Treasury yields climbing...tap the brakes on paying low interest student loans?

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hightower
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Treasury yields climbing...tap the brakes on paying low interest student loans?

Post by hightower » Tue Apr 24, 2018 12:52 pm

I'm sitting on around 85k of student loans at 2.6% fixed for 20 years. Payments are 488/month. Now that we see the costs of borrowing are going up (treasury yields hit 3% today), does that change anyone's mind on the pay off debt vs invest argument?

My plan was to pay this all off by the end of the year vs at least saving up enough cash to pay it off in that amount of time. However, with interest rates climbing and the price of stocks going down, I'm wondering if it's time to start considering opening a taxable account instead of finishing off this last bit? I'm a physician and started with over 260k. We have a very reasonable mortgage (barely 1X annual income) and lot's of equity, but no other consumer debt. I'm VERY debt averse nowadays and have no plans on upgrading our lifestyle or doing any wild spending. I am certain that if I don't pay it off, I'd be investing the extra cash, not spending it.

I'm probably still going to pay it off, I'm just curious if anyone else is starting to think about changing their plans based on how the economy is starting to change?

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Pajamas
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Re: Treasury yields climbing...tap the brakes on paying low interest student loans?

Post by Pajamas » Tue Apr 24, 2018 12:57 pm

I would compare after-tax to see if paying off the low-interest loan would be better than holding a safe investment such as treasuries. Twenty years is a long time and even if it is just near equivalent now, it might be greatly in your favor to hold the loan in the future. Of course, the difference on $85k might not matter to you.

Usually I would say invest instead as I would borrow money at 2.6% to invest, but you said you are very debt-adverse and sound very conservative even though you could probably easily take on more risk than you do.

mega317
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Re: Treasury yields climbing...tap the brakes on paying low interest student loans?

Post by mega317 » Tue Apr 24, 2018 2:03 pm

The thing is interest rates have risen, that doesn't mean they will rise in the future. No one can predict interest rates or really anything else. You don't like debt and can pay it off in a year--just do that, then you never have to think about it again. I'm guessing a physician with a mortgage of 1x income will be just fine even if paying it off doesn't end up being the mathematically optimal path.

I guess to answer your question, no my plans don't change based on short-term market movements.

02nz
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Re: Treasury yields climbing...tap the brakes on paying low interest student loans?

Post by 02nz » Tue Apr 24, 2018 2:08 pm

Depending on your mortgage interest rate and how much of it you can deduct under the new tax law (with its larger standard deduction and new limits on mortgage interest deduction), you may be better off putting extra payments to that first, and then the student loan.

venkman
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Re: Treasury yields climbing...tap the brakes on paying low interest student loans?

Post by venkman » Tue Apr 24, 2018 9:32 pm

If you're able to pay off 85k in less than a year, any extra money you might be able to get by investing in bonds instead of paying off the loan will be a drop in the bucket for you.

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whodidntante
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Re: Treasury yields climbing...tap the brakes on paying low interest student loans?

Post by whodidntante » Tue Apr 24, 2018 9:56 pm

I wouldn't pay off 2.6% debt. But I also wouldn't buy low yielding bonds instead of paying off 2.6% debt. It sounds like eliminating the debt will give you joy, so go for it.

EMwifey
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Re: Treasury yields climbing...tap the brakes on paying low interest student loans?

Post by EMwifey » Sun Apr 29, 2018 5:57 pm

Pay it off. We had similar student loans and just buckled down and did it. Our reasoning was it was a guaranteed rate of return, seeing those balances shrink gave us a lot of satisfaction. We put a lot into our solo 401k regular 401k, backdoor roths etc so I felt like the guaranteed 3% return was a nice way to diversify. We don’t regret paying down our $190k of student loans last year even though our money would have done better in the market.

Since you are only talking about one year the difference is marginal. If you want you could put the money in taxable until you had enough to pay it all off in one fell swoop.

JBTX
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Re: Treasury yields climbing...tap the brakes on paying low interest student loans?

Post by JBTX » Sun Apr 29, 2018 5:59 pm

At 2.6 I’d hold it. Why pay off a sub market rate loan?

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