## Should I pay off these loans?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Nearly A Moose
Posts: 772
Joined: Fri Apr 22, 2016 5:28 pm

### Should I pay off these loans?

I had one of those "huh..." moments recently and could use some input from the forum. Here's the situation. We have a pile of money ($50,000) that will be used as down payment on a new house, likely in Spring 2019 (along with the proceeds from the sale of our current house). We will be adding to this each bonus season, and the goal has been to put it in a reasonably conservative short-term investment that wasn't a savings account. We also have student loans and a car loan still outstanding, which are all on trajectories to be paid off roughly within the next two years. They total about$39,000. I'm wondering if I should take the money out of the downpayment fund, pay off these loans immediately, and then redirect the monthly payment amounts from each loan to refill our downpayment fund.

More details:
* Downpayment fund: Currently just over $50,000; invested in Vanguard Limited Term Tax Exempt Fund (VMLUX; ~2 year duration; SEC yield 1.42%; 0.09% ER). We anticipate contributing another$50,000 to this fund in Dec. 2017, and after that it's unclear. We project needing anywhere from $0 to$100,000 from this fund to buy our next house, depending on purchase price and how much our existing house sells for.
*My student loans: $10,700 outstanding balance; 4.5% rate; Paying ~$680/mo for an early payoff around June 2018
*Wife's student loans: $17,600 outstanding balance; approx. 4.3% rate; paying$450/mo; anticipated payoff date Nov. 2020; plan was to finish my loan repayments and then use that cashflow to pay off hers early (note that these are approximations because she has a portfolio of loans with different rates and payoff dates; these numbers are close enough)
*Car loan: $10,500 outstanding balance; 1.5% rate; paying$460/mo; payoff ~ Feb. 2018
*Taxes: Marginal rate (fed+state) is about 50%; no tax benefits to student loan interest payments.

I was originally thinking of the loans and house fund independently, but it occurred to me that this all comes to a head at around the same time: the loans will all be paid off shortly before I think I'll need the downpayment money. Since I'm not otherwise using the downpayment money for anything, and since the loan interest rates are all at or above what I'm earning in the bond fund, why shouldn't I use the downpayment fund to pay off the loans, redirect the loan payments to rebuilding the downpayment fund, and "pay myself" the interest that I'd otherwise be paying my loan providers? If I paid off all the loans this month, it would take about 25 months to replenish the $39,000 into the downpayment fund. Downsides I see: *If for some reason we do need to move earlier (I don't think it's likely), we don't have the liquidity and would have to tap our broader taxable account *Behavioral risk of not following through on always putting the loan payments into the house fund (we're generally pretty good at this, but I'm constantly amazed at the cost pressures associated with two very full-time parents having young kids in DC) *"Only" saving$1500-$2000 in total interest (it's a bit complicated to back out exactly how much interest I'd pay given how I had been planning to accelerate my wife's student loan repayment) *Lose admiral share status until I got back above$50,000 (admiral ER is 0.09%; investor ER is 0.19%)

Upside:

Yes, go for it. Put the student and car loans on autopayment into your savings or investment account. You're already committed to $680+450+460 every month, it's just a matter of where you direct it. Also, you can continue savings beyond the period of the loan, so if you have it on autopay, you forget that the loan (to yourself) is already paid off and keep on saving and investing. A good thing to forget. Consider it a consolidation loan to yourself and you reap all the interest payments (savings) and it's a zero cost! mortfree Posts: 844 Joined: Mon Sep 12, 2016 7:06 pm ### Re: Should I pay off these loans? I would pay off the 10,700 student loan now... then re-evaluate in a few months. It doesn't have to be all or nothing... don't you have about 21 months to go on the car loan?? either way, don't pay that one off early dziuniek Posts: 402 Joined: Mon Jul 23, 2012 2:54 pm Location: Corrupticut ### Re: Should I pay off these loans? I would definitely pay off the car note - can't deduct this in most situations. As far as student loans, you can pay off it down enough to still get maximum interest deductible. mortfree Posts: 844 Joined: Mon Sep 12, 2016 7:06 pm ### Re: Should I pay off these loans? dziuniek wrote:I would definitely pay off the car note - can't deduct this in most situations. As far as student loans, you can pay off it down enough to still get maximum interest deductible. Interesting point on the interest deduction... however, with the 10,500 auto loan ($460) and 10,700 loan ($680) being the same amount, wouldn't freeing up almost$200 more per month by paying off the student loan be well worth skipping the interest deduction? assuming OP gets to deduct it.

Watty
Posts: 13073
Joined: Wed Oct 10, 2007 3:55 pm

### Re: Should I pay off these loans?

Nearly A Moose wrote:.... We have a pile of money ($50,000) that will be used as down payment on a new house, likely in Spring 2019 (along with the proceeds from the sale of our current house). ...... *My student loans:$10,700 outstanding balance; 4.5% rate; Paying ~$680/mo for an early payoff around June 2018 *Wife's student loans:$17,600 outstanding balance; approx. 4.3% rate; paying $450/mo; anticipated payoff date Nov. 2020; plan was to finish my loan repayments and then use that cashflow to pay off hers early (note that these are approximations because she has a portfolio of loans with different rates and payoff dates; these numbers are close enough) *Car loan:$10,500 outstanding balance; 1.5% rate; paying $460/mo; payoff ~ Feb. 2018 Assuming that you have a good emergency fund then paying off any of the loans that would be paid off by the spring of 2019 is practically a no brainer easy choice as long as you then save your "loan payments" each month. All the money would be re-saved by the spring 2019 and you would have also saved some interest. Paying off your wife's student loans that would not normally be paid off after the spring of 2019 would be less of an easy choice so you would need to look at the individual details of each of those loans. I would suspect that by the spring of 2019 that her loans might be down to about$5,000 so it might not make a lot of difference if you just paid those off too.

Somewhere in the plan you should also start saving up to be able to pay cash for any future cars.

TBillT
Posts: 335
Joined: Sat Sep 17, 2011 1:43 pm

### Re: Should I pay off these loans?

I am in a different financial situation, but just paid off the college loans I was covering for our children, and some they were covering. I wanted to get rid of the burden, hassle and interest payments, given it's hard to think of good ways to make decent interest on savings these days anyways. Did some last year, did some this year. All gone now.

Nearly A Moose
Posts: 772
Joined: Fri Apr 22, 2016 5:28 pm

### Re: Should I pay off these loans?

Thanks all for weighing in. Based on what I'm hearing, I think we'll probably pay off the student loans but perhaps keep the car loan, as it's interest rate is at or below what the bond fund is yielding, and all else equal I'd probably prefer the liquidity just in case it's needed sooner. And we'll set the amount that had been going to these loans to autodeposit into our Vanguard account. To those who pointed it out, I'm not eligible for the student loan interest deduction. I got to claim that exactly once, which I guess is a good thing...

We'll noodle on this more over the weekend. If anyone else thinks this is a particularly good or bad idea, I'd love to hear your thoughts.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

dziuniek
Posts: 402
Joined: Mon Jul 23, 2012 2:54 pm
Location: Corrupticut

### Re: Should I pay off these loans?

mortfree wrote:
dziuniek wrote:I would definitely pay off the car note - can't deduct this in most situations.

As far as student loans, you can pay off it down enough to still get maximum interest deductible.
Interesting point on the interest deduction... however, with the 10,500 auto loan ($460) and 10,700 loan ($680) being the same amount, wouldn't freeing up almost $200 more per month by paying off the student loan be well worth skipping the interest deduction? assuming OP gets to deduct it. 1. Sure, but the OP mentions$680 for an early pay-off, which I imagine is throwing monthly extra at the principle balance?

2. It's the accountant in me!

3. All that being said, out of all the loans I've yet to pay off myself (auto x 2, mortgage, student loans) - student loans annoy me the most. I might always have a mortgage or rent payment, as well as a car loan (if I can't pay cash), but student loans - that should be gone forever should you pay them off.

On the fence here.

~dizzy

edit: incoherent ramblings, it's friday(?) night.

Nearly A Moose
Posts: 772
Joined: Fri Apr 22, 2016 5:28 pm

### Re: Should I pay off these loans?

dziuniek wrote:
mortfree wrote:
dziuniek wrote:I would definitely pay off the car note - can't deduct this in most situations.

As far as student loans, you can pay off it down enough to still get maximum interest deductible.
Interesting point on the interest deduction... however, with the 10,500 auto loan ($460) and 10,700 loan ($680) being the same amount, wouldn't freeing up almost $200 more per month by paying off the student loan be well worth skipping the interest deduction? assuming OP gets to deduct it. 1. Sure, but the OP mentions$680 for an early pay-off, which I imagine is throwing monthly extra at the principle balance?

2. It's the accountant in me!

3. All that being said, out of all the loans I've yet to pay off myself (auto x 2, mortgage, student loans) - student loans annoy me the most. I might always have a mortgage or rent payment, as well as a car loan (if I can't pay cash), but student loans - that should be gone forever should you pay them off.

On the fence here.

~dizzy

edit: incoherent ramblings, it's friday(?) night.
Yes, I'm currently paying $685 on my student loans. I think I owe about$350ish right now. My autopay was set up before some rate reductions kicked in (setup monthly debit, pay on time x months in a row, etc). I'm glad I didn't know enough back then to go and update the autodraft amount, as it has me a couple years ahead on payoff.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

dziuniek
Posts: 402
Joined: Mon Jul 23, 2012 2:54 pm
Location: Corrupticut

### Re: Should I pay off these loans?

Nearly A Moose wrote:
dziuniek wrote:
mortfree wrote:
dziuniek wrote:I would definitely pay off the car note - can't deduct this in most situations.

As far as student loans, you can pay off it down enough to still get maximum interest deductible.
Interesting point on the interest deduction... however, with the 10,500 auto loan ($460) and 10,700 loan ($680) being the same amount, wouldn't freeing up almost $200 more per month by paying off the student loan be well worth skipping the interest deduction? assuming OP gets to deduct it. 1. Sure, but the OP mentions$680 for an early pay-off, which I imagine is throwing monthly extra at the principle balance?

2. It's the accountant in me!

3. All that being said, out of all the loans I've yet to pay off myself (auto x 2, mortgage, student loans) - student loans annoy me the most. I might always have a mortgage or rent payment, as well as a car loan (if I can't pay cash), but student loans - that should be gone forever should you pay them off.

On the fence here.

~dizzy

edit: incoherent ramblings, it's friday(?) night.
Yes, I'm currently paying $685 on my student loans. I think I owe about$350ish right now. My autopay was set up before some rate reductions kicked in (setup monthly debit, pay on time x months in a row, etc). I'm glad I didn't know enough back then to go and update the autodraft amount, as it has me a couple years ahead on payoff.
I don't have the exact number due to refinancing, etc, but we started with approximately $113,000 u\in student loans . We are down to... drumroll...$48,000

Sandtrap
Posts: 4274
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳

### Re: Should I pay off these loans?

yes yes

Nearly A Moose
Posts: 772
Joined: Fri Apr 22, 2016 5:28 pm

### Re: Should I pay off these loans?

dziuniek wrote:
Nearly A Moose wrote:
dziuniek wrote:
mortfree wrote:
dziuniek wrote:I would definitely pay off the car note - can't deduct this in most situations.

As far as student loans, you can pay off it down enough to still get maximum interest deductible.
Interesting point on the interest deduction... however, with the 10,500 auto loan ($460) and 10,700 loan ($680) being the same amount, wouldn't freeing up almost $200 more per month by paying off the student loan be well worth skipping the interest deduction? assuming OP gets to deduct it. 1. Sure, but the OP mentions$680 for an early pay-off, which I imagine is throwing monthly extra at the principle balance?

2. It's the accountant in me!

3. All that being said, out of all the loans I've yet to pay off myself (auto x 2, mortgage, student loans) - student loans annoy me the most. I might always have a mortgage or rent payment, as well as a car loan (if I can't pay cash), but student loans - that should be gone forever should you pay them off.

On the fence here.

~dizzy

edit: incoherent ramblings, it's friday(?) night.
Yes, I'm currently paying $685 on my student loans. I think I owe about$350ish right now. My autopay was set up before some rate reductions kicked in (setup monthly debit, pay on time x months in a row, etc). I'm glad I didn't know enough back then to go and update the autodraft amount, as it has me a couple years ahead on payoff.
I don't have the exact number due to refinancing, etc, but we started with approximately $113,000 u\in student loans . We are down to... drumroll...$48,000
Over halfway there! I think my wife and I had about that much total when we both started (and before we met). In hindsight, in quite glad I didn't catch that my auto payment amount didn't decrease when my interest rate incentives kicked in - this has given me a nice view into what accelerating the payoff can look like.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

Nearly A Moose
Posts: 772
Joined: Fri Apr 22, 2016 5:28 pm

### Re: Should I pay off these loans?

Sandtrap wrote:yes yes
Scheduled the transfer from Vanguard to my checking account and got my payoff quotes from the lenders. Planning to zap the student loans out of existence on Friday, then will crack a cold one in their memory

Decided to continue paying the car loan. The interest rate is very low, and I think on the margin we value the liquidity at this point.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

dziuniek
Posts: 402
Joined: Mon Jul 23, 2012 2:54 pm
Location: Corrupticut

### Re: Should I pay off these loans?

Nearly A Moose wrote:
Sandtrap wrote:yes yes
Scheduled the transfer from Vanguard to my checking account and got my payoff quotes from the lenders. Planning to zap the student loans out of existence on Friday, then will crack a cold one in their memory

Decided to continue paying the car loan. The interest rate is very low, and I think on the margin we value the liquidity at this point.
Nice!

Atleast you got rid of the loan that could follow you into retirement.

dcd72
Posts: 28
Joined: Fri Apr 10, 2015 7:45 am

### Re: Should I pay off these loans?

*Car loan: $10,500 outstanding balance; 1.5% rate; paying$460/mo; payoff ~ Feb. 2018
Help me out with this - assuming you haven't yet made the April 2017 payment, you are paying $460/month and contemplate 14 months until payoff. But that translates to$6440 in payments, and your balance is $10,500. Even without considering the (low) interest rate, you still come up short in 14 months. How will this work? knpstr Posts: 1882 Joined: Thu Nov 20, 2014 8:57 pm Location: Michigan ### Re: Should I pay off these loans? Nearly A Moose wrote:Scheduled the transfer from Vanguard to my checking account and got my payoff quotes from the lenders. Planning to zap the student loans out of existence on Friday, then will crack a cold one in their memory Congrats, speaking from experience, they will NOT be missed! Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius Nearly A Moose Posts: 772 Joined: Fri Apr 22, 2016 5:28 pm ### Re: Should I pay off these loans? knpstr wrote: Nearly A Moose wrote:Scheduled the transfer from Vanguard to my checking account and got my payoff quotes from the lenders. Planning to zap the student loans out of existence on Friday, then will crack a cold one in their memory Congrats, speaking from experience, they will NOT be missed! The money transferred in from Vanguard quicker than I expected, so as of yesterday, no more student loans! It's actually a bit of an anticlimactic feeling, but I suspect that might change next month when my investment account starts increasing by what I was paying in loans... Pardon typos, I'm probably using my fat thumbs on a tiny phone. Nearly A Moose Posts: 772 Joined: Fri Apr 22, 2016 5:28 pm ### Re: Should I pay off these loans? dcd72 wrote: *Car loan:$10,500 outstanding balance; 1.5% rate; paying $460/mo; payoff ~ Feb. 2018 Help me out with this - assuming you haven't yet made the April 2017 payment, you are paying$460/month and contemplate 14 months until payoff. But that translates to $6440 in payments, and your balance is$10,500. Even without considering the (low) interest rate, you still come up short in 14 months. How will this work?
Here's an easy answer: my big fat thumbs typed 2018, but that should have been 2019 :/ . Would love to get this one off the books, but I think I'll feel better with the liquidity at this point.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.