How to make the most of college loan repayment?
As others have said, Choice 1 will pay down the loan faster (which means you pay less interest over the life of the loan.) This is what you want. Barring cash flow issues (as smackfu suggests,) the only obvious reason to choose Choice 2 is if you’ll be on a cruise or something next month and won’t be able to send in a check.
I dunno how the interest works with your student loan, but if you can get a bank account with higher interest you could save the overpayment money until you have enough to pay off the loan and make a profit. If you have any equivalent of UK ISAs (tax free personal savings accounts) you could move chunks into those. Obvously only go for investments where you can’t lose any money though.
Lunkfish beat me to it. I’ve been told that it is better to invest the extra money if you can find a relatively secure investment option that has a higher interest rate than your loan. The idea is that the same $100 can cancel out 5% worth of interest or earn you 10%. That is, in the long run the investment generates more money then the early payment saves.
I see that you’re located in the U.S. Based on that, you should strongly consider making only the minimum payments on your loans, and putting the rest in a bank account. A long-term money market account (which is, from your perspective, just an FDIC insured savings account) will currently pay you almost 5% APY. Add on to this the fact that inflation is currently averaging about 3.5%, and you’ve got a strong case for leaving that debt out there for the 25 year maximum period, and paying it in much smaller real dollars, and possibly even pocketing a bit of profit off of a riskless investment. For rates and a comparison of the bank accounts that I mentioned, take a look at this and this.
oddman and lunkfish beat me to it, but in general, interest rates on student loans are about the lowest you will ever get on any loan, especially if you have federal loans and consolidated them when the interest rates were super-low. A modest rate of return on a safe investment would most likely exceed the interest accrued on your student loan. So even if you could pay off your debt today, you’d be smarter to invest the money somewhere and pay your loans off slowly.
