Tell Me Why I Should Pay Off My Student Loans

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Tell Me Why I Should Pay Off My Student Loans

Postby SVT » Sun Jun 24, 2012 7:10 pm

I'm not exactly in the camp of paying off all debt pretty much no matter the interest rate like some/most of everyone here seems to be. I paid off the high interest 9.25% student loan but I'm hesitant to pay off ALL of it. I've read where a lot on here would even pay off 1-3% loans. Compared to that, my debt will seem like high interest debt to you. Some details:

Emergency funds = I have about $15k in cash in savings and checking combined which equals about 10 months worth of expenses currently.

Debt: School loans only -
$37,300 @ 6.00% fixed for 30 years (28 years left and a $238/month payment)
$3,400 @ 6.25% variable ($17/month payment)
$14,670 @ 5.25% variable ($64/month payment)

The last 2 loans are private variable loans with Sallie Mae. They are 10 year loans with about 8.5 years left on them. Currently, both loans are interest only loans for the first 4 years. So both loans are interest only for the next 2.5 years with a payment of $82 total per month. After the initial 4 year period in 2.5 years, the payment for these 2 loans will jump to $297 per month total for the remainder of the term (6 years).

So total debt is about $55,370. No other debt.

Tax Filing Status: Single

Tax Rate: 28% Federal 7.75% MD State of Residence

Age: 26

Also, here's a link to my networthiq entry to give a snapshot of all balances and net worth: https://www.networthiq.com/people/blah_blah

I currently max 401k (I've already contributed about $16500 this year, I'll contribute the rest sometime later this year), max Roth IRA, and I used to max HSA (current employer that I just started with a couple weeks ago doesn't offer an HSA). Current employer does an automatic 10% contribution of salary to 401k. My salary is about $115,000. Student loan interest is no longer deductible.

I plan on going for a Master's degree in about a year or so but the employer will completely pay for it if I space the classes out far enough, which I plan to do, so I will not be adding any debt for school. I don't plan on getting a car or a house for at least a few years and I do not plan on getting engaged or married anytime soon (soonest would probably be 30). So I hopefully won't have any major expenses coming up for a while.

I've been thinking about investing in taxable soon as I've already maxed all tax advantaged and I still have money left over. I understand the argument of how it's better to pay off debt first before investing in taxable, I'm just having a hard time feeling that I should actually do that. I don't have a problem with paying off the small $3400 loan at 6.25% but the rest of it I feel like I shouldn't pay off right away. I feel it's best to build up some savings just in case (even investing in taxable in S&P 500 and Total International), then MAYBE pay it all off at once if I feel like it when I have the total amount saved up.

I also understand the argument that savings and CD rates are low and no where near the amount of the interest rates on my loans but the $37,000 loan is a 30 year loan and I'm sure the interest rates will rise where I could get an equivalent rate for savings and CDs eventually. I have gotten to a point where sometimes I feel like I should just pay off all my loans (or at least the 2 variable loans for now) but them sometimes I feel like I should save more money first to ensure I have some liquidity in case something happens.

Do Bogleheads really suggest I should pay off all of these loans completely ASAP before investing in taxable instead of using the money to invest long term in tax efficient index funds?
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby Bob's not my name » Sun Jun 24, 2012 7:15 pm

Yes, before taxable investing, before Roth IRA, probably before unmatched 401k. Sounds like you get the math. Not sure what the issue is.

By the way, if you're in the 28% bracket you're barely in it.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby market timer » Sun Jun 24, 2012 7:17 pm

I agree that you should max out the 401K and Roth before paying these loans, because you cannot make up for this tax advantaged space in future years. I don't think it makes sense to invest in a taxable account while having these loans. If I were in your situation, I'd take out the largest loan I could from my 401K ($40K?) and use that plus the emergency fund to pay off all the loans.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby SVT » Sun Jun 24, 2012 7:41 pm

Bob, my issue is giving up tax advantaged space to pay off these loans for a couple years. Even after maxing everything, I'm hesitant to put everything I have towards the student loans because of the "making at least the same or more in long term investments" argument.

market timer, I have actually contemplated a 401k loan to pay a chunk of it off. I currently have $0 in my 401k though because I just started with a new employer 2 weeks ago. I could roll over roughly $65k worth of old 401k and IRA into the new 401k, though.

By the way, I have not maxed the Roth for 2012, yet. Also, it varies, but I do have something like $3000+ in cash flow every month I could put towards the loans instead of further savings or starting taxable.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby Elbowman » Sun Jun 24, 2012 7:54 pm

How much did you hold in the stock market between 2007 and 2009? If it wasn't very much, then one argument for paying off those loans is you don't truly know your risk tolerance yet. Paying those loans will give you a nice return with no risk, which is desirable if you don't know how big a loss you can take before you capitulate.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby jlq39 » Sun Jun 24, 2012 8:06 pm

because it is the smart thing to do.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby Bob's not my name » Sun Jun 24, 2012 8:21 pm

You don't miss out on tax-advantaged space if you put off your Roth IRA contribution until April 2013.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby SVT » Sun Jun 24, 2012 8:32 pm

Bob's not my name wrote:You don't miss out on tax-advantaged space if you put off your Roth IRA contribution until April 2013.


Yeah, that's what I've been doing the last couple years actually; contributing the max at the very end of the tax year.

Oh about the 28% bracket, I end up being at the top of the 25% bracket after maxing 401k, taking standard deduction and personal exemption, and health insurance contribution.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby Bob's not my name » Sun Jun 24, 2012 8:39 pm

SVT wrote:
Bob's not my name wrote:You don't miss out on tax-advantaged space if you put off your Roth IRA contribution until April 2013.


Yeah, that's what I've been doing the last couple years actually; contributing the max at the very end of the tax year.

Oh about the 28% bracket, I end up being at the top of the 25% bracket after maxing 401k, taking standard deduction and personal exemption, and health insurance contribution.
Well done on both points. Most posters don't understand their tax situation this well.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby SVT » Sun Jun 24, 2012 8:45 pm

Bob's not my name wrote:
SVT wrote:
Bob's not my name wrote:You don't miss out on tax-advantaged space if you put off your Roth IRA contribution until April 2013.


Yeah, that's what I've been doing the last couple years actually; contributing the max at the very end of the tax year.

Oh about the 28% bracket, I end up being at the top of the 25% bracket after maxing 401k, taking standard deduction and personal exemption, and health insurance contribution.
Well done on both points. Most posters don't understand their tax situation this well.


Wow, thanks for the compliment! That really means something to me coming from you as I see you as a tax guru. A lot of this tax stuff I've learned, has come from reading many of your posts. :)
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby livesoft » Sun Jun 24, 2012 9:09 pm

Those loan interest rates are kinda high for nowadays and it's only $55K. I would work on paying them off.

When I was 26, I was still in school and flat broke, so I wasn't eligible for a 401(k) at that time. So though I had a "late" start on 401(k) contributions when I started a few years later, it was no hindrance to early retirement. Thus in the "contribute to 401(k) versus pay the loans" dilemma, I would probably land on the "pay the loans" unless they were in the 3% or lower interest-rate range. I would probably not max 401(k) since employer gives you 10% anyways, but those tax savings are important.

Well, I would max 401(k) and maybe look into a 401(k) loan to help pay off education loans at a lower rate (and interest paid goes into your pocket).

And certainly pay the loans before investing in taxable.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby PedsDoc » Sun Jun 24, 2012 9:26 pm

Get the 401k match and if you want to max out the 401k and even the Roth then do that, but I would certainly pay off the loans. Yes, interest rates will rise eventually, but when will that be? It might be 5-10 years from now. Are you willing to make interest payments on these loans that long when the loans are at their highest level?

Get an emergence fund set up - 3-6 months of expenses and then put your extra 3k to these loans. If you don't like being debt free, you can always go get some more debt. I bet you won't, though. It is liberating to be debt free.

Please do not take out a 401k loan! If/when you do leave your current job, that loan is due within 60 days. If not paid, you will owe taxes and a penalty for the early withdrawal. Ouch!

All debt carries with it a level of risk. It does not sound like from your post that you see the risk involved. Learn from some others here who have had debt go bad or had too much leverage and had it all fall apart around them. One of the things you will hear a lot of around here is lowering risk and here is one very easy way for you to do just that. Pay off the debt. You won't regret it.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby relentless » Sun Jun 24, 2012 9:56 pm

You are doing pretty well overall and are obviously bright. I agree with others that 6+ percent is pretty high and as you noted you don't get any tax deduction on the student loan interest. Student loans are riskier than other loans because they are not bankruptable and are very difficult to get rid of short of dying.

I am personally increasing my total loans to fully fund my Roth IRA and Roth 403b (equivalent to 401k) in my last few months as a physician in training as the long term expected benefit FAR outweighs the short term interest cost. I will also have limited eligibility for increasing Roth space going forward. However, my income will be going up a lot soon and I will be repaying the additional loans in short order. I would certainly not do this to invest in taxable assets. I think you are in a much different situation. In your position, borrowing (or not paying down loans which is nearly equivalent) to fund taxable investments at this point does not make a lot of sense unless perhaps you anticipate lots of inflation (in which case you could make a case for plowing money into I-bonds in taxable). The bond market seems to be betting against that kind of high inflation scenario.

I would pay off these loans in your position.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby Watty » Sun Jun 24, 2012 11:05 pm

FYI, If you have a paid off car that is worth fair amount then one thing you might consider doing is to get a car loan at a lower interest rate and use the money from the car loan to pay down the student loan. PenFed has 1.99% car loans so you could save over 4% on as much as you could get a car loan for.

https://www.penfed.org/Auto-Loans-Overview/

Low or zero percent credid cards might be usable too.

One problem with having the loans is that in a lot of ways they are like a negative bond so they can screw up your overall asset allocation. For example if your target asset allocation is 80% stocks and 20% bonds and you have $100K which is $80K in stocks and $80K in bonds and $50K in debt then your asset allocation could be looked at as $80K in stocks and -30K in bonds (20-50) for an overall asset allocation percent of 160% in stocks and -60% in bonds because of your $50 net worth(80+20-50)

This is not exactly how it works but in essence you are using leverage to buy more stocks so you may have a riskier portfolio than you were planning to have since a 10% decline in the stock market would drop the value of your stocks from $80K to $72K and drive your net worth from $50K to $42K which is a 16% decline when the stock market only declined 10%.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby EmergDoc » Sun Jun 24, 2012 11:17 pm

5-6% guaranteed investment? Where do I sign up?
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby zaboomafoozarg » Sun Jun 24, 2012 11:21 pm

6% guaranteed ROI?

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Re: Tell Me Why I Should Pay Off My Student Loans

Postby relentless » Sun Jun 24, 2012 11:39 pm

EmergDoc wrote:5-6% guaranteed investment? Where do I sign up?


Actually has to be at least 6-7% because of tax effects (assuming LTCG of 15%) just to break even, even more if LTCG goes to 20% or if has to pay income tax rate on dividends/interest.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby archbish99 » Sun Jun 24, 2012 11:58 pm

Could you get the same or better expected return in the market? Sure. The key word there is "expected." Paying down the loans gives you two advantages:
  • Guaranteed return, rather than risky expected return
  • Decreased "mandatory" expenses each month, bringing your emergency budget down and your financial flexibility up.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby Mudpuppy » Mon Jun 25, 2012 12:55 am

Here's my personal take on it. You don't have to go all-or-nothing into one path or the other. Split the difference and work on multiple goals simultaneously. Unless your expenses are extremely high, you have the salary to do so. I would recommend that you get more cash-equivalent funds for an emergency fund, because, sorry, 10-15k of an emergency fund does not cut it when you're making 6 figures unless your job is iron-clad secure. But I don't think you need to start worrying about taxable investments like stocks just yet.

So continue maxing the 401k and the IRA. Pay off the little student loan because it would be trivial to do so. Start making the normal (not interest-only) payment on the remaining Sallie Mae loan to start chipping into the principal there. Accelerate the payments on the federal loan as well. Bring up your cash equivalents (I-bonds and TIPS if you feel the interest rate from high interest savings, money markets and CDs is too paltry) to a much healthier amount (6-12 months of salary depending on which pundit you listen to). Don't worry about any other taxable investing besides this cash equivalent emergency fund (and other savings goals like a car fund) until you've gotten the student loans paid off.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby Valuethinker » Mon Jun 25, 2012 12:50 pm

SVT wrote:Debt: School loans only -
$37,300 @ 6.00% fixed for 30 years (28 years left and a $238/month payment)
$3,400 @ 6.25% variable ($17/month payment)
$14,670 @ 5.25% variable ($64/month payment)


The expected, pre tax return on developed country stocks, long run, is 6-8% pa and I could make a good case it will be 6% or lower, not higher. Safe bonds of course pay 2%-- and that's the equivalent risk to paying down a student loan.

So by taking on a huge amount of risk (equities) you cannot reliably beat the *after tax* return of paying down those loans.

Given those interest rates, I think discussions of future returns are basically moot. Just pay off those loans and your internal rate of return on that investment is c. 6%, risk free-- in this market, that's as close to being given free money as we get.

I am all for staying liquid, btw, but on your salary you generate a lot of liquidity via your paycheque. As long as you have disability insurance, I think you are in pretty good shape on that score given your salary and young age.

So I'd just nuke the loans.

I suspect in 1-2 years its moot, those loans (post 401k and Roth contributions) will be liquidated-- if you just turn your contributions onto them, they will soon be gone.

I also understand the argument that savings and CD rates are low and no where near the amount of the interest rates on my loans but the $37,000 loan is a 30 year loan and I'm sure the interest rates will rise where I could get an equivalent rate for savings and CDs eventually. I have gotten to a point where sometimes I feel like I should just pay off all my loans (or at least the 2 variable loans for now) but them sometimes I feel like I should save more money first to ensure I have some liquidity in case something happens.

Do Bogleheads really suggest I should pay off all of these loans completely ASAP before investing in taxable instead of using the money to invest long term in tax efficient index funds?


Well you are now in the land of forecasting future interest rates (certain they must shoot up) and equity returns (guess what, they could be negative).

Put it this way, have Japanese investors received an 'equivalent rate eventually'?

Liquidity it is to your own comfort level but I think you can afford to have a relatively small cushion because you probably don't have big overheads.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby Valuethinker » Mon Jun 25, 2012 12:52 pm

archbish99 wrote:Could you get the same or better expected return in the market? Sure. The key word there is "expected." Paying down the loans gives you two advantages:
  • Guaranteed return, rather than risky expected return
  • Decreased "mandatory" expenses each month, bringing your emergency budget down and your financial flexibility up.


The equivalent certain return, pre tax, is 2% in US Treasury bonds.

The long run average risk premium for stocks is 3.5-4.5%, which would give us 5.5-6.5%. However we can find decades when stocks did not do anything like that-- it's not like the virtues of stocks are unknown in the way they might have been in, say, 1950.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby SVT » Tue Jun 26, 2012 5:11 pm

Thanks everyone for the responses. I just paid off the $3400 private loan. I'll have to think about course of action for the rest of it, as in how much to pay off when, how much liquidity I want to keep while paying extra, etc.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby dyangu » Tue Jun 26, 2012 6:10 pm

Posts like these makes me wonder if we should have peer to peer lending for student loans. I'm sure 90% of Bogleheads would love to lend you money at 6% or even 5% for 30 years, if you can provide collateral to insure against default.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby market timer » Tue Jun 26, 2012 6:19 pm

dyangu wrote:Posts like these makes me wonder if we should have peer to peer lending for student loans. I'm sure 90% of Bogleheads would love to lend you money at 6% or even 5% for 30 years, if you can provide collateral to insure against default.

If someone has collateral that isn't already backing a loan or part of an emergency fund, he likely doesn't have a student loan.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby dyangu » Tue Jun 26, 2012 9:00 pm

market timer wrote:
dyangu wrote:Posts like these makes me wonder if we should have peer to peer lending for student loans. I'm sure 90% of Bogleheads would love to lend you money at 6% or even 5% for 30 years, if you can provide collateral to insure against default.

If someone has collateral that isn't already backing a loan or part of an emergency fund, he likely doesn't have a student loan.


Ah but the OP maxed out his 401k and is planning on investing in taxable instead of paying off student loan. I know a few people in real life who are doing the same. Some people think 10% returns are easy and don't have the risk adverse gene. I'm willing to loan them the money if I get to make margin calls :D
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby market timer » Tue Jun 26, 2012 10:23 pm

dyangu wrote:Ah but the OP maxed out his 401k and is planning on investing in taxable instead of paying off student loan. I know a few people in real life who are doing the same. Some people think 10% returns are easy and don't have the risk adverse gene. I'm willing to loan them the money if I get to make margin calls :D

I'm sure you can find people willing to pay a high interest rate to borrow on margin, just look at most brokerages. However, the consensus in this thread is not to invest in taxable before paying down student loans. As for the 401K, to the extent it can be used as collateral via a 401K loan, I'm all for it, though some consider this risky due to the chance of job loss. In general, it is hard to make a case why someone should have good collateral (not part of an emergency fund) and high interest loans that are nondischargeable. The two aren't really consistent, hence the student loan market.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby relentless » Wed Jun 27, 2012 12:49 am

market timer wrote:However, the consensus in this thread is not to invest in taxable before paying down student loans.


To be specific--not to invest in taxable before paying off student loans for the OP at his income with his interest rates. I am actually wondering if someone in his position with a six figure income may be better off maxing out I-bonds before maximally paying off loans if they anticipate wanting and not being able to buy enough I-bonds in a few years after the debt would be gone. For example, if you are married and would want 40K of Ibonds next year you may be willing to pay the extra interest and purchase 20K this year and 20K next year since you CAN'T purchase 40K next year. The savings in taxes if redeemed in a lower bracket could far outweigh the upfront interest cost. It seems a common complaint that people can't get enough of them.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby SVT » Wed Jun 27, 2012 3:20 pm

relentless wrote:
market timer wrote:However, the consensus in this thread is not to invest in taxable before paying down student loans.


To be specific--not to invest in taxable before paying off student loans for the OP at his income with his interest rates. I am actually wondering if someone in his position with a six figure income may be better off maxing out I-bonds before maximally paying off loans if they anticipate wanting and not being able to buy enough I-bonds in a few years after the debt would be gone. For example, if you are married and would want 40K of Ibonds next year you may be willing to pay the extra interest and purchase 20K this year and 20K next year since you CAN'T purchase 40K next year. The savings in taxes if redeemed in a lower bracket could far outweigh the upfront interest cost. It seems a common complaint that people can't get enough of them.


And honestly, I don't know much about I-bonds at all at this point. I had always just thought about having some cash for emergency/short term purchases, then investing in equities in taxable after maxing tax advantaged.

Any advice in regards to purchasing I-bonds (whether I should or shouldn't and when) would be welcomed.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby Khanmots » Wed Jun 27, 2012 3:51 pm

I think others have well-covered the expected vs guaranteed return, liquidity, and cash-flow angles. I do think that one thing got lost in the mix...

relentless wrote:You are doing pretty well overall and are obviously bright. I agree with others that 6+ percent is pretty high and as you noted you don't get any tax deduction on the student loan interest. Student loans are riskier than other loans because they are not bankruptable and are very difficult to get rid of short of dying.


Bankruptcy can happen for a variety of reasons that are hard to avoid; huge medical bills (most insurance has a payout cap), getting hit with a big personal liability lawsuit (these seem to like to target people with assets for some reason...), etc. You can mitigate this risk with umbrella policies and such, but that doesn't eliminate it... and our jobs are likely never as stable as we like to think they are.

Anyways, the point is that while most debts are discharged in bankruptcy, student loans are not. Additionally, various retirement accounts have some protections from seizure for judgements and in bankruptcies... but a taxable brokerage account will not. If you do have a worst case storm hit you and you get hit with a massive judgement right as you lose your job or something, you'll emerge from the bankruptcy with the student debts still hanging over your head and the contents of your taxable accounts gone. While the odds of this are low, it's something to consider.

Personally, I find the breakeven point to be around 4% with a mortgage or 3% with a loan where the interest is non-deductible. For me that's where the combination of increased liquidity and expected return outweighs the combination of the known guaranteed return with increased risk of seizure. You'll need to determine where makes sense for you, but I think it's being overly optimistic if you conclude that non-dischargable non-deductible debt in the 5-6%+ range is where the line should be drawn.

That said, having a minimum level of liquidity is good, I do this with a big emergency fund (that I'm slowly converting to I-Bonds), but others do this in other ways.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby Khanmots » Wed Jun 27, 2012 4:03 pm

SVT wrote:And honestly, I don't know much about I-bonds at all at this point. I had always just thought about having some cash for emergency/short term purchases, then investing in equities in taxable after maxing tax advantaged.

Any advice in regards to purchasing I-bonds (whether I should or shouldn't and when) would be welcomed.


If you're not familiar with I-bonds, here's the basics:
- pay a base interest rate (currently 0%)
- also pay interest to match inflation; updated every 6-months
- base + inflation interest cannot be less than 0% (i.e., accumulated value cannot decrease)
- taxes can be deferred until redemption (so no yearly compounding of taxes as with normal bonds, and you'll pay based on your tax rate when you redeem... likely lower if you redeem in retirement)
- think they're exempt from state taxes as they're federal bonds (in a 0% state though, so unsure, someone else chime in?)
- Minimum holding period of 1 year
- Redeeming between 1 year and 5 years results in the loss of 3 months interest
- Can redeem after 5 years with no penalty (max holding period of 30 years)
- limited to purchasing $10k / year

The tax deferral makes them attractive if one is in need of additional tax-advantaged space. For an emergency fund, if you move your e-fund in slowly over a few years you can have your e-fund matching inflation with minimal penalties if you do need the withdrawl. You don't want to dump it all in at once as you might have that emergency happen in that first year that they're unredeemable.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby JupiterJones » Wed Jun 27, 2012 5:07 pm

I can't tell you why you should pay off your student loans. But I can tell you why I would pay off my student loans if I were in your situation...

The current payments are, what, $320 a month right now? And will one day be $535?

Ugh.

Imagine not having to cough that up every month. You get your paycheck, and (apart from rent/mortgage, utilities, etc.) you get to keep it! To do whatever you want with it! How great would that feel? And to not have to wonder where that $300-500 a month will come from if you lose your job.

I just plain don't like being on the hook for things when I don't really have to be. That's why I like to pay off stuff like student loans.

But hey, that's me. YMMV.

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Re: Tell Me Why I Should Pay Off My Student Loans

Postby SVT » Wed Jul 18, 2012 8:50 pm

So what are some of your opinions on how exactly I should be going about paying off these loans? I still have roughly $15k in savings/checking accounts and I have cash flow of $3000/month at the minimum (might even be $3500/month minimum now as I just received another $10k/year raise this month). 401k is already nearly maxed for 2012 (about $500 short of $17k) and I'm not going to worry about maxing the Roth IRA for 2012 until April of 2013. I payed off the small $3400 loan a few weeks ago.

So now I have:

$37,230 @ 6.00% fixed for 30 years (28 years left and a $238/month payment)
$14,670 @ 5.25% variable ($64/month payment which is interest only)

There's different ways of tackling this.

- Since I have $15k in savings, I could pay off the variable interest-only loan now (I can wait till the next paycheck so that I will have a few thousand dollars leftover) then pay off the federal loan from cash flow each month.
- I could just save up the entire balance plus some extra then pay it off all at once.
- I could leave the $15k in savings and just pay off the loans from cash flow.
- I guess taking a 401k loan out with a combination of one or some of the above methods is also an option, although, according to the 401k administrator of my new company, the interest rate for loans are 5.25%, so I'm not sure this would be a good idea (it didn't mention what fees there are or whether or not I could continue to contribute to the 401k while having an outstanding loan, though). Although maybe it's not such a bad idea? Doing this option would allow me to borrow a little more than $30k after rolling over an old rollover IRA and the 401k from my last employer ($30k would be about 50% of the balance).

There might be more options that I haven't thought of for paying these off as well. What are your opinions on this?

Thanks in advance!
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby archbish99 » Wed Jul 18, 2012 9:00 pm

I like the idea of taking the 401k loan and using that plus savings to pay off both loans, personally. You're essentially paying off one and refinancing the other to a lower fixed rate, and acquiring a good fixed income investment in your 401k to boot. While the fees on the loan are worth considering, they're likely to be a small fraction of your interest saved.

If your plan doesn't allow contributions while you have an outstanding loan, though, finish maxing out the 401k for the year before you take out the loan, and try to get the loan paid off in time to max it out for next year as well.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby market timer » Wed Jul 18, 2012 9:07 pm

SVT wrote:- I guess taking a 401k loan out with a combination of one or some of the above methods is also an option, although, according to the 401k administrator of my new company, the interest rate for loans are 5.25%, so I'm not sure this would be a good idea

Since you are paying this interest to yourself, the rate is almost irrelevant. The rate only matters to the extent it increases your future tax liability on 401K withdrawals, which happens if you would have earned less than 5.25% on the part of your 401K you loaned to yourself. However, even this is offset by the fact that $1 in a 401K compounds at a faster rate than $1 in taxable. In certain situations, you could paradoxically want to pay a very high interest rate to yourself, such as if you plan to retire early and convert the 401K to a Roth.

One option to consider that you did not list above is to apply for a few credit cards with low promotional rate balance transfers. I routinely float $30-80K on credit cards at 0-3% interest.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby NYBoglehead » Wed Jul 18, 2012 9:25 pm

55k worth of debt at roughly 6% is absolutely absurd to hang onto given that you can't even crack 1% in a savings account these days. I wouldn't advocate taking out a loan against the 401k, but whatever you're contributing to the 401k above what your employer matches would likely be better served accelerating the repayment of those loans. The fact that you don't get the tax deduction because of your AGI adds even more to the argument for paying them off.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby SVT » Thu Jul 19, 2012 2:25 pm

I will likely look more into the 401k loan (get more details on the fees and whether or not I can continue to contribute to it, although if I can't, I'll make sure to pay off the loan at least a few months before the end of calendar year 2013 to max 401k). The CC idea is a good one. I'll take a look into the types of CC's and deals I can get right now. Credit score is 760 according to CreditKarma so I would think I would qualify for pretty much anything really.

If I don't take the 401k loan or use CC's and instead just use savings and cash flow, should I start with the smaller Sallie Mae loan first or the bigger one? The bigger Federal loan is 6% interest but the Sallie Mae is 5.25%. I guess it's a matter of whether I want to get rid of the smaller loan and subsequent $64/month payment first and pay slightly more in interest or just pay off the higher interest, higher balance loan first to save more in interest.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby bottlecap » Thu Jul 19, 2012 2:32 pm

You make $125,000 per annum. Pay the student loans off in 2 or 2.5 years. Don't bother with a 401k loan. It will complicate your life and add stress. If you lose your job, you'll wish you hadn't. You're paying yourself back, but with the threat of penalties and taxes if you can't pay back on schedule. At least with the student loans you might be eligible for a hardship deferment if something untoward happens.

Good luck,

JT
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby FNK » Thu Jul 19, 2012 2:55 pm

I wouldn't bother with 401 or CC machinations, and also would not raid the emergency fund. Just take the available cash that you were looking to invest in taxable, and kill the higher-rate loan with it. Simple.
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby Nukeboilermaker » Thu Jul 19, 2012 3:23 pm

I don't know how your company does the 401k match... But my company (my understanding at least) I only get the company match on the paychecks that I contribute to my 401k on. So if you max out your 401k too early then you are leaving company match on the table (something to consider and think about as you mentioned nearly hitting the 17k all ready)
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby SVT » Thu Jul 19, 2012 3:31 pm

Nukeboilermaker wrote:I don't know how your company does the 401k match... But my company (my understanding at least) I only get the company match on the paychecks that I contribute to my 401k on. So if you max out your 401k too early then you are leaving company match on the table (something to consider and think about as you mentioned nearly hitting the 17k all ready)


No offense but I'm not that stupid. :P

As mentioned in the OP, my company does an automatic 10% contribution to 401k every paycheck no matter what. There is no "match". I certainly wouldn't have maxed my 401k this early if they offered a 10% match instead of an automatic contribution. :)
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Re: Tell Me Why I Should Pay Off My Student Loans

Postby Dandy » Fri Jul 20, 2012 6:47 pm

You have many years to retirement and are saving like a champ so I don't think you will have a problem with having enough tax advantaged space. I don't necessarily think you have to write 3 checks and pay off all three right away. I would pay off the two smaller loans this year if possible and use the extra money along with some of your take home to aggressively pay down your larger loan let's say over the next 3 years. This should allow you to exit your loan obligations while still saving aggressively for retirement and not wiping out your other savings.

After 3 years if you are debt free you will have signifcant extra money you can either invest. Having no debt will give you flexibility and will enable you to weather any future financial challenges better.
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