Student Loan Frustrations and Retirement

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krasnyja
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Student Loan Frustrations and Retirement

Post by krasnyja » Thu May 01, 2014 8:50 am

Hi all. I have been lurking for some time and I have read a number of posts on this topic, but alas I figured that I would take advantage of all the knowledge here and get some solid feedback, as well as start participating in the community. I am 34 and have only now started thinking about investing (it's a shame, I know).


My questions are:

1. Should I try to aggressively repay my student loan debt which is at 6.25% or should I use the extra money to max my roth IRA first?

2. My wife is toying with the idea of working again 3/4 time. If she does work, should we max her 401K or should I use her earnings to pay down the student loans?

3. Should I continue with traditional TSP or should I switch to ROTH?

Anyhoo, any insight/thoughts would be deeply appreciated and thank you for your good work.
Last edited by krasnyja on Tue May 06, 2014 7:57 am, edited 1 time in total.

Grt2bOutdoors
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Re: Student Loan Frustrations and Retirement

Post by Grt2bOutdoors » Thu May 01, 2014 11:48 am

That mortgage rate seems high.

I would focus on paying down those student loans - a guaranteed rate of 6.25% return is nothing to sneeze at. Your call if you want to consolidate, how secure is your federal job?
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windhog
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Re: Student Loan Frustrations and Retirement

Post by windhog » Thu May 01, 2014 12:38 pm

Hi and welcome,

Do you have an emergency fund, and does it account for the recent addition to your family? (Congrats!) I assume you are comfortable with your disability and life insurance coverage.

How long have you had your Roth account? (If you are close to 5 years, this could be counted as part of your emergency fund.) :oops: This is incorrect! Thanks to Bob's not my name for pointing this out a few posts downstream.

It seems like you are 100% stocks right now. What is your planned asset allocation?

I also think your mortgage rate is a bit high. You might consider either a 15-yr fixed or an ARM. Either of these choices could free up dollars for student loan repayment over the next few years. It’s worth a look.

It seems you are considering a plan that boils down to using aggressive investing in tax-deferred space to correct or overcome the problem of excessive debt. Just remember, the interest on your loans is locked in: the growth of a Roth account is not. Here is another vote for debt repayment first.

If your wife returns to work and has a 401k match, she should get that. Otherwise, pay down the debt.

Good luck!
Paul
Last edited by windhog on Fri May 02, 2014 1:29 am, edited 3 times in total.

deikel
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Re: Student Loan Frustrations and Retirement

Post by deikel » Thu May 01, 2014 1:08 pm

+1 try to refinancy your mortgage to reduce monthly cost

All money (besides matches if such is available) should go towards student loan pay back - no point in trying to save money in one account and carry this much debt on the other hand.

Given the loan amount, your wife almost have to start working again to pay this back AND make money for your kid to study AND plan for retirment.

However, if your wife starts working again you will incur extra cost for child care, so its not 3/4 of the old salary. On the plus side, if you both work (your wife even just a little) the child acre become tax advanatged.
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MathWizard
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Re: Student Loan Frustrations and Retirement

Post by MathWizard » Thu May 01, 2014 1:21 pm

Here's what I'd do:

1) Refinance to 15 year at around 4% , roll closing costs into loan. You'll make it back fast.

2) Roll student loans together to save the 1.25% Student loans cannot be forgiven through bankruptcy, so you
want to get rid of them as fast as possible. The 1.25% allows you to clear them faster. 1.25% on 200K is
$2500/year.

3) Up the ROTH a little as an emergency fund, say to $10K, and

4) Aggressively pay down student loans.

HMan768
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Re: Student Loan Frustrations and Retirement

Post by HMan768 » Thu May 01, 2014 1:23 pm

Have you considered IBR (Income Based Repayment) for your student loans? It sounds like you work for the federal government so you could have them forgiven in 10 years...

Bob's not my name
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Re: Student Loan Frustrations and Retirement

Post by Bob's not my name » Thu May 01, 2014 1:44 pm

windhog wrote:How long have you had your Roth account? (If you are close to 5 years, this could be counted as part of your emergency fund.)
It can be counted immediately. You can withdraw contributions (but not earnings) at any time penalty-free.

TSR
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Re: Student Loan Frustrations and Retirement

Post by TSR » Thu May 01, 2014 2:32 pm

1. I agree that you should contribute enough into your Roth to create a compelling emergency fund if you don't already have one. (Just to make sure, you understand that you can withdraw the contributions -- but not earnings -- from a Roth at any time, penalty free, right?) Then hold off for a while until you can get your loans under control.

2. Consider switching to the L2040 or L2050 fund for the TSP -- this gets you some international exposure, some small caps, and some bonds (more in 2040, less in 2050, depending on your risk tolerance), including the near-mythical G Fund.

3. Continuing to use Traditional TSP will save you a lot of money on taxes RIGHT NOW, which you could really use to pay off those loans. I am no strong advocate of Roth 401k programs, and I think you're a great candidate for the traditional. I can't tell how much you're contributing per year, but I would argue that you should contribute as much as you can while still being aggressive with the loans. I disagree with others who say you should focus only on your loans because the interest rate is "hard to beat." It's also "hard to beat" an instant tax savings of whatever your marginal rate is in the traditional TSP(note that once the tax bill comes due in retirement, you will pay a much, much lower rate on the withdrawals, so there is still extremely significant savings), and all of that savings is "use it or lose it." Keep at it!

4. Can we talk more about those loans? Are they consolidated or are there a bunch of individual loans? What is your monthly payment on each, and how long of a repayment term do you have? Is there a way you can target the smaller ones such that you can have a more immediate cash-flow benefit? (This is the "snowball" method.) I am a fan of aggressive repayment, but with that amount of money, I really don't think you want to put off saving for retirement for the ten or so years at least that it will take you to pay that off.

Best of luck!

krasnyja
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Re: Student Loan Frustrations and Retirement

Post by krasnyja » Thu May 01, 2014 10:02 pm

Yes, actually my ROTH as of now is simply my emergency fund converted into a ROTH. My job is extremely stable, so the need for an emergency fund is relatively low. I do have couple more thousand dollars as buffer in checking account. The reason why I have gone 100 percent for a stock allocation in my TSP for now is that I have about 30 years to go before retirement, and will have a pension plus social security, so for now I am accepting more risk. Although I will have to take a closer look at the lifecycle funds, because I am not so sure about the SP500 right now, I am also thinking about changing my allocation a bit to spread the risk by imitating the entire market by adding small cap stocks and not only the SP500.

I am maxing my 401k contributions to 17500. I find that the difference in take home pay between the 5% to get the employer match and the maximum contribution is small due to the tax savings.

My student loans are broken up between lenders. I do have a question about that. I have two low interest loans - they are 3.5% which have a balance of around 10K each. I will have about 17K in cash pretty soon and I am planning to use this money to pay some student loans. The loans that are at 6.25% are made up of larger sums, which I cannot just pay in one swoop. But I was thinking it may be nice to simply get rid of the smaller loans, even though they have a lower interest rate, because I can eliminate the minimum payment, which may actually make a bigger difference on my monthly payment schedule than putting the 17K towards a 40K loan.

IBR doesnt work in my situation because I make too much money. The public service loan forgiveness program only benefits those with significantly lower income than mine, maybe around 50K. This is because under that program you have to be in a 10-year repayment plan, or in IBR for 10 years. With my income a 10 year repayment plan means that I would repay the loan in 10 years, with nothing left. Under IBR I would in fact have to pay significantly more per month, than I am paying now.

I contacted my mortgage company to see if what refinance options I may have, based on your recommendations!

MooseandBear
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Re: Student Loan Frustrations and Retirement

Post by MooseandBear » Fri May 02, 2014 8:16 am

"Also, would lose ability to deduct student loan interest, though as it stands my annual student loan interest payments are so high that 2500 is more or less insignificant."

OP - I'm not sure what you meant by this but thought I'd inquire as it struck me as odd. Can you elaborate?

Also, +1 on refinancing the student loans through SoFi or Darien Rowan Bank if they are grad school loans.

TSR
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Re: Student Loan Frustrations and Retirement

Post by TSR » Fri May 02, 2014 8:21 am

Sounds like you're doing great. If you want to rethink your allocation, don't do it solely because there's anything wrong with the S&P -- you can get too far down the road to market timing that way. I think international exposure is a good thing, as is small-cap exposure. Something like L2050 might be good for you because of its small exposure to bonds. You could also just formulate an allocation between C, S, and I and keep it that way (be sure to understand WHY you've chosen that allocation and don't change it when it seems like one is doing worse than the others).

I don't mind the piecemeal approach to the loans, and there is nothing wrong with paying off a smaller one at a lower rate for cash-flow purposes. Assuming that you can take that extra monthly savings and put it directly into your loans (as opposed to spending it on something else), you will definitely buy yourself more flexibility and you may move more quickly toward complete pay-off that way. I did this for certain loans, and I'm happily close to being done with the whole thing.

Best of luck!

emperorcorey
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Re: Student Loan Frustrations and Retirement

Post by emperorcorey » Fri May 02, 2014 9:18 am

krasnyja wrote: IBR doesnt work in my situation because I make too much money. The public service loan forgiveness program only benefits those with significantly lower income than mine, maybe around 50K. This is because under that program you have to be in a 10-year repayment plan, or in IBR for 10 years. With my income a 10 year repayment plan means that I would repay the loan in 10 years, with nothing left. Under IBR I would in fact have to pay significantly more per month, than I am paying now.

I contacted my mortgage company to see if what refinance options I may have, based on your recommendations!
IBR may be a benefit to you despite your high income. For instance, IBR subtracts 150% of the federal poverty guideline for your family size in determining your discretionary income. For a family of three, you can subtract 29.7k from your income for IBR purposes. You can also subtract $17.5k for your TSP contributions.

Already we have your discretionary income down to around 73k. 15% of 73k is certainly less than what you'd be paying on a 10-year repayment plan for 200k+ in loans. And, if your loans were taken out after Oct 2007, you may qualify for the new Pay As You Earn repayment plan, which brings it down to 10% of discretionary income.

Also - Do you live in a community property state? If so, filing your taxes separately and attributing half your income to your spouse would significantly reduce your AGI for IBR purposes. Of course, it may also increase your wife's tax burden, so you would need to figure that out as well.

IBR and PSLF are great programs for student loan borrowers. You should redo your calculations to make doubly sure you would not benefit.

kdub
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Re: Student Loan Frustrations and Retirement

Post by kdub » Fri May 02, 2014 10:15 am

emperorcorey wrote:
krasnyja wrote: IBR doesnt work in my situation because I make too much money. The public service loan forgiveness program only benefits those with significantly lower income than mine, maybe around 50K. This is because under that program you have to be in a 10-year repayment plan, or in IBR for 10 years. With my income a 10 year repayment plan means that I would repay the loan in 10 years, with nothing left. Under IBR I would in fact have to pay significantly more per month, than I am paying now.

I contacted my mortgage company to see if what refinance options I may have, based on your recommendations!
IBR may be a benefit to you despite your high income. For instance, IBR subtracts 150% of the federal poverty guideline for your family size in determining your discretionary income. For a family of three, you can subtract 29.7k from your income for IBR purposes. You can also subtract $17.5k for your TSP contributions.

Already we have your discretionary income down to around 73k. 15% of 73k is certainly less than what you'd be paying on a 10-year repayment plan for 200k+ in loans. And, if your loans were taken out after Oct 2007, you may qualify for the new Pay As You Earn repayment plan, which brings it down to 10% of discretionary income.

Also - Do you live in a community property state? If so, filing your taxes separately and attributing half your income to your spouse would significantly reduce your AGI for IBR purposes. Of course, it may also increase your wife's tax burden, so you would need to figure that out as well.

IBR and PSLF are great programs for student loan borrowers. You should redo your calculations to make doubly sure you would not benefit.

Agree with emperorcorey, here. You and I are in similar circumstances. I think you need to take a closer look at what your payment with IBR would be... don't assume your income is too high to benefit from it. Also, your IBR payment is capped at the 10 year standard repayment amount, so your IBR payment can never be higher than that.

mlipps
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Re: Student Loan Frustrations and Retirement

Post by mlipps » Fri May 02, 2014 11:43 am

Chiming in regarding the point about deducing student loan interest if you were to refinance w/a private lender. You deduct interest from ANY loan that is taken out to finance exclusively qualified educational expenses. If you used a credit card to buy textbooks & nothing else, you could deduct that interest. The only loan interest you CAN'T deduct in this fashion is a loan that is deductible in another way, ie a HELOC, which can be deducted if you itemize. So, refinancing to a private loan would not affect this benefit.

Bob's not my name
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Re: Student Loan Frustrations and Retirement

Post by Bob's not my name » Fri May 02, 2014 12:37 pm

But the $2,500 limit still applies so the interest is not deductible at the margin.

letsgobobby
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Re: Student Loan Frustrations and Retirement

Post by letsgobobby » Fri May 02, 2014 12:44 pm

With an income of $155-$165k and a mortgage of only $144k, you must be in a relatively low cost of living area, especially for your salary?

If so, I wouldn't think of "Roth IRA or student loans", I would find a way to do both. In other words you want to reexamine all of your budgeting/spending decisions because given your ages and debt levels, I would try to put at least 50% of your gross income to debt repayment and retirement. Even with that you will still be 40 if not 45 years old - and your child 6-11 years old - before you reach a net worth of zero dollars.

Diverting 50%+ of income to debts and retirement sounds extreme, but your situation is extremely dire. You have debt equal to 300% of your gross household income, and you are 34 years old with retirement accounts of less than half your gross income. You just had a baby and will need to pay for college at some point. It's really time to get extremely serious.

Are there outflows that you can curtail? You might benefit from some time with the Dave Ramsey philosophy, which is basically: 4 walls, lights and water, and beans and rice on the table. Everything else gets cut and the extra money goes toward debts.

anonforthis
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Re: Student Loan Frustrations and Retirement

Post by anonforthis » Fri May 02, 2014 12:51 pm

letsgobobby wrote:With an income of $155-$165k and a mortgage of only $144k, you must be in a relatively low cost of living area, especially for your salary?

If so, I wouldn't think of "Roth IRA or student loans", I would find a way to do both. In other words you want to reexamine all of your budgeting/spending decisions because given your ages and debt levels, I would try to put at least 50% of your gross income to debt repayment and retirement. Even with that you will still be 40 if not 45 years old - and your child 6-11 years old - before you reach a net worth of zero dollars.

Diverting 50%+ of income to debts and retirement sounds extreme, but your situation is extremely dire. You have debt equal to 300% of your gross household income, and you are 34 years old with retirement accounts of less than half your gross income. You just had a baby and will need to pay for college at some point. It's really time to get extremely serious.

Are there outflows that you can curtail? You might benefit from some time with the Dave Ramsey philosophy, which is basically: 4 walls, lights and water, and beans and rice on the table. Everything else gets cut and the extra money goes toward debts.

Why would they need to pay for college? Just wondering.

letsgobobby
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Re: Student Loan Frustrations and Retirement

Post by letsgobobby » Fri May 02, 2014 2:14 pm

"need" may be a little too strong - "May want" or "will need to lest your child end up in the same situation as you" or some such.

asha1001
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Re: Student Loan Frustrations and Retirement

Post by asha1001 » Fri May 02, 2014 2:28 pm

For market participants the risk free rate is currently ~2.7% (roughly, the yield on the 10 year T-note). For you the risk free rate is ~4.5% net of tax deductions on student loans. Therefore you should try to repay the student loan before you invest further funds into stocks.

Stock market return = risk free rate * (stock market risk premium)*beta

If you are "borrowing" at 4.5% by not paying student loans you would not be able to earn a decent return given the risk.

You can reason that on average you may earn an 8% return in the stock market, while paying just 4.5% interest on student loans and thus make 3.5%, but that does not take into account the risk profile of stocks.

The HELOC idea is excellent, if you can bring down the cost of your debt net of tax deductions around 3%, you can slowly pay that debt and use funds to invest in your retirement account.

You can bring in the argument about the stock market's current level, but since we don't like to time the market here at Bogleheads, lets leave that out.

Bob's not my name
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Re: Student Loan Frustrations and Retirement

Post by Bob's not my name » Fri May 02, 2014 3:08 pm

asha1001 wrote:For you the risk free rate is ~4.5% net of tax deductions on student loans.
Bob's not my name wrote:the interest is not deductible at the margin.
So it's 6.25%.

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Re: Student Loan Frustrations and Retirement

Post by grabiner » Fri May 02, 2014 3:20 pm

Check whether your government agency has a loan forgiveness program; some do. If one is available, pay only the minimum on loans which will be forgiven.

I believe you make too much for the generic Public Service Loan Forgiveness to help, but you might check into that as well; if you pay an amount based on your income for 10 years of government work, the remainder of the loan will be forgiven.
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krasnyja
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Re: Student Loan Frustrations and Retirement

Post by krasnyja » Fri May 02, 2014 6:04 pm

Yup, I miswrote. By using DRB or SOFI to refinance my high interest student loans, I wouldn't lose the ability to deduct the interest, but I would lose the ability to participate in my employers loan forgiveness program for my fed loans (I can have up to 60k forgiven) under certain conditions. Thank you everyone for your contributions. It will be an uphill climb, but I have already significantly improved my position over the last couple of years, and I will continue to aggressively pay the loans off. My goal is to be debt free in 10 years, while maxing my 401k during that time.

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