• Skip to main content
  • Skip to primary sidebar

Ask Liz Weston

Get smart with your money

  • About
  • Liz’s Books
  • Speaking
  • Disclosure
  • Contact

Pay down low-rate debt or boost savings?

August 27, 2012 By Liz Weston

Dear Liz: I’m not sure whether I should be aggressively paying off the balance of my student loans or saving that money for a down payment for an apartment. I graduated from law school with $150,000 in federal and private loans. Over the last few years I’ve paid off most of that, but I still have about $50,000 in federal loans with a rate fixed at 3.75%. I fully fund my 401(k) each year, have an emergency fund of five months’ bare-bones living expenses and another $35,000 in fairly conservative, mostly liquid investments. I plan to change jobs in the next six to nine months and will likely take somewhat of a pay cut. I am torn right now as to whether I should continue aggressively paying off my loans, since that is a guaranteed 3.75% return on that money, or put the surplus into my investment account, which may earn a better return but also has some risk of losing principal. This would be my down payment money; I live in New York, so I have another five years or so before I could consider buying, and I’m currently single, so changes in my relationship status could change this goal. It would be wonderful to be debt-free, but it would also be comforting to have a bigger balance in my bank account.

Answer: You’ve already done well by fully funding your retirement, paying off those private student loans and building an emergency fund. At this point, you can’t make a truly wrong decision about what to do with your money. What comes next depends on your comfort level.

Many financial planners would advise against paying off that low-rate student debt. If inflation returns, the rate you’re paying could seem incredibly cheap. Also, paying off student debt doesn’t really increase your financial flexibility. It’s not like a line of credit that you can pay down and tap again later. The money you send off to your student lender is gone for good.

On the other hand, you’re not likely to earn a whopping return on money that’s earmarked for a goal within the next five years. If you need money within 10 years, it shouldn’t be in the stock market; if your goal is five years out, most of it should be in shorter-term bonds and cash, such as an FDIC-insured savings account or certificates of deposit with varying maturities. You could decide the guaranteed 3.75% return of paying off the debt is better than the alternative.

Like so much of adult life, the choice is yours. Unlike so much of adult life, you really can’t go wrong whichever path you take.

Related Posts

  • Use windfall to pay down debt, boost savings

    Dear Liz: I am closing a business deal that will net me just under $1…

  • Q&A: Ask yourself these questions before using savings to pay off student debt

    Dear Liz: I’m wondering whether I should use part of my emergency fund to pay…

  • How to pay off your credit card debt

    Dear Liz: I'm confused about paying down credit card debt. Some say to pay the…

  • Q&A: How to pay down debt

    Dear Liz: I am wondering about what to do with some debts I have due…

Filed Under: Credit & Debt, Q&A, Real Estate Tagged With: Down Payment, down payments, emergency savings, federal student loans, private student loans, Savings, savings account, Student Loan, student loan debt, Student Loans

Reader Interactions

Comments

  1. Beth says

    August 27, 2012 at 7:23 pm

    Kudos on doing so well! Why not split the difference and do both?

    The nice thing about building your savings is you can always chance your mind and put more towards paying off your student loan.

    • lizweston says

      August 28, 2012 at 8:59 pm

      Good suggestion. Sometimes the best answer when trying to decide either/or is “both”!

Primary Sidebar

Search

Copyright © 2025 · Ask Liz Weston 2.0 On Genesis Framework · WordPress · Log in