Payoff Student Loans Early? Requesting help.

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Jb11
Posts: 16
Joined: Tue Feb 21, 2017 4:09 pm

Payoff Student Loans Early? Requesting help.

Post by Jb11 » Fri Mar 10, 2017 1:48 pm

My wife currently has $19,000 left on her student loans at a 5.875% rate. We are currently on schedule to pay them off in August 2021. She is a stay at home mom with no earned income so we have not found a lender willing to refinance them to a lower rate. So we have been tossing around a couple of ideas to try to pay them off earlier. I have done a lot of reading on this forum regarding the paying off debt vs investing debate and it seems that a 5.875% rate is in the gray area between the two concepts. I would appreciate any feedback on our options below. Thanks!

Age: 31
Married Filing Jointly
Emergency Fund (EF): 5-6 months of expenses in online savings account (1% interest rate)
Tax Bracket: 15% Federal, 5.75% Virginia
Debt: $19k student loan (5.875%), $187k Mortgage (3.375%)
TSP Contributions: 10% of gross salary + 5% government match, in L Fund 2040
TSP Balance: currently one year of gross income
His/Her Vanguard Roth IRAs Balance: currently one year of gross income. Not currently contributing as we shifted all new money to TSP. Currently invested in Vanguard TDR 2040.

Payoff options we are considering:

1. Stay with current Payoff plan at 5.875% interest rate paying off loan in August 2021.
Pro: Interest is fully tax deductible.
Con: Would "cost us" roughly $2,700 in interest.

2. Take a TSP Loan for $19,000 at current G Fund interest rate of 2.375% and payoff existing 5.875% loan.
Pros: We would pay off loan about a year sooner even while keeping our monthly payments the same. All interest (approx. $900) from TSP Loan would be paid back to my TSP.
Cons: Opportunity cost of having $19,000 out of the market. If I lose my job (although unlikely), payment would be due back almost immediately.

3. Reduce 2017 TSP contributions to 5%. Use that savings plus about $10,000 from Emergency Fund to pay off loan immediately. We would then use money we would have spent on loan payments from 2018-2020 to replenish Emergency Fund and missed 2017 TSP contributions.
Pros: Loan paid off immediately. $2,700 in interest savings.
Cons: Opportunity cost of reduced 2017 TSP contributions out of the market. Emergency Fund reduced to 3 months of funds.

4. Use only Emergency Fund to payoff loan immediately. Use money we would have spent on loan payments from 2018-2020 to replenish Emergency Fund.
Pro: Loan paid off immediately. $2,700 in interest savings.
Cons: Emergency Fund reduced to 1 month of expenses.

One final note, we have more then enough contributions between both of our Vanguard Roth IRAs that we could withdraw contributions early if we went with Options 3 or 4 and we needed emergency funds.

nimo956
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Re: Payoff Student Loans Early? Requesting help.

Post by nimo956 » Fri Mar 10, 2017 1:51 pm

I like option 4 the best. Pay it off in full without taking any loans against your 401k and be done with it. Then build up your emergency fund back to where it was over time.
50% VTI / 50% VXUS

N10sive
Posts: 593
Joined: Thu May 05, 2016 6:22 pm

Re: Payoff Student Loans Early? Requesting help.

Post by N10sive » Fri Mar 10, 2017 1:56 pm

If you are in the 15% tax bracket you should qualify for the student loan interest deduction when filing MFJ. This effectively lowers the overall interest rate of your loan.

https://www.irs.gov/publications/p970/ch04.html

I think this would put your position closer to the 3-4% range. Still paying off your loan faster guarantees you a return but I wouldn't necessarily borrow from a retirement account, maybe reduce down to the match......You can do a combination of some emergency fund to just pay it off faster if that would make you feel more comfortable.
Last edited by N10sive on Fri Mar 10, 2017 1:59 pm, edited 1 time in total.

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White Coat Investor
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Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: Payoff Student Loans Early? Requesting help.

Post by White Coat Investor » Fri Mar 10, 2017 1:59 pm

Jb11 wrote:My wife currently has $19,000 left on her student loans at a 5.875% rate. We are currently on schedule to pay them off in August 2021. She is a stay at home mom with no earned income so we have not found a lender willing to refinance them to a lower rate. So we have been tossing around a couple of ideas to try to pay them off earlier. I have done a lot of reading on this forum regarding the paying off debt vs investing debate and it seems that a 5.875% rate is in the gray area between the two concepts. I would appreciate any feedback on our options below. Thanks!

Age: 31
Married Filing Jointly
Emergency Fund (EF): 5-6 months of expenses in online savings account (1% interest rate)
Tax Bracket: 15% Federal, 5.75% Virginia
Debt: $19k student loan (5.875%), $187k Mortgage (3.375%)
TSP Contributions: 10% of gross salary + 5% government match, in L Fund 2040
TSP Balance: currently one year of gross income
His/Her Vanguard Roth IRAs Balance: currently one year of gross income. Not currently contributing as we shifted all new money to TSP. Currently invested in Vanguard TDR 2040.

Payoff options we are considering:

1. Stay with current Payoff plan at 5.875% interest rate paying off loan in August 2021.
Pro: Interest is fully tax deductible.
Con: Would "cost us" roughly $2,700 in interest.

2. Take a TSP Loan for $19,000 at current G Fund interest rate of 2.375% and payoff existing 5.875% loan.
Pros: We would pay off loan about a year sooner even while keeping our monthly payments the same. All interest (approx. $900) from TSP Loan would be paid back to my TSP.
Cons: Opportunity cost of having $19,000 out of the market. If I lose my job (although unlikely), payment would be due back almost immediately.

3. Reduce 2017 TSP contributions to 5%. Use that savings plus about $10,000 from Emergency Fund to pay off loan immediately. We would then use money we would have spent on loan payments from 2018-2020 to replenish Emergency Fund and missed 2017 TSP contributions.
Pros: Loan paid off immediately. $2,700 in interest savings.
Cons: Opportunity cost of reduced 2017 TSP contributions out of the market. Emergency Fund reduced to 3 months of funds.

4. Use only Emergency Fund to payoff loan immediately. Use money we would have spent on loan payments from 2018-2020 to replenish Emergency Fund.
Pro: Loan paid off immediately. $2,700 in interest savings.
Cons: Emergency Fund reduced to 1 month of expenses.

One final note, we have more then enough contributions between both of our Vanguard Roth IRAs that we could withdraw contributions early if we went with Options 3 or 4 and we needed emergency funds.
At 5.875% I'd do # 4 today. Then do whatever it takes to get your e-fund back to 3 months within the next year. I see little reason to have an e-fund bigger than 3 months expenses when you still have non-mortgage debt.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

TravelforFun
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Joined: Tue Dec 04, 2012 11:05 pm

Re: Payoff Student Loans Early? Requesting help.

Post by TravelforFun » Fri Mar 10, 2017 2:05 pm

5.875% guaranteed interest is hard to beat. Yes I would use the emergency fund to pay off the loan but you got to be disciplined about replenishing the EF.

chicagoan23
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Joined: Thu Jan 29, 2015 4:34 pm

Re: Payoff Student Loans Early? Requesting help.

Post by chicagoan23 » Fri Mar 10, 2017 2:09 pm

From a purely math standpoint, I would say pay it off now, using your emergency funds. But I also think you need to be careful with this.

I am assuming you are in a fairly stable government job. But, you have a non-working spouse and (at least) one child at home, so if you were to pay off this debt and then lose your job, you might be in a crunch.

This is one of those unique cases where I would say it might be worth it to pay $2,700 in deductible interest over the next four years to ensure that you will have money available to you if you really need it.

aristotelian
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Joined: Wed Jan 11, 2017 8:05 pm

Re: Payoff Student Loans Early? Requesting help.

Post by aristotelian » Fri Mar 10, 2017 2:24 pm

Option 4. If you are gainfully employed in a stable job, you can take a calculated risk to deplete your emergency fund.

Second choice would be Option 2. 2.375% is less than 5.875%.

You could split the difference and dip into half your emergency funds and then get the low interest loan for the rest.

Biglaw Investor
Posts: 135
Joined: Tue Oct 20, 2015 1:08 pm
Location: Brooklyn

Re: Payoff Student Loans Early? Requesting help.

Post by Biglaw Investor » Fri Mar 10, 2017 3:32 pm

Another vote for option 4. I'd use the money in my efund and press the delete button on those student loans!

hille141
Posts: 46
Joined: Mon Dec 05, 2016 4:55 pm

Re: Payoff Student Loans Early? Requesting help.

Post by hille141 » Fri Mar 10, 2017 4:04 pm

Option 4. Carrying that loan until payoff in 2021 isn't something I would do or recommend.

bdpb
Posts: 1533
Joined: Wed Jun 06, 2007 3:14 pm

Re: Payoff Student Loans Early? Requesting help.

Post by bdpb » Fri Mar 10, 2017 6:44 pm

Agree with everyone else to use option 4.

But, you should shift the bond portion of your retirement assets as much as possible to your Roth. This will help to avoid the situation where you have a need for your EF at the same time that the stock market has a big drop. A drop of 50% in stocks in your Roth would reduce your EF to 6 months instead of one year. After you build up your EF again you can change your Roth back to stocks.

mortfree
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Joined: Mon Sep 12, 2016 7:06 pm

Re: Payoff Student Loans Early? Requesting help.

Post by mortfree » Fri Mar 10, 2017 6:52 pm

what is the monthly payment on the student loan?

I would do #4 with a twist. I would apply 5k now to the loan... then I would plan the remainder of payments (14k) to have it fully paid in say 8 months (End of Year target). so you're looking at $1800 (?? or so) payments. and you can always stretch it to a longer time period or skip an extra payment.

if anything happens between now and then you haven't depleted your entire EF.

Tal-
Posts: 358
Joined: Fri Apr 22, 2016 10:41 pm

Re: Payoff Student Loans Early? Requesting help.

Post by Tal- » Fri Mar 10, 2017 6:55 pm

It's not uncommon for me to be the dissenting opinion, but it's odd for me to be the one arguing for a bigger emergency fund...

I'm a big fan of door #1. At your age, with one income and a mortgage, it would take an *emergency* for me to dip into your emergency funds. This clearly doesn't qualify in my eyes. Emergency funds are not there for paying off 5.75% debt - they are for you losing your job. Your car dying. Medical expenses. A new I-Phone. Emergency travel for a funeral, or the like.

Emergency funds are not about maximizing returns. They are about security. And clearly, your security is decreased if your emergency funds go to one month.

Just my take.
Debt is to personal finance as a knife is to cooking.

Alto Astral
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Joined: Thu Oct 08, 2009 10:47 am

Re: Payoff Student Loans Early? Requesting help.

Post by Alto Astral » Fri Mar 10, 2017 7:08 pm

+1 for option 4 since you can use Roth IRA as emergency fund.

Compound
Posts: 616
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Re: Payoff Student Loans Early? Requesting help.

Post by Compound » Fri Mar 10, 2017 8:17 pm

Another vote for option 4. Since you have enough Roth contributions to cover the loss of emergency funds, your effective emergency fund is currently in the 11-12 month range. Reducing that to 5-6 months makes a lot of sense to dismiss the high interest rate loan.

searhapsody
Posts: 79
Joined: Mon Mar 26, 2012 10:17 pm

Re: Payoff Student Loans Early? Requesting help.

Post by searhapsody » Fri Mar 10, 2017 10:46 pm

The fact that you have a TSP implies that you are a federal government worker.

If it were me, I would wait for the federal budget to be passed before emptying my emergency fund.

There are no guarantees that the budget will be done in a timely manner. That could mean a government shutdown. (I used to think that could never happen, but then had an involuntary 2 week vacation) In the past, there has been some delay in getting paid for those gaps. Those workers that had no savings to borrow to make it until through that period. There is also no guarantee you will ever get that pay since it requires a congressional act as well.

Some of the federal unions are warning that the budget proposal might mean furloughs in some agencies: http://federalnewsradio.com/budget/2017 ... ed-budget/

I don't know where you work, but something to consider if you don't have much in back up money.
If anything perhaps you should wait until after the April 28th budget deadline before emptying the emergency fund.

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