Should I pay off my student loans or keep it in the bank? [duplicate]
"Many years ago I heard a multi-level marketing pitch that pointed out how many doctors don't get out of debt until they are well into their 50's.  The selling point was that you can get rich quick, as rich as a doctor, with nothing more then a bit of elbow grease.  Of course the pitch failed to mention that most doctors, buy the things doctors buy, when they get that first big job.  The big house, expensive cars nerf the income that they receive and they are probably stuck with years of student loan payments. I assume that you are one of the ""lucky"" ones that have graduated college with a well paying job.  By lucky I mean you concentrated on obtaining a skill for which the marketplace has a need.  Why not continue to live like a college student for a few more months and pay off all of your student loans ASAP?   Get rid of them like you were purging the phone number of that high maintenance girl you dated during a short time of insanity." Basically you have 4 options: Use your cash to pay off the student loans. Put your cash in an interest-bearing savings account. Invest your cash, for example in the stock market. Spend your cash on fun stuff you want right now. The more you can avoid #4 the better it will be for you in the long term. But you're apparently wise enough that that wasn't included as an option in your question. To decide between 1, 2, and 3, the key questions are:  What interest are you paying on the loan versus what return could you get on savings or investment?  How much risk are you willing to take? How much cash do you need to keep on hand for unexpected expenses? What are the tax implications? Basically, if you are paying 2% interest on a loan, and you can get 3% interest on a savings account, then it makes sense to put the cash in a savings account rather than pay off the loan. You'll make more on the interest from the savings account than you'll pay on interest on the loan. If the best return you can get on a savings account is less than 2%, then you are better off to pay off the loan. However, you probably want to keep some cash reserve in case your car breaks down or you have a sudden large medical bill, etc. How much cash you keep depends on your lifestyle and how much risk you are comfortable with. I don't know what country you live in. At least here in the U.S., a savings account is extremely safe: even the bank goes bankrupt your money should be insured. You can probably get a much better return on your money by investing in the stock market, but then your returns are not guaranteed. You may even lose money. Personally I don't have a savings account. I put all my savings into fairly safe stocks, because savings accounts around here tend to pay about 1%, which is hardly worth even bothering. You also should consider tax implications. If you're a new grad maybe your income is low enough that your tax rates are low and this is a minor factor. But if you are in, say, a 25% marginal tax bracket, then the effective interest rate on the student loan would be more like 1.5%. That is, if you pay $20 in interest, the government will then take 25% of that off your taxes, so it's the equivalent of paying $15 in interest. Similarly a place to put your money that gives non-taxable interest -- like municipal bonds -- gives a better real rate of return than something with the same nominal rate but where the interest is taxable.
"It's not a bad strategy. I'd rather owe money at 4% interest than at 6-7%. However, there is something to consider.  Consolidating debt into a new loan can backfire. When you have money borrowed at 7%, you want to get that paid off as quickly as possible. Once you have that converted to 4%, if you think, ""Now I can take my time paying off this debt,"" then you aren't really better off. In fact, if you take too long paying off the new loan, you might end up paying more interest than if you had kept the high interest loan and paid it as soon as possible. Don't lose your drive to get out of debt after you refinance.  As far as how the student loans affect your debt-to-income ratio, I'm not sure; however, if they do count (I think they do), your ratio will not really be going up by taking out the new loan, since you are using the money to pay other debt. Make sure the new lender knows this, so they take that into consideration when making their decision.  Overall, I like your strategy: pay off what you can right away (the car loan and the highest interest student loans) and reduce the interest on the rest. Just make sure that you continue to pay down that debt as quick as you can." "Welcome to Money.SE. Your question is similar to a number of others. The ""How do I pay my debt down?"" and ""How do I invest extra money?"" is a bit of a continuum since there's no consensus than one should pay off the last cent of debt before investing.  Oversimplify it for me: the correct order of investing offers a good look at this. You see, Pete's answer on your question is perfectly fine, but, since you make no mention of, say, a matched 401(k), I'd suggest that any answer to a question like yours should first take a step back and evaluate the bigger picture. A dollar for dollar matched 401(k) beats paying off even an 18% credit card.  Absent any tangents, any thought of investing, saving for anything else, etc, my answer is simple, line up the debt, highest interest rate to lowest. Keep in mind the post-tax rate, i.e. a 6% student loan you can deduct, is an effective 4.5% if you are in the 25% bracket." "There are quite some options, but without additional information, I can only provide examples. Last year I had the option to buy a house, but I decided against it because in my area it is getting harder and harder every year to sell it at a reasonable price. But if I had bought a house, my mother would have lent me the money, with me paying it back to her over the years on 3% interest. So it would have been some kind of a private loan. But my mom would never have taken ownership of the house, since it was not her intention to own it in any way. (Does your dad intend to own the house and rent it to you? If yes, and if you are comfortable with renting instead of buying, then this is an option.) The second option, the one we discarded because of the additional cost, is that I could have taken a loan, paying 4.5% interest to the bank, which would then pay under 1% to my mom, and keep the rest. Banks always want to make profit, and this profit has to come from somewhere - from the difference between the interest rates. If your dad has 230k on the bank, and you owe 230k to the bank, you are better off if you keep the bank out - at least as long as your dad is comfortable with lending you money, and you are comfortable with owing him money. (my gf would never borough money from her mother, because her mother would always play the ""you are in my debt"" card - on each and every visit, and whenever she needed help in any way...) So the key is: What does your dad feel comfy with - and what do you feel comfy with. If possible, keep the banks out, but set up a written contract between you and your dad." "They don't actually need to. They accept deposits for historical reasons and because they make money doing so, but there's nothing key to their business that requires them to do so. Here's a decent summary, but I'll explain in great detail below. By making loans, banks create money. This is what we mean when we say the monetary supply is endogenous. (At least if you believe Sir Mervyn King, who used to run England's central bank...) The only real checks on this are regulatory--capitalization requirements and reserve requirements, which impose a sort of tax on a bank's circulating loans. I'll get into that later. Let's start with Why should you believe that story--that loans create deposits? It seems like a bizarre assertion. But it actually matches how banks behave in practice. If you go borrow money from a bank, the loan officer will do many things. She'll want to look at your credit history. She'll want to look at your income and assets. She'll want to look at what kind of collateral or guarantees you're providing that the loan will be repaid. What she will not do is call down to the vaults and make sure that there's enough bills stacked up for them to lend out. Loans are judged based on a profitability function determined by the interest rate and the loan risk. If those add up to ""profitable"", the bank makes the loan. So the limiting factor on the loans a bank makes are the available creditworthy borrowers--not the bank's stock of cash. Further, the story makes sense because loans are how banks make money. If a bank that was short of money suddenly stopped making loans, it'd be screwed: no new loans = no way to make money to pay back depositors and also keep the lights on = no more bank. And the story is believable because of the way banks make so little effort to solicit commercial deposit business. Oh sure, they used to give you a free toaster if you opened an account; but now it's really quite challenging to find a no-fee checking account that doesn't impose a super-high deposit limit. And the interest paid on savings deposits is asymptotically approaching zero. If banks actually needed your deposits, they'd be making a lot more of effort to get them. I mean, they won't turn up their noses; your deposited allowance is a couple basis points cheaper to the bank than borrowing from the Fed; but banks seem to value small-potatoes depositors more as a source of fees and sales opportunities for services and consumer credit than as a source of cash. (It's a bit different if you get north of seven figures, but smaller depositors aren't really worth the hassle just for their cash.) This is where someone will mention the regulatory requirements of fractional reserve banking: banks are obliged by regulators to keep enough cash on hand to pay out a certain percentage of deposits. Note nothing about loans was said in that statement: this requirement does not serve as a check on the bank making bad loans, because the bank is ultimately liable to all its depositors for the full value of their deposits; it's more making sure they have enough liquidity to prevent bank runs, the self-fulfilling prophecy in which an undercapitalized bank could be forced into bankruptcy. As you noted in your question, banks can always borrow from the Fed at the Fed Discount Rate (or from other banks at the interbank overnight rate, which is a little lower) to meet this requirement. They do have to pledge collateral, but loans themselves are collateral, so this doesn't present much of a problem. In terms of paying off depositors if the bank should collapse (and minimizing the amount of FDIC insurance payout from the government), it's really capital requirements that are actually important. I.E. the bank has to have investors who don't have a right to be paid back and whose investment is on the hook if the bank goes belly-up. But that's just a safeguard for the depositors; it doesn't really have anything to do with loans other than that bad loans are the main reason a bank might go under. Banks, like any other private business, have assets (things of value) and liabilities (obligations to other people). But banking assets and liabilities are counterintuitive. The bank's assets are loans, because they are theoretically recoverable (the principal) and also generate a revenue stream (the interest payments). The money the bank holds in deposits is actually a liability, because it has to pay that money out to depositors on demand, and the deposited money will never (by itself) bring the bank any revenue at all. In fact, it's a drain, because the bank needs to pay interest to its depositors. (Well, they used to anyway.) So what happens when a bank makes a loan? From a balance sheet perspective, strangely enough, the answer is nothing at all. If I grant you a loan, the minute we shake hands and you sign the paperwork, a teller types on a keyboard and money appears in your account. Your account with my bank. My bank has simultaneously created an asset (the loan you now have to repay me) and an equal-sized liability (the funds I loaned you, which are now deposited in your account). I'll make money on the deal, because the interest you owe me is a much higher rate than the interest I pay on your deposits, or the rate I'd have to pay if I need to borrow cash to cover your withdrawal. (I might just have the cash on hand anyway from interest and origination fees and whatnot from previous loans.) From an accounting perspective, nothing has happened to my balance sheet, but suddenly you owe me closing costs and a stream of extraneous interest payments. (Nice work if you can get it...) Okay, so I've exhaustively demonstrated that I don't need to take deposits to make loans. But we live in a world where banks do! Here's a few reasons: You can probably think of more, but at the end of the day, a bank should be designed so that if every single (non-borrowing) depositor withdrew their deposits, the bank wouldn't collapse or cease to exist." Note that having the money in your savings/investments may impress the bank as much as, or more than, paying down this commitment. I would not advise rushing into an action that arguably reduces you financial options; it isn't likely to help. It doesn't make a whole lot of sense to save up and wait to make a payment on any of these loans.  Any dollar you pay today works better than saving it and waiting months to pay it, no matter which loan it will be applied to. Since your lender won't let you choose which loan your payment is being applied to, don't worry about it.  Just make as big a payment as you can each month, and try to get the whole thing out of your life as soon as possible. The result of this will be that the smaller balance loans will be paid off first, and the bigger balance loans later.  It is unfortunate that the higher interest rate loans will be paid later, but it sounds like you don't have a choice, so it is not worth worrying about. Instead of thinking of it as 5 loans of different amounts, think of it as one loan with a balance of $74,000, and make payments as quickly and as often as possible. For example, let's say that you have $1000 a month extra to throw at the loans.  You would be better off paying $1000 each month than waiting until you have $4000 in the bank and paying it all at once toward one loan.  How the lender divides up your payment is less significant than when the lender gets the payment. You don't state your age, debt amount, loan rate, and amount of retirement savings. These facts impact the strategy you pursue: If your student loan interest is at low rate, it is more effective in the long run for you to prioritize 401k match contributions or Roth IRA contributions. Your student loan interest will be tax deductible. You may be able to file taxes separately as a married couple. This will keep your monthly loan payments lower than if you file jointly, allowing you to do tax-deferred savings (401k/Roth). I share the concerns about commingling your finances before marriage. You'll be married soon enough, and after that the $14k/yr gift tax concern won't even be an issue. I feel this is best. Credit card is an immediate debt and you has the finds to wipe it out. the Student loans are a longer term debt and you have the money to pay it all off. So yes, pay cc, and keep loan on scheduled payments. Plus it helps your credit