Save/Invest with Student Loans?

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Renzi
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Joined: Wed Nov 07, 2018 9:32 am

Save/Invest with Student Loans?

Post by Renzi » Wed Nov 07, 2018 9:48 am

Age: late 20s
Tax Filing Status: Single
Tax Rate: 35%
COL: Medium (major metro not NY/SF)

Debt:
165K Student Loans @ approx. 6.5% (all federal)
10K tax bill due Jan 2019

Current Assets:
Checking: 10k
Savings: 55k (2.05% in HY savings account)
HSA: 3k (1k cash and 2k investment. Investment portion in MM @ 2%)

Retirement assets:
Current 401k - $1.7k at Vanguard - Vanguard Target 2055
Old 401k - 58k at Well Fargo - MM @ 2%
Roth - 12k at Schwab in VIIIX

Target Allocation (starting after rollover):

Ticker    Type                                      Allocation            Expense
VITSX    Total US Stock Market   50%                        0.035
VTSNX  Total Intl Stock Market  25%                        0.09
VBTIX    Total US Bond Index       10%                        0.04
VIPIX     TIPS                                       5%                          0.07
VEMIX  Emerging Markets           5%                          0.11
FSRNX   Real Estate Index             5%                          0.07

Contributions/Cash Flow:
Max 401(k) (no match)
Max Roth (backdoor)
Max HSA
3k monthly to student loans
2k monthly to HY Savings
No Home - $2k rent
Leased car - $500 pm

Questions:

1. Student loans are the elephant in the room. The rates are high but when I look to refi the best I’m seeing is 4.5%, which I’m not sure is worth giving up the federal protections. Part of me just wants to pay them down ASAP for the overall savings, but part of me likes the comfort of having assets/cash flow (minimum loan repayments are tied to income). Just want to make sure I’m taking the right approach by putting 3k a month toward the loans, and not upping it to 5-6k at the expense of savings/investments. I took this approach for the last 3 years and paid off about 100k (80k principle), but that was at the expense of post-tax savings.

I'm not really sure I should treat this like a regular loan given the federal income protections and the possibility of favorable political changes or increasing interest rates (the loans are fixed so while 6.5% was bad a few years ago, may not be awful in a few more). I have taken advantage of the tax advantaged space I can but now I'm basically saving taxable at 2% instead of debt repayments 6.5%. But all other things equal from a mental perspective id rather be 150k/150k assets/debt than 0/0 on both.

2. Is the 50k in HY savings the right move? This is my emergency fund. I would also like to be in a position to buy a home if the market is favorable in the next 1-2 years, and I suspect that if that is the case, it will be because of poor market performance. Ideally I’d actually like to get this to 75k by year and and 100k long term, but that may be me being overly conservative. I know you should be more aggressive when young but frankly I'm not even solvent yet so I feel like I should have some cushion.

3. I plan to roll over my old 401k into the new vanguard one. The funds in vanguard are better and I think it’s best for simplicity.  I would just like to make sure my asset allocation isn’t completely off base though. Currently I’m 99.9% money market while I prepare things for the rollover (this saved me a lot this month actually), but would like to have everything done and my allocations in place by year end. TIPS, EM, REIT are odd but I like to tinker so I wanted to build that into the initial allocation. I know its dumb but its human nature.

4. I also have 30k signing bonus which will be paid at year end. What should it go toward? I will have maxed all tax advantaged space for the year by that point. Current plan would be first 15k to loans, rest to HY savings. Then starting 2019 shifting my 2k savings p/m into taxable brokerage. I’m hoping to closing the year at 75k cash/75k retirement/-150k loans and break even.

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grabiner
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Re: Save/Invest with Student Loans?

Post by grabiner » Wed Nov 07, 2018 10:30 pm

Welcome to the forum!
Renzi wrote:
Wed Nov 07, 2018 9:48 am
Debt:
165K Student Loans @ approx. 6.5% (all federal)
Paying these down is a risk-free 6.5% return (or 4.5% if you refinance), which is a much better return than you can get on your investments without taking a lot of risk. I would suggest maxing out the HSA (for the tax benefits), contributing enough to the 401(k) to get the employer match, and maxing out the Roth IRA but using this as an emergency fund. Anything else beyond your emergency fund should either go to paying down these loans or saving for your home down payment. (The home down payment is not a good investment on its own, but buying a home could be worth doing.)

And I do recommend refinancing the student loans. Since you have a high-paying job, the protection on the student loans, and the right to make income-based repayments, is not worth that much now.
Wiki David Grabiner

Brambor
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Re: Save/Invest with Student Loans?

Post by Brambor » Thu Nov 08, 2018 12:17 am

I am in a situation very similar to you, except more student loans. I refinanced my loans of 250K through sofi at 3.6% fixed to repay over 5 years and I have decided to invest heavily in taxable investments since i've maxed out nontaxable. My plan was to have the loans paid off in a year but instead I am taking a risk to get better gains in stocks. I'm young like you, so why not risk it, especially having a stable job in medicine.

Renzi
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Joined: Wed Nov 07, 2018 9:32 am

Re: Save/Invest with Student Loans?

Post by Renzi » Thu Nov 08, 2018 1:11 pm

grabiner wrote:
Wed Nov 07, 2018 10:30 pm
Welcome to the forum!
Renzi wrote:
Wed Nov 07, 2018 9:48 am
Debt:
165K Student Loans @ approx. 6.5% (all federal)
Paying these down is a risk-free 6.5% return (or 4.5% if you refinance), which is a much better return than you can get on your investments without taking a lot of risk. I would suggest maxing out the HSA (for the tax benefits), contributing enough to the 401(k) to get the employer match, and maxing out the Roth IRA but using this as an emergency fund. Anything else beyond your emergency fund should either go to paying down these loans or saving for your home down payment. (The home down payment is not a good investment on its own, but buying a home could be worth doing.)

And I do recommend refinancing the student loans. Since you have a high-paying job, the protection on the student loans, and the right to make income-based repayments, is not worth that much now.
Thanks for the advice! Just a bit more on my current thinking:

- I don't get 401k match, but given my high tax rate I feel like I should take advantage of all my tax advantaged space for the year, since I can't get it back. I considered using my roth as an emergency fund but the annual limit will keep it from being large enough to serve as a real emergency account for a few years.

- To be clear, I don't NEED to buy a home and there is a chance I move out of state in the next 1-3 years, but this is one market I would like to time and I would like to be in a position to buy during the next downturn. But that may not come a while. IN short I can afford to buy and I can afford to wait, but I'm not sure what to do with the cash while I wait (bearing in mind i expect to need it during a down market).

- I know I should refi but I'm not in medicine so my job is a bit more market oriented. I could lose it in a month if things really go bad. This is the one thing putting me off refi. To really get the savings I would be locked into a 5k monthly payment. I'm still not sure I can pull that trigger. Yea I have a lot of debt now, but come hell or high water i cannot be bankrupted by it - it's less a debt and more a tax in my mind, and taxes adjust to your income whereas debt does not. It's odd because refi would make me FEEL more leveraged, when in fact its the opposite. I plan to pay off the loans in 2-3 years anyway so I'm thinking the differential isn't that much for the peace of mind...but still on the fence here. If I could get something in the 2% range I would do it for sure.

Esq123
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Re: Save/Invest with Student Loans?

Post by Esq123 » Fri Nov 09, 2018 11:37 am

Hello- I am also in a similar situation (sort of) but I have less loans. I am down to around 45k in student loans. I refinanced w/ Earnest at 4.5%. I am hoping to pay off my loans in 5-8 years. I am also contributing up to match for my 401k and maxing HSA. I also do some taxable investing too in order to save for mid-term purchases (house, new car, etc.)...

Thegame14
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Re: Save/Invest with Student Loans?

Post by Thegame14 » Fri Nov 09, 2018 11:46 am

you didn't post your income, current and if any major changes are coming. Future goals, plans for marriage/kids.

Id say you are pretty much ok with your thought process. Many will say take the savings and pay off the debt, but then you have no emergency fund and no opportunity to buy a house. I would however say, you should pay off your loans before you buy a house, and if you are not planning on getting married, then you have no reason to buy a house. Housing prices are likely too high in most markets and will come down with rates going up. Also why put all that money into a house when you have no idea what a future spouse may want in a house especially location and size and planning for kids will play a big part in home ownership.

Build your E-fund to your comfort level, max out tax advantaged accounts, the rest pays off the loans...

Neffles
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Re: Save/Invest with Student Loans?

Post by Neffles » Fri Nov 09, 2018 2:55 pm

I think you have a good plan. I like maxing your tax-advantaged spaces for sure. If anything my preference would be to pay more towards the loans and less to your savings since I think I would be more than comfortable with 55k, but you know more about your saving/downpayment goals so that's just a nit for me to pick. Given your rent you are likely looking at much more expensive houses than I.

If you are planning on paying the loans off in a few years the interest rate won't be too significant if you think the Fed benefits may come in handy.

The portfolio plan is fine. You can get a hundred different opinions on that but the foundation is solid.

I would prefer to put extra money to loans rather than taxable investment, but again probably personal preference. Hate having the debt bogeyman over my head.

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StormShadow
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Re: Save/Invest with Student Loans?

Post by StormShadow » Fri Nov 09, 2018 3:22 pm

1. You'll never be at fault for paying down your student loans. Whether or not you consolidate at a lower rate, working on this ASAP is a no brainer.
2. I'd keep enough for a comfortable EF. I'd use the rest to pay down the loans or invest. I don't recommend saving for a home until the student loans are eliminated.
3. Pick an AA you are comfortable with and stick with it. Don't over think it. At this stage, the amount you save matters more than which investments you choose.
4. See my answer 1.

dknightd
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Re: Save/Invest with Student Loans?

Post by dknightd » Fri Nov 09, 2018 3:24 pm

I agree with most everything above. You seem to have everything under control.
You are maxing out tax advantaged accounts. Great! (I could not afford to do that when I was paying off my student loans, but I had a new wife, kid on the way, had just bought a house)
I'd get your emergency account where you want. Perhaps consider part of your Roth as an emergency fund. Perhaps start a CD ladder with some of it just to get the higher interest.
I don't think I'd start after tax investments (except your emergency fund) till I had the loans paid off. If you need money for a house, you can always drop the student loan payment to the minimum required amount. In the mean time, get rid of that debt as fast as you can. 6% is a good guaranteed amount.

At first I thought the thread topic meant you were going to take out student loans for investments. Which is not such a silly idea during the grace period ;)

Renzi
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Re: Save/Invest with Student Loans?

Post by Renzi » Sat Nov 10, 2018 6:56 pm

Thegame14 wrote:
Fri Nov 09, 2018 11:46 am
you didn't post your income, current and if any major changes are coming. Future goals, plans for marriage/kids.

Id say you are pretty much ok with your thought process. Many will say take the savings and pay off the debt, but then you have no emergency fund and no opportunity to buy a house. I would however say, you should pay off your loans before you buy a house, and if you are not planning on getting married, then you have no reason to buy a house. Housing prices are likely too high in most markets and will come down with rates going up. Also why put all that money into a house when you have no idea what a future spouse may want in a house especially location and size and planning for kids will play a big part in home ownership.

Build your E-fund to your comfort level, max out tax advantaged accounts, the rest pays off the loans...
Current: 275k. Major changes coming in next 1-3 years, probably go from Bank to Corp role, will downshift a bit but expecting between 200k-350k depending on what I can swing. Still a few years out from 30 but not that many anymore, aiming to switch around/by then. Single, I work a lot part of the reason I'm not committed to this particular job in the long run. Marriage and kids sure, but people my age have them later and later and not in a particular rush.

I want the house for the equity, I need a place to live. Not a bit house, would look in the 300-500k range townhome style. I figure I can live there now, build equity, and at 2k-2.5kpm all in it won't really stretch me. The goal wouldn't be to buy now, it would be to wait for a significant correction and jump in then. When that is who knows, I'm fine waiting.

I'll continue maxing all taxed advantaged. At YE18 I should be at 75k cash, 150k debt, + retirement. I think I can tighten and bump my debt payment up by 1k p/m in the new year. YE19 I should have 100k in cash (that's my number tbh), and debt should be down to about 100k. Maybe I'll refi at this point since I have the cash to cover the full amount. In 2020 I'll throw every extra dollar at the loans. I'll be 30 in 2020 and hope to have them paid down by year end (and can use some of the cash to do it if I have to).

Once they are gone I'l come back and we can talk about investing :D

Renzi
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Re: Save/Invest with Student Loans?

Post by Renzi » Sat Nov 10, 2018 7:39 pm

dknightd wrote:
Fri Nov 09, 2018 3:24 pm
I agree with most everything above. You seem to have everything under control.
You are maxing out tax advantaged accounts. Great! (I could not afford to do that when I was paying off my student loans, but I had a new wife, kid on the way, had just bought a house)
I'd get your emergency account where you want. Perhaps consider part of your Roth as an emergency fund. Perhaps start a CD ladder with some of it just to get the higher interest.
I don't think I'd start after tax investments (except your emergency fund) till I had the loans paid off. If you need money for a house, you can always drop the student loan payment to the minimum required amount. In the mean time, get rid of that debt as fast as you can. 6% is a good guaranteed amount.

At first I thought the thread topic meant you were going to take out student loans for investments. Which is not such a silly idea during the grace period ;)
Thanks! I'm thinking I want 100k for the energy account/housing downpayment. I know its probably excessive but I didn't grow up wealthy so it's good to have something tangible I can draw on after all this. I plan to build up emergency with 25k from the bonus and another 25k through savings next year, then I'm done. No taxable investments, everything extra dollar toward loans at that point. Thanks for the advice everyone, consistent and def have a plan moving forward. Oddly enough I can actually sleep a bit better with that much cash in a savings account now.

And funny enough, about half my current cash is from crypto (bought with student loan money). Had a bit of a wild ride, up over $200k (and it would have been millions if I held through the peak in early 18) at one point, but the market crashed and I got out with about 30k after taxes. Still have about 10k in crypto but don't consider it an investment in that sense. So yea, it's not as silly as it sounds.

StopIroningShirts
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Re: Save/Invest with Student Loans?

Post by StopIroningShirts » Sat Nov 10, 2018 7:40 pm

There's a lot of good advice in here already. We carried around $100,000+ in student loans until we got into our late 20s, then paid them down quickly. We had the good fortune of rates that were below 4%.

Here are some random thoughts:
- How secure/in demand is your job? We ditched the idea of a "Cash" emergency fund and eventually just opened a regular brokerage account. Inside that account we keep some liquid, but the rest invested. Step one is pick a target in liquid assets and stick to it.
- As a married couple, we felt financial freedom when we had $100,000 saved outside of retirement accounts. We didn't make a *lot* of money in our 20s but kept plugging away at the retirement vehicles. That came at the expense of having some liquidity. Once . we had the $100,000, we started paying down the loans aggressively. We'd throw our extra income towards it and even sell of some investments when the account kept going up.
- I'm not entirely sold on the "federal protection" arguments unless you are well down the path of working for a not for profit and in the Federal Student Loan forgiveness program. The rate difference is costing you $3,000/year. That gap declines over time.

Best of luck in your decisions, you're doing well already and you have good options.

Nissanzx1
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Re: Save/Invest with Student Loans?

Post by Nissanzx1 » Sun Nov 11, 2018 8:15 am

You're thinking about it, which is more than people most do. It really depends on how you feel about that much debt. Does it make you nervous? Do you feel like it limits your future? Do you feel like its adds an element of risk in your life? Is there a better use of that $9750/yr in interest?

I'm 40, married $65K in student loans at 37. I couldn't sleep at night, so we started in at about $2600/mo for several years. They are done mercifully.

My personal advice from my heart is stop all investing (except any employer match) and just punch these loans in the face. Live like a broke college kid, get a second job, start a side business, literally whatever it takes that's not illegal.

It's a wonderful thing to be young, but literally you will blink twice and be 40. The decisions you make today will have real consequences soon.

Just my $.02. Good Luck!

Thegame14
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Re: Save/Invest with Student Loans?

Post by Thegame14 » Mon Nov 12, 2018 10:19 am

Renzi wrote:
Sat Nov 10, 2018 6:56 pm
Thegame14 wrote:
Fri Nov 09, 2018 11:46 am
you didn't post your income, current and if any major changes are coming. Future goals, plans for marriage/kids.

Id say you are pretty much ok with your thought process. Many will say take the savings and pay off the debt, but then you have no emergency fund and no opportunity to buy a house. I would however say, you should pay off your loans before you buy a house, and if you are not planning on getting married, then you have no reason to buy a house. Housing prices are likely too high in most markets and will come down with rates going up. Also why put all that money into a house when you have no idea what a future spouse may want in a house especially location and size and planning for kids will play a big part in home ownership.

Build your E-fund to your comfort level, max out tax advantaged accounts, the rest pays off the loans...
Current: 275k. Major changes coming in next 1-3 years, probably go from Bank to Corp role, will downshift a bit but expecting between 200k-350k depending on what I can swing. Still a few years out from 30 but not that many anymore, aiming to switch around/by then. Single, I work a lot part of the reason I'm not committed to this particular job in the long run. Marriage and kids sure, but people my age have them later and later and not in a particular rush.

I want the house for the equity, I need a place to live. Not a bit house, would look in the 300-500k range townhome style. I figure I can live there now, build equity, and at 2k-2.5kpm all in it won't really stretch me. The goal wouldn't be to buy now, it would be to wait for a significant correction and jump in then. When that is who knows, I'm fine waiting.

I'll continue maxing all taxed advantaged. At YE18 I should be at 75k cash, 150k debt, + retirement. I think I can tighten and bump my debt payment up by 1k p/m in the new year. YE19 I should have 100k in cash (that's my number tbh), and debt should be down to about 100k. Maybe I'll refi at this point since I have the cash to cover the full amount. In 2020 I'll throw every extra dollar at the loans. I'll be 30 in 2020 and hope to have them paid down by year end (and can use some of the cash to do it if I have to).

Once they are gone I'l come back and we can talk about investing :D
You don't build as much equity as you think, most of the first years are interest payments, also you will have many new expenses like furniture, and tons of maintenance, repairs, repainting, mowing a lawn, exterminator, water, sewer, gas, electric,etc..... my monthly expenses are around $5K, and only $1,500 of that is mortgage, and of that $1,500 only about $500 a month goes to principal/equity.

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