you have to evaluate what your risk tolerance level is and what will be comfortable for you to handle. what you do not want to do is have to worry about your money 24/7.

have fun

You’re right.

“If you pay off the student loan and put the money in a savings account at 5.05% instead, you will make $54,769.”

I assume you mean put the monthly payment into savings, because if you pay off the student loan you don’t have any money to put into savings. If saving the monthly payment IS what you mean, then I’m in agreement. This is basically the same option as when I mentioned investing the monthly payment into a mutual fund, albeit at a lower interest rate.

“If you take the money and put it in savings at 5.05% you will make $66,967. You will also have paid off the student loan and an extra $6,795 in interest. Leaving you with a net gain of $60,262. The tax savings are additional.”

I got tired of typing and figuring the math and figured that the math I had provided was enough to point to this direction. After rereading my post I see that this wasn’t all that clear. My original point that got lost in the process of creating my post was to point out the benefits of moving away from the 5.05 savings account in view of the fact that she already had a liquid emergency fund.

I’d like to reiterate the point that the tax savings here are so negligible as to be barely worth considering as a benefit.

If you pay off the student loan and put the money in a savings account at 5.05% instead, you will make $54,769.

If you take the money and put it in savings at 5.05% you will make $66,967. You will also have paid off the student loan and an extra $6,795 in interest. Leaving you with a net gain of $60,262. The tax savings are additional.

In either scenario, investing in a potentially higher return investment may net a potentially greater profit.

On the other hand, if debt bothers you that much, it may be good psychologically to pay it off.

If not (I wouldn’t), pay off your student loans. Then dump your student loan payments into a mutual fund.

Based on a 20 year payment schedule on a loan of 25k at 2.5% your loan payments are ~132.48. Paying off your student loand with your 25k cash and then investing your monthly payment in a conservative mutual fund earning 10% will net you $100,601 in 20 years.

Keeping your 25k and earning 2.55% interest will net you $41,367. If you factor in the tax savings which are approximately 84.92 a year ($6,793.87 total interest / 20 years * .25 tax bracket…simplistic, but accurate enough for our purposes) you will have $43,065.40

So basically paying off the stupid debt and investing the payment in a mutual fund will potentially pay you $100,601 instead of the $43,065.40 you will have if you leave things as they are now.

In the UK, I’d tell you to max out your Stocks and Shares ISA allowance with the first £7000 (£4000 for the mini) of the money and invest the rest directly in unit trusts.

The suggestion would then be to put say 60% in a FTSE All-Share tracker, 20% in an ex-UK Tracker, 15% in UK corporate bonds, and 5% in something unusual maybe in Zopa.com or in a bunch of individual shares or in mining. You can hold any/all of these inside or outside an ISA.

I like where Alex was going, but I’d say get a Wilshire 5000 type fund rather than S&P 500. I’m partial to Vanguard’s Total Market EFT (symbol VTI) for that.

Why not break that money in half? Since she already has an emergency fund, she can take half of the 25k and keep it in the online savings at 5%, so she’s not losing in interest on her student loan and put the rest into some other investment that hopefully would have a better yield?