Paying off Student Loans

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aa411
Posts: 24
Joined: Mon May 06, 2013 1:10 pm

Paying off Student Loans

Post by aa411 »

Hello All:

I recently sold my condo (closing escrow in a few days). I'm getting about a $65k windfall from it. I'll be renting w/ my current roommate. I also have 45k in savings and 30k in my day trading account (not an investment account). I have ~125k in (federal) student loans @ 5.75 % interest. I also have a small private loan for 12k but that's at 3.2%. My only other loan in a car loan, which has a balance of 5k @ 2.9%. I'm not particularly considered w/ the 12k private loan or the car loan as the interest of the loans are a non-factor compared to federal student loan. No credit card debit. I make about 100k year plus (average) of $20k in bonuses. My loan payment on the 125k is about $650/mo (on an income based repayment plan which has not readjusted to reflect the increase in income I got from switching jobs, which is almost all interest but for a few bucks. So in total I will have ~140k in cash on hand.

I'm wondering if I should pay off the 125k in student loans @ 5.75 % interest all at once? I will still have more than enough left over for a rainy day fund as my monthly expenses are less than 2k w/o the federal school loan.

Pros:

1. I will be saving $650 / mo in interest if I do this.

2. Piece of mind/weight lifted of shoulders/more flexibility in moving to lower pay jobs with better quality of life.

Cons:

1. It would deplete my saving so I won't be able to put a down payment down if I find another property I want to buy. However, I'm pretty sure I can save $30k to 35k per year. We signed a one year lease on the rental and the game plan is to stay at least 2 so by the time me and my roommate part ways, I SHOULD have 60k to 70k saved up for a down payment as I'm pretty sure the next place after the current lease will be my "settle down for a while" house.

2. As some point, I'd like to go into public employment which would theoretically allow me to forgive my loans for 10 years of service. However, I've had this idea for a while but government funding seems to be a problem so jobs are very hard to come by. Even with the ones available, I would have a take nearly a 50% pay cut so this may be a pipe dream all together.

3. I would have to cash out my trading account, which has appreciated nicely this year. I'm expecting 2014 to be breakout years for several of my holdings so I'll be missing the boat on that.

Alternative Option:

The other option would be to split the baby. Essentially pay off ~85k of the loan, which is the NON-SUBSIDIZED portion. This will drastically reduce the monthly interest and still keep me fairly liquid.

I'm 29 y/o with no dependents if that plays a factor in any way.

Any advice is greatly appreciated.
supton
Posts: 76
Joined: Wed Oct 02, 2013 7:37 am
Location: NH

Re: Paying off Student Loans

Post by supton »

If it was me, I'd probably pay off the loan with 5.75%, as you said, it's acruing interest at $650/month. Once done you'll be vastly ahead, the other loans aren't that much worse than depreciation, and while you'll clean out your rainy day fund I think you can aggressively save and make it back in short time -- at the rate of $650/month.

I just don't know the tax implications of such a decision, since the $65k would be taxed.
stan1
Posts: 14235
Joined: Mon Oct 08, 2007 4:35 pm

Re: Paying off Student Loans

Post by stan1 »

I don't see much reason for someone making $120K/year to carry $142K in non-mortgage debt. I'd have a plan to get that to zero over the next 3 years while maxing out your retirement account contributions.
Warning: I am about 80% satisficer (accepting of good enough) and 20% maximizer
lloydbraun
Posts: 101
Joined: Mon May 30, 2011 9:14 pm

Re: Paying off Student Loans

Post by lloydbraun »

I'm in a similar position to you except I don't have 120K cash on hand and work in the non profit world so I'm already working towards debt forgiveness (8 years away). In my position, since I'm in a qualifying job already, I would keep my money for a down payment if I had 120K on hand. If I were in your position, however, I would just pay off the federal loans. Here is my reasoning:

1. You make a good amount of money and at 29, even if you had a dependent, you should be able to save 20-35K per year over the next 3-4 years to replenish your savings/down payment fund.

2. Unless you're 100% sure you're going to switch to a public sector/non profit job, by staying on IBR or ICR you'll have to make payments for 25 years at which point your remaining balance may still be taxed when forgiven (current law states that those in qualifying jobs who have loans forgiven after 10 years don't have to pay taxes on the principal or interest that is forgiven but those who aren't in qualifying jobs and need to pay for 25 years will have to pay taxes on the balances that are forgiven. While this may change in the future, it is the current law).

3. If it helps you sleep better at night then it's worth it. I'm not complaining about my debt because I took it on willingly but even with the IBR program, I still worry about it.

4. Paying off your debts totally improves your labor mobility, as you pointed out. Moving forward you'll basically be free and clear to make the best decisions for you and your future family as opposed to basing your decisions on whether or not you can service your loan, especially if you decide you want to take a lower paid position in the private sector at some point.

Either way you're in good shape!
TSR
Posts: 1249
Joined: Thu Apr 19, 2012 9:08 am

Re: Paying off Student Loans

Post by TSR »

Not sure what kind of loan(s) you have. Is it all one consolidation loan? If you went with your "alternative option," would that also substantially reduce your monthly payment (in addition to the interest rate)? If so, I would recommend doing your alternative option PLUS paying down all of your private debt, which has fewer benefits of the federal student loans.

If not, I would just pay that thing off -- and you might go with this plan regardless. You will never, EVER regret having paid off your student loans.

Also, I work in the law and know a lot of people who are in various non-profit forgiveness programs, but I have yet to meet someone who has actually completed one of those programs. I wouldn't make decisions based on that somewhat remote possibility.
campy2010
Posts: 1252
Joined: Sun Nov 28, 2010 4:01 pm

Re: Paying off Student Loans

Post by campy2010 »

I stopped reading at "I will be saving $650/month in interest".

I'm joking, but to me the answer is clear and don't know why you didn't pay down your loans sooner. If I were in your shoes, I would do the following:

1. Put aside emergency fund
2. Contribute max to 401k ($17.5) and Roth IRA ($5.5k) for 2013
3. Pay down loans with remainder

Going forward, after putting aside living expenses and retirement savings, aggressively pay down the remainder of the high-interest loans. There is no sense saving cash earning 0.75% interest when you have debt accruing interest at 6%.

Like others have said, you're in good shape and are very close to being debt-free. Something to celebrate. :-)
Last edited by campy2010 on Thu Oct 03, 2013 1:40 pm, edited 2 times in total.
WendyW
Posts: 345
Joined: Sat Dec 08, 2012 3:01 pm

Re: Paying off Student Loans

Post by WendyW »

aa411 wrote:I also have 45k in savings and 30k in my day trading account (not an investment account). I have ~125k in (federal) student loans @ 5.75 % interest.
Close the day trading account, and use the 30k to pay off 5.75% interest loans.
lloydbraun
Posts: 101
Joined: Mon May 30, 2011 9:14 pm

Re: Paying off Student Loans

Post by lloydbraun »

[quote="TSR"]Not sure what kind of loan(s) you have. Is it all one consolidation loan? If you went with your "alternative option," would that also substantially reduce your monthly payment (in addition to the interest rate)? If so, I would recommend doing your alternative option PLUS paying down all of your private debt, which has fewer benefits of the federal student loans.

If not, I would just pay that thing off -- and you might go with this plan regardless. You will never, EVER regret having paid off your student loans.

Also, I work in the law and know a lot of people who are in various non-profit forgiveness programs, but I have yet to meet someone who has actually completed one of those programs. I wouldn't make decisions based on that somewhat remote possibility.[/quote]


TSR, I would note here that the plans you're talking about are probably those that existed in the 90s and early 2000s that stipulated that a person had to be employed at a specific organization. The plans the OP is referring to came into effect in 2007-2008. Nobody in those plans has had loans discharged because we're only a few years into the program.
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torius71
Posts: 280
Joined: Sun Apr 24, 2011 10:39 pm

Re: Paying off Student Loans

Post by torius71 »

lloydbraun wrote:
TSR wrote:Not sure what kind of loan(s) you have. Is it all one consolidation loan? If you went with your "alternative option," would that also substantially reduce your monthly payment (in addition to the interest rate)? If so, I would recommend doing your alternative option PLUS paying down all of your private debt, which has fewer benefits of the federal student loans.

If not, I would just pay that thing off -- and you might go with this plan regardless. You will never, EVER regret having paid off your student loans.

Also, I work in the law and know a lot of people who are in various non-profit forgiveness programs, but I have yet to meet someone who has actually completed one of those programs. I wouldn't make decisions based on that somewhat remote possibility.

TSR, I would note here that the plans you're talking about are probably those that existed in the 90s and early 2000s that stipulated that a person had to be employed at a specific organization. The plans the OP is referring to came into effect in 2007-2008. Nobody in those plans has had loans discharged because we're only a few years into the program.
+1 The Public Service Loan Forgiveness (PSLF) program was created under the College Cost Reduction and Access Act of 2007. I know a couple of people who are 4 years away from large checks from the federal government.
"A new truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it."-MP
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