Pay off Student Loan in 2016?

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TarHeel2002
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Pay off Student Loan in 2016?

Post by TarHeel2002 » Sun Jul 12, 2015 7:37 pm

I have come to terms that I need to pay off my student loan for a variety of reasons. Up until just a few months ago, I was only making the minimum payment on a 30 year loan fixed at 3.5%. My payments are $764/month. My current balance is 124k. I was running some numbers and I think there is a fairly good chance I could pay off my loan by December 2016 if I skip out on all tax deferred investing for 2016. Currently I max my 401k and my backdoor Roth. I am married with 2 young children. My only other debt is my mortgage sitting at 164k fixed 30 year 3.125%. I have no intention of paying this off early. I am 35. I have 305k in 401k/Roth, 40k in a 529 for the kids, and 45k emergency fund. My income usually comes in around 185-200k/year. Should I put the pedal to the metal and just pay it off in 2016 or should I continue to invest in tax deferred vehicles and keep plugging away at it as best as I can. I figure that the other route will take me about 2.5-3 years to pay it off if everything works out. I cannot wait to get rid of this monkey on my back. Thanks!
Last edited by TarHeel2002 on Mon Jul 13, 2015 3:14 pm, edited 1 time in total.

Beth*
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Re: Pay off Student Loan in 2016?

Post by Beth* » Sun Jul 12, 2015 7:39 pm

Do you get an employer match on your contributions to the 401(k)? If so, that's free money and I would invest enough in the 401(k) to get the maximum match and then throw everything else at the student loans. I am sure it will be a huge relief to get the debt monkey off your back and it will give you a lot more flexibility to make financial decisions moving forward.

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TarHeel2002
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Re: Pay off Student Loan in 2016?

Post by TarHeel2002 » Sun Jul 12, 2015 7:43 pm

I do get a match but I am self employed so it's my money matching it. Thanks!

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market timer
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Re: Pay off Student Loan in 2016?

Post by market timer » Sun Jul 12, 2015 8:29 pm

I think it would be a mistake to prioritize loan repayment over tax deferred investing when you have such a low interest rate. I recommend that you continue making the minimum payment on these loans unless long term interest rates decline significantly (e.g., 30-year Treasuries below 2.5%). Paying down these loans ahead of schedule is equivalent to buying long term bonds at 3.5% interest, while giving away the option to borrow at 3.5% (a valuable option). I would even recommend taxable investing before loan repayment.

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TarHeel2002
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Re: Pay off Student Loan in 2016?

Post by TarHeel2002 » Sun Jul 12, 2015 8:45 pm

I am definitely not 100% sure I am making the correct decision here in paying off the loan early. I do have some extra cash every month and usually a nice little chunk a the end of the year too. I am trying to be good and do something responsible with the money. Previously, I was funneling it toward my kids' 529, home improvements and I was starting to dabble in taxable investing. Someone mentioned I should just pay the thing off and move on so that is what I am doing. I will admit the loan does eat at me a little bit on a daily basis...on the other hand it is fun to watch that 401k/Roth IRA balance grow too. Either way, I don't think I am making a horrible decision but it is hard to decide which is better. I was fairly comfortable with maxing tax deferred investments and pay down the debt as much as I can along the way. I just saw an opportunity to pay it down a little faster and wanted some constructive criticism. Thanks!

mhalley
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Re: Pay off Student Loan in 2016?

Post by mhalley » Sun Jul 12, 2015 8:53 pm

Being debt free is a worthy goal. So is maxing out retirment funds. You don't have to be all or nothing. Why not both save and pay off loans?
mike

TIAX
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Re: Pay off Student Loan in 2016?

Post by TIAX » Sun Jul 12, 2015 9:54 pm

That makes no sense. I assume you're pretty confident your 401(k) will return more than 3.5% over the next 30 years. If you are, you should continue paying the minimum on your 3.5% loans. There's no prize for being student loan debt-free (other than the "prize" of having less money when you retire).

Happy decision-making.

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grabiner
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Re: Pay off Student Loan in 2016?

Post by grabiner » Sun Jul 12, 2015 10:36 pm

I would suggest maxing out your 401(k) and Roth, and putting the rest of the money against your student loan. If it takes an extra year to pay off the loan, you lose that one year of interest (offset by any returns you make on your 401(k) and Roth investments), but you gain the benefit of tax-deferred growth for the rest of your investment career.

Since 529 contributions do not have an annual limit. you can pay off the student loans before adding to the 529 plans; once the loans are gone, you can redirect your loan contributions to the 529s as needed.

And I agree with not touching the mortgage given the low rate and tax deduction (at your income level, you cannot deduct the student loan interest). You can probably get a better after-tax return at about the same risk level by investing in long-term municipal bonds.

(edited to fix typo)
Last edited by grabiner on Tue Jul 14, 2015 7:47 pm, edited 1 time in total.
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jabberwockOG
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Re: Pay off Student Loan in 2016?

Post by jabberwockOG » Sun Jul 12, 2015 10:42 pm

Pay off student loans as quickly as possible but not at the cost of funding your 401k. Fund that first and then pay off the student loans as quickly as possible by making extra payments to principle when ever you can. Paying debt interest for 30 years on a non appreciating asset for 30 years is foolish.

sailfish2
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Re: Pay off Student Loan in 2016?

Post by sailfish2 » Mon Jul 13, 2015 12:58 pm

I am a late 30something single person who took the advice of the majority here.

I am confident that my total IRA /457 balance is MUCH greater than it would have been had I prioritized paying out my school loans. I'm doing quite well with retirement savings.

I still have about $60,000 to go on federal loans, at 3.15 %

Another factor - if you die before the balance is paid, your estate would not have to pay the federal student loans (they die with you) , which is not the case with other debts.

I'd like to get the balanced knocked out within 3 years. But I took a harsh blow due to the housing crisis and am re-starting with a starter home down payment fund.

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Re: Pay off Student Loan in 2016?

Post by sailfish2 » Mon Jul 13, 2015 1:36 pm

There's no prize for being student loan debt-free (other than the "prize" of having less money when you retire).
Well said - I'd rather have plenty of additional retirement funds than be able to scream into the telephone on the Dave Ramsey show. :o

Beth*
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Re: Pay off Student Loan in 2016?

Post by Beth* » Mon Jul 13, 2015 1:50 pm

You folks who would invest rather than pay off the loan must have inherently more optimistic personalities than I do. Would you also borrow money at 3.5% in order to invest it? That is the equivalent of not paying off the loan.

The original poster said that he could not wait to get rid of this monkey on his back (referring to the student loans). That sounded to me like the loans were a burden to him. He also said that he already had over $400,000 in savings. He didn't give his age, but given the information he provided I am guessing he is at most in his 30s and has many years to save for retirement. He doesn't sound to me like someone who risks reaching retirement without enough savings because he devoted some money to paying off loans for one year!

There is a advantage to getting required monthly payments down to a minimum and paying off a loan helps to do that. The poster has two small children. What if something happens and someone needs to take time off from work to care for the children or an elderly parent? That is much easier with smaller required fixed payments.

I'm not saying that the original poster should definitely pay off the loans. It sounded from his first post like he wanted to do that ("monkey on my back") and I thought it was a reasonable choice to make. Only the poster can determine if it is the right choice. However, many of the posters on this thread sound convinced that not paying the loans off is the only right/logical choice and I just don't think that is true. There is no guarantee that investments will earn more than 3.5% over the next several decades. Probably they will but maybe they won't. Many people on this board have paid of their student loans or their mortgages early and still have saved plenty of money for retirement and they may have slept better in the process. There are pros and cons to either choice and only the original poster can decide what works for him.

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Watty
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Re: Pay off Student Loan in 2016?

Post by Watty » Mon Jul 13, 2015 6:58 pm

One thing I would do would be to look at my tax brackets to see if I am anywhere near the next lower tax bracket. For example you might be $10K into the 28% tax bracket. If that is the case then you could make $10K in retirement account contributions so that any tax breaks you give up by skipping the 401k would be in the next lower tax bracket.

You would want to also include your state income taxes to see where the break points are for your combined tax rates.

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market timer
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Re: Pay off Student Loan in 2016?

Post by market timer » Mon Jul 13, 2015 7:42 pm

Beth* wrote:What if something happens and someone needs to take time off from work to care for the children or an elderly parent? That is much easier with smaller required fixed payments.
Student loans have income based repayment option. The minute you lose or quit your job, you can apply to have your loan payments stopped. You're typically given an automatic 2-4 month forbearance without any proof required, then you need to get a letter from your employer saying you're no longer employed. If the loans are subsidized, they stop accruing interest for three years. If you never work again (or die), the loans are ultimately forgiven. If something bad happens, I'd rather have more cash to live on and more student loans, than less of both.

JH in Ohio
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Re: Pay off Student Loan in 2016?

Post by JH in Ohio » Tue Jul 14, 2015 8:33 am

Beth* wrote:I'm not saying that the original poster should definitely pay off the loans. It sounded from his first post like he wanted to do that ("monkey on my back") and I thought it was a reasonable choice to make. Only the poster can determine if it is the right choice. However, many of the posters on this thread sound convinced that not paying the loans off is the only right/logical choice and I just don't think that is true. There is no guarantee that investments will earn more than 3.5% over the next several decades. Probably they will but maybe they won't. Many people on this board have paid of their student loans or their mortgages early and still have saved plenty of money for retirement and they may have slept better in the process. There are pros and cons to either choice and only the original poster can decide what works for him.
Beth, you wrote exactly what I was thinking. Stocks are not an investment that reliably cough up 10-12% returns year after year, and I think it's a mistake to treat them as such. We've had multi-year periods in which the market has declined, and multi-decade periods in which the market has spun sideways. It's true that stocks will almost certainly prevail in the long run, but that long run may take a lot longer than you think.

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Re: Pay off Student Loan in 2016?

Post by Compound » Tue Jul 14, 2015 12:37 pm

Starting with the obvious, both options -- paying down debt or saving for retirement -- are good financial decisions (as opposed to bad decisions such as carrying high interest credit card debt). You just need to choose which you're more comfortable with.

I would suggest you exercise patience in paying off the loans. It sounds like you can pay them off within three years without adjusting your retirement contributions -- I'd do that. Here's another way to think about this situation. You have Roth contributions as part of your nest egg -- would you withdraw those contributions to accelerate the debt repayment? I certainly would not, but ymmv.

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TarHeel2002
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Re: Pay off Student Loan in 2016?

Post by TarHeel2002 » Tue Jul 14, 2015 2:38 pm

Thanks for the feedback everybody. Just of out curiosity - how do you all feel about maxing tax deferred retirement contributions and doing some taxable investing (vtsax) in lieu of paying the loan off earlier (keep making minimum payments)? I am 35 y.o. and plan on working another 20 years at least hopefully. :happy

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Re: Pay off Student Loan in 2016?

Post by Toons » Tue Jul 14, 2015 2:44 pm

Pay it off by 2016,and I know plenty will disagree,but even it means foregoing retirment contributions.
You could start with foregoing Roths and continue 401k,Or,,,,
You could forego both,use some savings,budget like a madman,stick to it ,save ,,,,
And pay it off before 2016,,,,That is what I would do,,could be better could be worse :happy
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StormShadow
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Re: Pay off Student Loan in 2016?

Post by StormShadow » Tue Jul 14, 2015 2:51 pm

Why not a mix?

I'd max out retirement options, then split the difference between taxable investments and extra-loan payments.

I wouldn't fault you for paying down the loans completely. Its a negative 3.5% guaranteed bond, so paying it off is a pretty good deal. You're not going to beat that with a short term bond (which has risk of lower return) from the market, especially when you consider capital gains taxes.

Plus, if SHTF and you need to file for bankruptcy... student loans (at least direct federal loans) aren't dischargable. You pay your loan off, then its gone forever.

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Re: Pay off Student Loan in 2016?

Post by Compound » Tue Jul 14, 2015 6:29 pm

I have a reasonably similar financial picture to you. In my case, I'm comfortable maxing 401k and Roth contributions and then using extra funds to pay down low interest student loans (in my case loans are at 2.5%), rather than starting taxable investing. I'm certain others on these boards wouldn't do this -- they'd argue for taxable investing and letting the loan payoffs continue for the entire duration of the loan. But I can't take it! I want those loans gone! I just don't want those loans gone bad enough to forgo tax advantaged investing -- that would be too steep a trade-off for me.

Good luck.

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Re: Pay off Student Loan in 2016?

Post by LadyGeek » Wed Apr 06, 2016 9:54 pm

FYI - new member silverchair54 has a question about paying off a loan, which I moved into a new thread: [Pay off Student Loan in 2016 or invest?]
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Re: Pay off Student Loan in 2016?

Post by stungerz » Wed Apr 06, 2016 9:57 pm

I am going to use some round numbers

If you have 124K left on your debt and you think you can pay it off this year and assuming that both you and your wife contribute $46K to after-tax means that if you can pay off $78K this year and then take about 3/4 of a year to pay off the other $46K.
In terms of time, I don't think it makes much of a difference between paying it off in 1 year, 1.75 years or 3 years.

If you decide to pay it off as early as possible think about these items:
1. Tax deferred space is use it or lose it
2. As someone above mentioned, try to get into the 25% tax bracket by contributing to your 401k
3. Fill up your tax deferred space before you invest in taxable

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Re: Pay off Student Loan in 2016?

Post by Big Dog » Wed Apr 06, 2016 10:12 pm

I'm also in the get-rid-of-debt camp, particularly if self-employed.

Contribute enough to your 401k to get "your" company match, pay off the school loans as fast as possible and then put that same payment amount into tax-deferred investments.

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TXJuice
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Re: Pay off Student Loan in 2016?

Post by TXJuice » Wed Apr 06, 2016 11:12 pm

TarHeel2002 wrote:I have come to terms that I need to pay off my student loan for a variety of reasons. Up until just a few months ago, I was only making the minimum payment on a 30 year loan fixed at 3.5%... My only other debt is my mortgage sitting at 164k fixed 30 year 3.125%. I have no intention of paying this off early.
You can find a variety of opinions about paying off the student loans early or not, but I'll leave that for others to comment on.
I left the part of your post that was interesting/didn't make sense to me. You want to pay off loans at 3.5%, but 3.125% doesn't bother you too much... I don't understand the logic behind this.

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