Fixed vs Variable Rate - Student Loan Refi

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brownie1022
Posts: 14
Joined: Fri Jan 06, 2017 1:40 pm

Fixed vs Variable Rate - Student Loan Refi

Postby brownie1022 » Wed Jan 11, 2017 9:38 am

Hi all! I got some great advice in another thread about general finances and housing plans, and now I'm shifting gears to ask about student loan debt.

My wife recently graduated from a masters nursing program--post-college she realized her passion so had to do a second degree thing, so while she'll make good money going forward she's left with $127K in debt.

Our goal the next 1.5 years is to wipe that completely out, along with the low-hanging fruit of my debt. Some details are below, but I have three main questions:
1. Does it make sense to wipe out my $9K loan first then focus on hers, or continue to pay the minimum toward that because of the lower interest rate?
2. We have two rates to consider: 4.01% variable rate, 5.30 fixed rate. Is there any reason to take the fixed rate? I do worry a bit about the fed continuing to hike interest rates, how much would that effect the loan if we'll be done with it in a year?
3. Should I continue to max out 401K (13% pre-tax) or reduce to company match (6%) while we hit this debt? Wife has no retirement options at work currently, though we can still put $5,500 toward her Roth IRA for 2016 (haven't contributed at all for FY2016).

Thanks in advance! Some details that may or may not help are below.

Debt:
HER $127K student loans @5.3%
HIS $9K student loans @3.25%
$23K car loan @0.9%
--monthly debt ~$1,900

Age:
HER 29
HIM 36
Tax Filing Status: married filing jointly
Tax Rate:
Federal 28% but will be 33% in 2017
State 5.1%


Current retirement assets
HIS 401K ($84,000) - company matches 3%, then .5% extra for each percent up to 6%
HIS HSA Investment Acct ($1,800) - recently opened, decided to pull back from contributing here for the time being
HER Roth IRA ($8,700) - not contributing currently
HER Brokerage account ($17,500) - we plan on closing this into a savings acct and using the funds for our emergency fund

harikaried
Posts: 1136
Joined: Fri Mar 09, 2012 3:47 pm

Re: Fixed vs Variable Rate - Student Loan Refi

Postby harikaried » Wed Jan 11, 2017 12:49 pm

brownie1022 wrote:Tax Filing Status: married filing jointly
Tax Rate:
Federal 28% but will be 33% in 2017
This means taxable income for 2017 will be over $230k, and that's after reducing it by 401k contributions, so after-tax take home pay should be over $10k/mo.

brownie1022 wrote:HIS $9K student loans @3.25%
Some will suggest just paying off HIS student loans first as it has the smallest balance, and this will free up those payments to go towards HER student loans. Given the monthly income above, this may or may not be a significant boost depending on your other monthly expenses. Another way to look at this is $9k towards a 3.25% loan saves about $300 in interest while $9k towards a 5.3% loan saves about $500 in a year, so do you value that $200 difference or just get rid of the loan?

brownie1022 wrote:HER Brokerage account ($17,500) - we plan on closing this into a savings acct and using the funds for our emergency fund
Is there an existing emergency fund? If it's already sufficient, using this money towards debt might make sense. One way to think about it is that you're already going to liquidate the account by selling positions, so you end up with a pile of cash. If you received cash in any other way, perhaps a bonus or gift, would you put that extra money towards the loans?

brownie1022 wrote:2. We have two rates to consider: 4.01% variable rate, 5.30 fixed rate.
How long do you expect to have the loan? If you're paying it off quickly, even if the rates go up, the principal might be relatively insignificant resulting in total interest paid being much lower.

brownie1022
Posts: 14
Joined: Fri Jan 06, 2017 1:40 pm

Re: Fixed vs Variable Rate - Student Loan Refi

Postby brownie1022 » Wed Jan 11, 2017 1:59 pm

Thanks for the response! To answer your questions:
harikaried wrote:This means taxable income for 2017 will be over $230k, and that's after reducing it by 401k contributions, so after-tax take home pay should be over $10k/mo.

Correct, ~11-12K per month depending on how we structure 401K/HSA contributions.

Some will suggest just paying off HIS student loans first as it has the smallest balance, and this will free up those payments to go towards HER student loans. Given the monthly income above, this may or may not be a significant boost depending on your other monthly expenses. Another way to look at this is $9k towards a 3.25% loan saves about $300 in interest while $9k towards a 5.3% loan saves about $500 in a year, so do you value that $200 difference or just get rid of the loan?

Monthly payments on it are just $150, so it wouldn't free up much cash. I don't think it makes sense to knock this loan out early but I'm not sure.

Is there an existing emergency fund?

No existing e-fund, we both had some cash lying around for a rainy day but certainly not 6 months worth. We now have ~$12K in cash across a few accounts, but plan on throwing that at the student loans.

How long do you expect to have the loan? If you're paying it off quickly, even if the rates go up, the principal might be relatively insignificant resulting in total interest paid being much lower.

Anywhere from a year to (max) 30 months. I think you're likely right, I just don't know how quickly and dramatically variable rates can fluctuate...let's say we pay off the loan in 24 months, how likely is it that the 4.01% variable rate loan turns out worse--that we pay more interest--than the 5.3%?


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