Student Loan with low interest, keep or pay off early?

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hightower
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Student Loan with low interest, keep or pay off early?

Post by hightower »

I thought it would be nice to hear what the wise bogleheads think before absolutely making up my mind on this.
I just finished paying off all of my high interest rate student loan debt from medical school. I had loans with interest rates ranging from 2.625% all the way up to 7.25%! It feels great now that all the bad ones are gone.
Now I'm left with 2 loans totaling about $100k at 2.625% fixed. I can pay them off over roughly 25 years and the monthly payments are only $488. My thinking is that it would be wise at this point to start taking the extra money I had been using to pay off these loans early and instead save and invest it. It doesn't bother me knowing that I still have this debt as long as I know that I'm saving/investing aggressively and earning good returns.
I also have a $296K mortgage at 4%, but my wife and I are considering a move in the next 3-5 years that would put us in a smaller, cheaper home on her parents property where she grew up. So, I also don't feel a lot of urgency to pay that off early either.

What do you all think?
Gropes & Ray
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Re: Student Loan with low interest, keep or pay off early?

Post by Gropes & Ray »

my first questions are how old are you and what does your current retirement portfolio look like? My typical advice would be to pay the minimum on the debt, which I do with my law school debt. But if you already have a high savings rate, you could pay the debt down as a sort of hedge.. You owe a lot of money but 2.6 is an attractive rate to hold.
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Taylor Larimore
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Re: Student Loan with low interest, keep or pay off early?

Post by Taylor Larimore »

Hightower:

A physician is subject to claims for medical malpractice (whether valid or not). In some states a home is exempt from claims of creditors. If you live in such a state, it may be wise to pay off the mortgage to maximize equity. Check with your accountant.

Best wishes and Happy Holiday!
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Last edited by Taylor Larimore on Thu Dec 15, 2016 3:46 pm, edited 1 time in total.
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nyknicks2544
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Re: Student Loan with low interest, keep or pay off early?

Post by nyknicks2544 »

I wouldn't touch paying off student loans at 2.65% interest. You get some tax benefits from the interest and should be able to invest money you would be paying towards the student loans to generate a higher return. Only reason to payoff is if you are uncomfortable with holding debt.
bigred77
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Re: Student Loan with low interest, keep or pay off early?

Post by bigred77 »

nyknicks2544 wrote:I wouldn't touch paying off student loans at 2.65% interest. You get some tax benefits from the interest and should be able to invest money you would be paying towards the student loans to generate a higher return. Only reason to payoff is if you are uncomfortable with holding debt.
If the OP and his wife make over 160k per year (MAGI), which i suspect they probably do, there are 0 tax benefits.


With student loans at 2.625% and a mortgage at 4% (assuming that's the only debt you have), I wouldn't necessarily make paying off debt my number 1 priority, but I would probably at least come with a plan for some additional principal payments every month to accelerate the process.
chicagoan23
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Re: Student Loan with low interest, keep or pay off early?

Post by chicagoan23 »

Absolutely keep the loans. With a stable and high income, long-term fixed-rate unsecured debt is a good thing for you, not a bad thing.

Ask yourself, could you go out and get a $100,000 personal loan with no collateral for a 25-year term at a fixed rate of 2.65%? No possible way. A risk free 10-year Treasury will yield 2.5% today, and will likely go up from here. And if the loans are federal loans that can be discharged on death or disability, even more reason to keep them.

Of course, don't use this strategy as an excuse to spend more instead of saving and investing the amounts that would go to paying off the loans. Have to stay disciplined.

My experience: I graduated in 2000 approximately $70,000 in debt, paid off the high rate loans almost immediately, and kept the remainder at various rates (always below 5%). 16 years later and I still carry a student loan balance of $12,000 or so, with a rate of 2.3%. The monthly payment is a small portion of my net income and my investment portfolio has now grown to the low seven figures. I don't regret that decision at all.
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retire57
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Re: Student Loan with low interest, keep or pay off early?

Post by retire57 »

I would clear up the debt ASAP. That's just me - don't like trying to run with even light ankle-weights.
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ruralavalon
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Re: Student Loan with low interest, keep or pay off early?

Post by ruralavalon »

hightower wrote:Now I'm left with 2 loans totaling about $100k at 2.625% fixed. I can pay them off over roughly 25 years and the monthly payments are only $488. My thinking is that it would be wise at this point to start taking the extra money I had been using to pay off these loans early and instead save and invest it. It doesn't bother me knowing that I still have this debt as long as I know that I'm saving/investing aggressively and earning good returns.
Since the amount doesn't bother you psychologically, I suggest keeping this low interest fixed rate debt and increasing your contributions to investing rather than accelerating payment of the debt.
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pennstater2005
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Re: Student Loan with low interest, keep or pay off early?

Post by pennstater2005 »

My wife had student loan debt at 6.8% interest that we paid off quickly. The rest was 3% or less. I split the difference there, paying a little more toward the debt but continuing to invest. I haven't lost any sleep yet.
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Pranav
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Re: Student Loan with low interest, keep or pay off early?

Post by Pranav »

After maxing out tax-advantaged accounts, I would prepay the debts with the highest interest rate. In this case, mortgage (4%) is first and then student loan (2.625%).
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nyknicks2544
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Re: Student Loan with low interest, keep or pay off early?

Post by nyknicks2544 »

bigred77 wrote:
nyknicks2544 wrote:I wouldn't touch paying off student loans at 2.65% interest. You get some tax benefits from the interest and should be able to invest money you would be paying towards the student loans to generate a higher return. Only reason to payoff is if you are uncomfortable with holding debt.
If the OP and his wife make over 160k per year (MAGI), which i suspect they probably do, there are 0 tax benefits.


With student loans at 2.625% and a mortgage at 4% (assuming that's the only debt you have), I wouldn't necessarily make paying off debt my number 1 priority, but I would probably at least come with a plan for some additional principal payments every month to accelerate the process.
I should leave the tax issues to someone else lol...thanks for the clarification.

I still think you can do a lot better investing the extra money you would be putting towards a 2.65% interest student loan
Compound
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Re: Student Loan with low interest, keep or pay off early?

Post by Compound »

retire57 wrote:I would clear up the debt ASAP. That's just me - don't like trying to run with even light ankle-weights.
I'm with you. In fact, I've paid off very low interest rate school loans like the OPs and have been happy see them gone.

OP -- you can't really go wrong either way. Pay them off if you want them gone. If you don't care about that and you want to start long term investing, then go for it.
Biglaw Investor
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Re: Student Loan with low interest, keep or pay off early?

Post by Biglaw Investor »

hightower wrote:It doesn't bother me knowing that I still have this debt as long as I know that I'm saving/investing aggressively and earning good returns.
I paid off the remaining balance of my $190K loan school loans a few days ago ($80K paid down this year). For awhile, I was doing as you proposed and making standard payments on my student loans and putting the rest in taxable. And then I realized that it sucked having student loans. It was one more account to deal with. It meant I had to factor into my finances and track the monthly payment each month. It meant my career choices were informed by the student loans since I wanted to keep cash flow at a certain level. In short, it just wasn't worth it in order to arbitrage the difference. I'm pretty happy to see them completely paid off and be 100% debt free, but to each their own.

One other point I'd make is that many people will tell you mathematically it makes sense to keep the loans (which it does) but I think it really underestimates human behavior and your ability to accidentally - from time to time - maybe take a little bit of that money that you would have paid to your loans and spend it on that "one off" expense. People that follow this path say that they're just going to make it automatic and divert the money that would have gone to the loans to the taxable account, but in reality you're leaving the door open a crack to lifestyle inflation that could be eliminated if you make the payment on the loans.
Rickard82
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Re: Student Loan with low interest, keep or pay off early?

Post by Rickard82 »

Are the loans fixed-rate or variable-rate?

I paid off my higher fixed-rate loans first, and kept the low (sub 3%) variable rate loans around for years and invested instead. I still have a small amount that I can pay off at any time, but choose not to yet.

Interest rates are rising now, so if the interest rates start creeping the loan rates up, it'll make sense to start paying them off a bit faster.
bkh8
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Re: Student Loan with low interest, keep or pay off early?

Post by bkh8 »

Yea, I am struggling with this as well. I have 160k at 1.65%. Mathematically it doesn't make sense to pay them off. I decided to split the difference. I take my excess cash and pay extra on the loan and then put the rest in a taxable account. My loan term was 25 years and I decided 5 years was long enough. So I pay enough to pay off the loan in 5 years instead of 25 and then put the excess cash after that into a taxable.

(I may change that plan again though. Our group now has a cash balance plan that I could put a lot more money into and so I may stop paying extra on the loan and just put more money into pre tax accounts.)
Kencufc
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Re: Student Loan with low interest, keep or pay off early?

Post by Kencufc »

My med school loans are variable and have crept up to 3.7% so I am paying them down aggressively. Minimum payments will take an eternity (almost) to pay off over $100k. Max out tax advantaged accounts then put the difference into the loans.
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hightower
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Re: Student Loan with low interest, keep or pay off early?

Post by hightower »

Thanks for all the feedback. Since I'm a physician and spent my 20's in school and residency (not earning much or living off of loans), I missed out on a lot of years of potential savings and taking advantage of compounding interest. So, I feel like I should do everything I can now to start really building up some wealth. My savings are just getting started really...I'm 34 and only have about $160k in 401k's, IRAs, and savings accounts.
I would eventually like to start paying down the mortgage quicker though. I'd love to get rid of it in 15 years, so I'll need to up those payments at some point.
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hightower
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Re: Student Loan with low interest, keep or pay off early?

Post by hightower »

Rickard82 wrote:Are the loans fixed-rate or variable-rate?
They're fixed. I'd definitely be paying them off immediately if they were variable.
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hightower
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Re: Student Loan with low interest, keep or pay off early?

Post by hightower »

chicagoan23 wrote: My experience: I graduated in 2000 approximately $70,000 in debt, paid off the high rate loans almost immediately, and kept the remainder at various rates (always below 5%). 16 years later and I still carry a student loan balance of $12,000 or so, with a rate of 2.3%. The monthly payment is a small portion of my net income and my investment portfolio has now grown to the low seven figures. I don't regret that decision at all.
This is exactly what I'm hoping for:) And for the record, I have no interest in increasing my lifestyle in anyway. I've been down that road and have learned that material things don't make me happy. I want to save, save, and save some more! I will occasionally splurge a little on travel (our vacations are usually to National Parks and we do a lot of camping/backpacking, so when we travel it tends to be pretty cheap except for the occasional trip to Europe or Hawaii, but even then we do it as cheap as possible), but I'm not interested in spending much on anything else. If anything, I'll be downsizing our house to something smaller, cheaper, and more energy efficient. And my wife is fully on board with that plan as well. I'm lucky I didn't marry a gold digger! Haha
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Re: Student Loan with low interest, keep or pay off early?

Post by Biglaw Investor »

hightower wrote:I want to save, save, and save some more!
Then you're going to be just fine. It sounds like you want to go down the road of keeping the loans, so do that. This is a personal decision.

One more thought occurred to me on your subject last night. Nobody talks about taking out a $100K loan at a 3% variable rate to fund an investment in index funds, but that is essentially what you're doing when you decide between putting a marginal $1 toward the loans or in a taxable account.

My perspective is also colored by the fact that I'm a lawyer. Lawyers seem to have less stable jobs and careers than physicians, so there's that angle as well.

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ruralavalon
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Re: Student Loan with low interest, keep or pay off early?

Post by ruralavalon »

hightower wrote:Thanks for all the feedback. Since I'm a physician and spent my 20's in school and residency (not earning much or living off of loans), I missed out on a lot of years of potential savings and taking advantage of compounding interest. So, I feel like I should do everything I can now to start really building up some wealth. My savings are just getting started really...I'm 34 and only have about $160k in 401k's, IRAs, and savings accounts.
I would eventually like to start paying down the mortgage quicker though. I'd love to get rid of it in 15 years, so I'll need to up those payments at some point.
There is no need for the "only" in describing the size of your accounts. At 34 most people have far less.

Your plan on debt is very sensible in my opinion.
hightower wrote:I want to save, save, and save some more!
You will do just fine.

A frugal wife is a great advantage.

Invest as much as practical for you every year, use broadly diversified low expense ratio mutual funds wherever possible, and continue to take advantage of those tax-protected accounts.
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Dulocracy
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Re: Student Loan with low interest, keep or pay off early?

Post by Dulocracy »

First of all, if you pay down one of your debts, it should be the mortgage, not the student loan. The interest is higher no matter how I figure the potential tax benefits tied into it. You would, of course, get that money out if you move, but it could go toward keeping the loan down on your next home (allowing for potential interest rate savings).

Second of all, I would in no circumstance pay down either until after your retirement savings are maxed. You can never get tax advantaged space back, and as someone with a high level of income, I can assure you that you will regret any tax advantaged space lost. 401k, Roth IRA (or backdoor Roth), HSA... stuff money in tax-advantaged locations first.

Once your tax advantaged locations are filled, consider the interest rate on the house in conjunction with interest rates offered by bond funds. In my situation (also at a 4% interest rate), it made sense for me to put my fixed income allocation into paying down the mortgage in a reverse-bond strategy. There are significant advantages and disadvantages to this strategy. If you are already checking out and thinking "not for me," then the answer is that you do not pay down either debt any faster than your minimums, absent some psychological reason (financially it is not the most sound decision, despite the potential benefits).

1) If you think a reverse bond strategy makes sense, let me first state that no one should consider it until AFTER filling their tax advantaged space. Until that is filled, you are better off putting more money in tax advantaged space and using fixed income there.

2) You will make your fixed income contribution as an additional payment towards your mortgage. When you sell and move, you put every penny into the new mortgage. (Taking money out is decreasing your fixed income portion).

3) The part that is essential (that people for and against often leave out in consideration) is the re-capture of your fixed income. WHEN the house is paid off, you will continue to make your mortgage payment (the full regular payment) towards fixed income. (You can buy muni-bonds for taxes, OR buy stock funds in taxable and simply convert the stock funds in your IRA or 401k to fixed income. Either way, you are increasing your fixed income by the amount of the mortgage payment.) You continue to do this until you have recaptured all of your fixed income contributions to the mortgage. Without this second step, you are simply increasing your risk in your portfolio.

ADVANTAGES:

1) In a low interest rate environment, this allows you to skip or work around the low interest rate period. You pay down your mortgage, getting a better rate of return because of the mortgage interest rate.

2) This also has the advantage of allowing you to increase your stock allocation in the tax advantaged accounts. With a higher expected return, over a long period of time, your account SHOULD grow more (although it may not) with a higher stock allocation. There are those who discuss how this increases one's risk profile, but if you use the above recapture after a long period of this strategy, the risks are minimized (although they are there) and you should have better results. As you are younger, this would apply to you. I would not necessarily make the same statement about someone 5 years from retirement, although for different reasons, this strategy may be valid for them.

3) If you use this method, you are going to have more of your stock allocation in tax advantaged space, which is a tax savings on the growth. EVEN IF you switch out the funds instead of using muni bonds, you should have a tax advantage. As you sold a stock fund in your tax advantaged account to buy fixed income, there are no taxes on that sale. You then buy the equal amount of stock fund in taxable, meaning your cost basis for this taxable amount is established at a later point in time.

4) Your house is paid off sooner. The sooner your house is paid off, the sooner A) your expenses drop meaning you need to use less money to live and must withdraw less and/or have more to invest and B) the lower risk you have of being homeless in the event of a job loss.

DISADVANTAGES:

1) Liquidity. If you need the money, it is in your house. You exchange liquidity for higher return.

2) Rebalancing. If you use your entire fixed income portfolio (as I do) for this strategy, you must recognize that if the market collapses, you have no "dry powder" as people on this site like to say. That is: you cannot sell bonds to buy stocks cheap in a rebalancing move, as your fixed income is tied up in your house.

3) If you lose your house, you lose your fixed income allocation. For most on this site, this is not a real consideration, but it is a disadvantage.

4) Human Behavior. If you fail to re-capture the fixed income allocation, all you have done is drastically increase your risk in your portfolio.

Of the above, 3 and 4 are least likely to be problems for someone who is on this site and is disciplined. Presuming you have a solid emergency fund, 2 is really your risk most likely to show up (I almost guarantee that it will). You will want to consider whether it is worth it to you to give this up.

AFTER NOTE:
This strategy could also be used on your student loan debt, but interest rates are going up, so it is HIGHLY UNLIKELY that this will be beneficial to you on the student loan side. I would let that amount ride. The ONLY benefit you really receive in paying the student loan in the risk/benefit evaluation would be that should you ever have to file for bankruptcy, the student loan debt would survive the bankruptcy. By getting rid of it, you would improve your post-bankruptcy situation. (This view ignore psychological benefits, which I typically do not take into consideration, as YOU are the one that can best answer what is good or bad for YOUR psychological well being. Personally, I try to keep my feelings well out of my investing strategies).
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
hille141
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Re: Student Loan with low interest, keep or pay off early?

Post by hille141 »

Biglaw Investor wrote:
hightower wrote:It doesn't bother me knowing that I still have this debt as long as I know that I'm saving/investing aggressively and earning good returns.
I paid off the remaining balance of my $190K loan school loans a few days ago ($80K paid down this year). For awhile, I was doing as you proposed and making standard payments on my student loans and putting the rest in taxable. And then I realized that it sucked having student loans. It was one more account to deal with. It meant I had to factor into my finances and track the monthly payment each month. It meant my career choices were informed by the student loans since I wanted to keep cash flow at a certain level. In short, it just wasn't worth it in order to arbitrage the difference. I'm pretty happy to see them completely paid off and be 100% debt free, but to each their own.

One other point I'd make is that many people will tell you mathematically it makes sense to keep the loans (which it does) but I think it really underestimates human behavior and your ability to accidentally - from time to time - maybe take a little bit of that money that you would have paid to your loans and spend it on that "one off" expense. People that follow this path say that they're just going to make it automatic and divert the money that would have gone to the loans to the taxable account, but in reality you're leaving the door open a crack to lifestyle inflation that could be eliminated if you make the payment on the loans.
This. Thanks for posting so I didn't have to.

Making the minimum payments and investing the difference just doesn't work for most over the long term. It never feels like you make any progress and lifestyle creep kicks in, eliminating the extra investment dollars.

For the OP, I'd cut back on lifestyle, pay aggressively on the SL to get it paid off in 12-24 months. Removing the debt burden of the SLs will simplify your life and give you more options. A doc salary, no student loans, and a reasonable house payment sets a good foundation for simple long term wealth building.

(We have paid off over $80k in SLs over the last 15 months, while only investing enough for the company match.)
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hightower
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Re: Student Loan with low interest, keep or pay off early?

Post by hightower »

Dulocracy wrote:First of all, if you pay down one of your debts, it should be the mortgage, not the student loan. The interest is higher no matter how I figure the potential tax benefits tied into it. You would, of course, get that money out if you move, but it could go toward keeping the loan down on your next home (allowing for potential interest rate savings).

Second of all, I would in no circumstance pay down either until after your retirement savings are maxed. You can never get tax advantaged space back, and as someone with a high level of income, I can assure you that you will regret any tax advantaged space lost. 401k, Roth IRA (or backdoor Roth), HSA... stuff money in tax-advantaged locations first.

Once your tax advantaged locations are filled, consider the interest rate on the house in conjunction with interest rates offered by bond funds. In my situation (also at a 4% interest rate), it made sense for me to put my fixed income allocation into paying down the mortgage in a reverse-bond strategy. There are significant advantages and disadvantages to this strategy. If you are already checking out and thinking "not for me," then the answer is that you do not pay down either debt any faster than your minimums, absent some psychological reason (financially it is not the most sound decision, despite the potential benefits).

1) If you think a reverse bond strategy makes sense, let me first state that no one should consider it until AFTER filling their tax advantaged space. Until that is filled, you are better off putting more money in tax advantaged space and using fixed income there.

2) You will make your fixed income contribution as an additional payment towards your mortgage. When you sell and move, you put every penny into the new mortgage. (Taking money out is decreasing your fixed income portion).

3) The part that is essential (that people for and against often leave out in consideration) is the re-capture of your fixed income. WHEN the house is paid off, you will continue to make your mortgage payment (the full regular payment) towards fixed income. (You can buy muni-bonds for taxes, OR buy stock funds in taxable and simply convert the stock funds in your IRA or 401k to fixed income. Either way, you are increasing your fixed income by the amount of the mortgage payment.) You continue to do this until you have recaptured all of your fixed income contributions to the mortgage. Without this second step, you are simply increasing your risk in your portfolio.

ADVANTAGES:

1) In a low interest rate environment, this allows you to skip or work around the low interest rate period. You pay down your mortgage, getting a better rate of return because of the mortgage interest rate.

2) This also has the advantage of allowing you to increase your stock allocation in the tax advantaged accounts. With a higher expected return, over a long period of time, your account SHOULD grow more (although it may not) with a higher stock allocation. There are those who discuss how this increases one's risk profile, but if you use the above recapture after a long period of this strategy, the risks are minimized (although they are there) and you should have better results. As you are younger, this would apply to you. I would not necessarily make the same statement about someone 5 years from retirement, although for different reasons, this strategy may be valid for them.

3) If you use this method, you are going to have more of your stock allocation in tax advantaged space, which is a tax savings on the growth. EVEN IF you switch out the funds instead of using muni bonds, you should have a tax advantage. As you sold a stock fund in your tax advantaged account to buy fixed income, there are no taxes on that sale. You then buy the equal amount of stock fund in taxable, meaning your cost basis for this taxable amount is established at a later point in time.

4) Your house is paid off sooner. The sooner your house is paid off, the sooner A) your expenses drop meaning you need to use less money to live and must withdraw less and/or have more to invest and B) the lower risk you have of being homeless in the event of a job loss.

DISADVANTAGES:

1) Liquidity. If you need the money, it is in your house. You exchange liquidity for higher return.

2) Rebalancing. If you use your entire fixed income portfolio (as I do) for this strategy, you must recognize that if the market collapses, you have no "dry powder" as people on this site like to say. That is: you cannot sell bonds to buy stocks cheap in a rebalancing move, as your fixed income is tied up in your house.

3) If you lose your house, you lose your fixed income allocation. For most on this site, this is not a real consideration, but it is a disadvantage.

4) Human Behavior. If you fail to re-capture the fixed income allocation, all you have done is drastically increase your risk in your portfolio.

Of the above, 3 and 4 are least likely to be problems for someone who is on this site and is disciplined. Presuming you have a solid emergency fund, 2 is really your risk most likely to show up (I almost guarantee that it will). You will want to consider whether it is worth it to you to give this up.

AFTER NOTE:
This strategy could also be used on your student loan debt, but interest rates are going up, so it is HIGHLY UNLIKELY that this will be beneficial to you on the student loan side. I would let that amount ride. The ONLY benefit you really receive in paying the student loan in the risk/benefit evaluation would be that should you ever have to file for bankruptcy, the student loan debt would survive the bankruptcy. By getting rid of it, you would improve your post-bankruptcy situation. (This view ignore psychological benefits, which I typically do not take into consideration, as YOU are the one that can best answer what is good or bad for YOUR psychological well being. Personally, I try to keep my feelings well out of my investing strategies).
Wow, thanks for that post. I have to be honest though, I'm not sure I totally understand. Sorry, I'm still new to all this. So, what I think you're saying is, I should continue to do my best to max out my tax-advantage contributions each year and IF I have additional money to invest, I should pay off my mortgage and consider it the same as investing in bonds? Then, after my mortgage is paid off continuing using that money to invest in bonds? I think I like the idea of this, but I don't know how much money I'll have left over to invest after maxing out retirement accounts. We'll have to see how this year goes I suppose.
Dulocracy
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Re: Student Loan with low interest, keep or pay off early?

Post by Dulocracy »

hightower wrote:
Wow, thanks for that post. I have to be honest though, I'm not sure I totally understand. Sorry, I'm still new to all this. So, what I think you're saying is, I should continue to do my best to max out my tax-advantage contributions each year and IF I have additional money to invest, I should pay off my mortgage and consider it the same as investing in bonds? Then, after my mortgage is paid off continuing using that money to invest in bonds? I think I like the idea of this, but I don't know how much money I'll have left over to invest after maxing out retirement accounts. We'll have to see how this year goes I suppose.

Correct. If you are not maxing your tax advantaged accounts, this strategy is not for you. This strategy would get a worse result than using tax advantaged accounts if you have space available there.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
Tamalak
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Re: Student Loan with low interest, keep or pay off early?

Post by Tamalak »

2.6% is pretty low. Round about inflation. Getting investment returns higher than that is a cinch, even after taxes. IMO do whatever you're comfortable doing, in this case - keep them and invest.
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jimb_fromATL
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Joined: Sun Nov 10, 2013 12:00 pm
Location: Atlanta area & Piedmont Triad NC and Interstate 85 in between.

Re: Student Loan with low interest, keep or pay off early?

Post by jimb_fromATL »

Dulocracy wrote:First of all, if you pay down one of your debts, it should be the mortgage, not the student loan.

... Second of all, I would in no circumstance pay down either until after your retirement savings are maxed. You can never get tax advantaged space back, and as someone with a high level of income, I can assure you that you will regret any tax advantaged space lost. 401k, Roth IRA (or backdoor Roth), HSA... stuff money in tax-advantaged locations first.

... and a lot more...
hightower wrote:Wow, thanks for that post. I have to be honest though, I'm not sure I totally understand. Sorry, I'm still new to all this. So, what I think you're saying is, I should continue to do my best to max out my tax-advantage contributions each year and IF I have additional money to invest, I should pay off my mortgage and consider it the same as investing in bonds? Then, after my mortgage is paid off continuing using that money to invest in bonds? I think I like the idea of this, but I don't know how much money I'll have left over to invest after maxing out retirement accounts. We'll have to see how this year goes I suppose.
Yep. Contribute the max allowed to any available tax-deferred retirement plans first. Then if you still have money to spare, and after you have at least 6 months to a year of living expenses set aside in liquid assets for emergencies, start paying down the debts faster.

Taylor mentioned that your money is probably safest if it's tied up in your home equity. That could be pretty important if something bad were to go wrong.

Another point is that if times were to get tough financially because of bad health, accident, injury, disability or [shudder] lawsuit, etc, federal student loans would probably qualify for income-based repayments. And they might be forgiven altogether if you qualified for some Public Service Loan Forgiveness programs. So that's another reason to pay off the mortgage faster than the student loans.

As for the other loans, you'll save the most interest and time in debt by paying extra on the ones with the highest rates first. But if you "snowball" by reapplying the freed-up payments to the remaining loans, it probably won't make much difference in the long run. So it could be worthwhile to pay off some of the smaller debts regardless of the rate in order to reduce the minimum payments in case of any future financial setback.

If there's any doubt about maxing your retirement plans before paying off the debts, it could be well worth your time to read some of my posts with examples of how incredibly much it can sometimes cost out of your probable future retirement if you neglect retirement funding in order to pay off debts too fast. There are links to several of them below:

jimb


Examples:

viewtopic.php?f=2&t=136151&p=2011928#p2011928 Student Loans and Retirement help
viewtopic.php?t=136385 Paying student loans vs Losing compounding interest
viewtopic.php?f=2&t=128788 Swamped In Debt - Thoughts?
viewtopic.php?t=131027 Advice when to start investing considering Student Loan Debt
viewtopic.php?f=2&t=129906 Mortgage PMI or Student Loan?
viewtopic.php?f=1&t=180529 Pay down mortgage or stuff retirement accounts?
viewtopic.php?f=1&t=178566 Mortgage or 401k
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