cynedra November 6, 2010 at 12:37 pm #

    Honestly if it were me I would pay 100% to debt until you are totally debt free. You currently have 6 months of living expenses in savings, enough to start focusing on getting rid of debt and then investing in something safe that will return a lot more than a savings account.

    Just my .02c since we are currently working on the same thing.

  3. Ben November 23, 2010 at 9:16 pm #

    Hi Karen & Cynedra!

    Thanks for coming by and giving me some feedback on this question!

    What I’ve decided to do is wait until I get to a certain amount of savings – probably $10,000 – and then after that, push an extra amount of money each month into my student loan – probably $250 to $500.

    This seems like a good compromise between paying it off early yet also giving me a good financial foundation to keep my choices in life open and free.

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