Debt: Student loan or cabin

[Makaveli]

Posting for my brother and his new wife!

Their goal is to reduce debt aggressively before purchasing a home and starting a family. Recently married with combined income in low 200k range.

Student loans: 90k @ 5.8%
Lake cabin: 175k @ 4.2%

Cash savings 80k

I advised to tackle highest interest debt first but my brother says he’s paying more monthly interest on cabin (due to higher balance). If you were allocating 60k to debt, do we agree to tackle student loans first?

[Sidney]

student loan. It has higher rate.

[Minty]

student loan. It has higher rate.

Agreed. And it is not dischargeable in bankruptcy. That does not appear to be a major consideration here, but all other things being equal, student loans are undesirable debt. And the fact that the overall interest on the cabin his higher given the higher balance is irrelevant because there is only $60 K available for loan repayment. Whether the money goes to the larger balance or the smaller, only $60K in principle, and therefore only $60K in interest, can be eliminated. Therefore it is better to eliminate the highest rate.

[chevca]

Another vote for student loans first.

[Herekittykitty]

Do your brother and his wife welcome your input? If not, stop here. If so:

$200,000 annual income (if not in a HCOL area) if budgeted well should offer significant discretionary income that could go toward debt.

Here's a few things to consider.

Is the $60,000 to debt a one time payment coming out of the $80,000 savings or is it coming from somewhere else or coming out over time from somewhere else, such as earned income?

Is the $80,000 an emergency fund, fund for house down payment, or what?

What happens if/when she gets pregnant and/or one or both are not able to work - do they have the financial reserve to weather that?

Do they want to keep the lake cabin?

A comment: Buying a house and starting a family do not necessarily have to go together. If they want to do both, that's fine. But I did want to mention it is not necessary to buy a house in order to start or even raise a family. If they want to do both that is fine.

[Flyer24]

Pay the student loan first.

[gclancer]

Student loan is the answer. There’s not a single valid argument for paying down the cabin loan instead.

[chrisdds98]

it would really suck if he did the student loan and that debt is going to be forgiven eventually... The student loan makes sense but its not going to make much difference one way or the other so I don't think its horrible to do the cabin first and hope for loan forgiveness down the road.

[Nate79]

Get serious. Work extra. Live very frugally. Debt free in <3 years and the interest rate doesnt matter that much in the grand scheme of things. Spending less will have far more impact than the minor interest rate differences.

[White Coat Investor]

Posting for my brother and his new wife!

Their goal is reduce debt aggressively before purchasing a home and starting a family. Recently married with combined income in low 200k range.

Student loans: 90k @ 5.8%
Lake cabin: 175k @ 4.2%

Cash savings 80k

I advised to tackle highest interest debt first but my brother says he’s paying more monthly interest on cabin (due to higher balance). If you were allocating 60k to debt, do we agree to tackle student loans first?

Interesting mental process that tells someone it is okay to buy a second home prior to paying for their education.

I'd sell the cabin and pay off the loans and then buy a cabin with cash once I was rich enough that questions like this didn't exist in my life. But I fully acknowledge I'm unusual.

[tdmp]

Note close. Pay student loan first . Mathematics don’t lie.

[grabiner]

I advised to tackle highest interest debt first but my brother says he’s paying more monthly interest on cabin (due to higher balance). If you were allocating 60k to debt, do we agree to tackle student loans first?

While there is more interest on the larger loan, that just means that the interest savings from paying off the larger loan would be higher (but would require much more money). The interest savings from paying a fixed dollar amount against the smaller higher-rate loan is higher, so that is the loan you should pay off.

[F150HD]

Interesting mental process that tells someone it is okay to buy a second home prior to paying for their education.

+1 wondering why someone doing this would even be worried about the difference in rates on the loans.

[randybobandy]

Interesting mental process that tells someone it is okay to buy a second home prior to paying for their education.

I'd sell the cabin and pay off the loans and then buy a cabin with cash once I was rich enough that questions like this didn't exist in my life. But I fully acknowledge I'm unusual.

+1, quality post.

-Randy Bo Bandy

[Makaveli]

Posting for my brother and his new wife!

Their goal is reduce debt aggressively before purchasing a home and starting a family. Recently married with combined income in low 200k range.

Student loans: 90k @ 5.8%
Lake cabin: 175k @ 4.2%

Cash savings 80k

I advised to tackle highest interest debt first but my brother says he’s paying more monthly interest on cabin (due to higher balance). If you were allocating 60k to debt, do we agree to tackle student loans first?

Interesting mental process that tells someone it is okay to buy a second home prior to paying for their education.

I'd sell the cabin and pay off the loans and then buy a cabin with cash once I was rich enough that questions like this didn't exist in my life. But I fully acknowledge I'm unusual.

Long backstory but cutting to the chase, he purchased the cabin before owning a house (rents) and married into the student loans. He’s currently not willing to sell the cabin (lifestyle choice) but there are some scenarios where he’d change his mind (local mine hitting it big and workers relocating to the area that are willing to pay a pretty penny).

Just not in the cards right now.

[Makaveli]

I advised to tackle highest interest debt first but my brother says he’s paying more monthly interest on cabin (due to higher balance). If you were allocating 60k to debt, do we agree to tackle student loans first?

While there is more interest on the larger loan, that just means that the interest savings from paying off the larger loan would be higher (but would require much more money). The interest savings from paying a fixed dollar amount against the smaller higher-rate loan is higher, so that is the loan you should pay off.

Cheers - that’s the wording I was looking for.. I’m in a remote area with no computer but was planning to map this out on excel because seeing the numbers always helps.

[Makaveli]

Do your brother and his wife welcome your input? If not, stop here. If so:

$200,000 annual income (if not in a HCOL area) if budgeted well should offer significant discretionary income that could go toward debt.

Here's a few things to consider.

Is the $60,000 to debt a one time payment coming out of the $80,000 savings or is it coming from somewhere else or coming out over time from somewhere else, such as earned income?

Is the $80,000 an emergency fund, fund for house down payment, or what?

What happens if/when she gets pregnant and/or one or both are not able to work - do they have the financial reserve to weather that?

Do they want to keep the lake cabin?

A comment: Buying a house and starting a family do not necessarily have to go together. If they want to do both, that's fine. But I did want to mention it is not necessary to buy a house in order to start or even raise a family. If they want to do both that is fine.

Great questions and to be honest their plan seems fluid. They just know that they hate debt and want it gone. It is 1 bucket.. emergency fund.. house down payment.. debt slasher. There is talks of her going part time or even stay at home mom once family increases. $60k would be one time payment from those reserves. Another X factor is that my brother is toying around with starting his own company in the next year or so. Hence not wanting debt installments.. but also risking their cash cushion. Ideally, I think it makes sense to eliminate student loans before house/family/start up company. Potentially sell cabin if opportunity presents itself (further explanation in another post). Live off his income and use hers (~75k per year) solely for debt reduction. Post student loan elimination, save like crazy and rebuild cash reserve.

[Cyanide123]

No brainer. Student loans first.

[Makaveli]

it would really suck if he did the student loan and that debt is going to be forgiven eventually... The student loan makes sense but its not going to make much difference one way or the other so I don't think its horrible to do the cabin first and hope for loan forgiveness down the road.

The initial plan was for loan forgiveness but their combined income doesn’t make it possible.

[miamivice]

it would really suck if he did the student loan and that debt is going to be forgiven eventually... The student loan makes sense but its not going to make much difference one way or the other so I don't think its horrible to do the cabin first and hope for loan forgiveness down the road.

I have not heard of any concrete plans to forgive student loan debt. Some folks are trying to have the government forgive their loans because they worked in public sectors, but I have heard that process is going badly. I know of no other loan forgiveness programs for student loans.

[Herekittykitty]

Living on his income and using hers to pay the debt down seems like a good idea. On the other hand, why limit debt payment to her income. Send all her income to debt, and part of his income, budget well, live frugally, and get the debt gone. They need to budget well anyway, not just to get the debt gone but to be ready for kids, and for the option of having one parent stay home with the kids, the option of his starting a business, and the option of buying a house. Having options is good whether or not one takes any of those options.

If I were in their shoes, I would start with the SLs.

One reason is that SLs are generally not bankruptable. Another is that since they are lower in total amount, they can be paid off faster. Also, if the SLs can be paid separately I would put as much as I could toward one at a time (decide based on total amount, I'd start with the lowest amount to get rid of it first, or start with the highest interest rate one if they prefer), while paying the minimums on the rest. Then move on to the next, and so on.
Another reason to start with the SLs is that a SL can't be sold to get out from under the debt - it is there until paid off, but a cabin can be sold. So the SLs, IMHO, are a bigger risk than the cabin and should go first.

Also I would be concerned about using much of the cushion to pay off loans with two risks on the horizon: a pregnancy/childbirth and starting a new business and with the desire to buy a house sometime. I don't know how much they should have in cash reserve, but given what they are considering and depending on their costs of living and job security, they may want to leave at least a big part in reserve.

Whatever they decide as far as debt, savings, budgeting, and so on - they need to start with a plan and be deliberate about it. If they scatter their efforts, or go about this in a disorganized fashion, they will not be as efficient or attain goals as fast.

I see the most important things for them to do is clarify goals, know what order of importance they want to achieve them, know the financial cushion they need to realistically pursue their goals, establish a time line. Focus most on what matters most. And make sure they are on a budget that is realistic for them. They should put all this in writing so they are clear with themselves and with each other at each point and so they stay on task.

ETA: Depending on their ages, having kids may need to start sooner rather than later, making clarity on goals and budgeting well even more important.

[midareff]

Pay off higher interest rate loan first.... this is a no brainer.

[fru-gal]

Posting for my brother and his new wife!

Their goal is reduce debt aggressively before purchasing a home and starting a family. Recently married with combined income in low 200k range.

Student loans: 90k @ 5.8%
Lake cabin: 175k @ 4.2%

Cash savings 80k

I advised to tackle highest interest debt first but my brother says he’s paying more monthly interest on cabin (due to higher balance). If you were allocating 60k to debt, do we agree to tackle student loans first?

Interesting mental process that tells someone it is okay to buy a second home prior to paying for their education.

I'd sell the cabin and pay off the loans and then buy a cabin with cash once I was rich enough that questions like this didn't exist in my life. But I fully acknowledge I'm unusual.

I can totally understand why they did this. The student loan is going to be history in 2-3 years, the cabin sounds wonderful and maybe was a rare opportunity. With those salaries, they have some leeway.

Like virtually everyone else, I say throw that $60,000 at the student loan, then be reasonably frugal and increase their emergency fund to at least a year's worth of spending and get rid of the rest of the student loan. After that really increase their savings.

[Independent George]

There is a good argument for the psychological benefit to paying off a lower-balance account than a higher one even if the math says to tackle the higher rate first. In this case, though, the student loans have both a lower balance and a higher interest rate. Combined with the non-dischargability of student loan debt, that makes it a no-brainer - pay off the student loan first. The only other benefit to paying student loans down later is the deductibility of student loan interest, but that is capped at $2,500, so he's not gaining any additional benefit to carrying a balance.

The way I'd break it down to him is to show him the total annual interest he's paying, then how much he pays after allocating 60k to the student loans versus the cabin. His total interest paid is going to be higher if he puts the money into the cabin.

[grabiner]

One reason is that SLs are generally not bankruptable. Another is that since they are lower in total amount, they can be paid off faster. Also, if the SLs can be paid separately I would put as much as I could toward one at a time (decide based on total amount, I'd start with the lowest amount to get rid of it first, or start with the highest interest rate one if they prefer), while paying the minimums on the rest. Then move on to the next, and so on.

The reason to do this is that it improves cash flow, allowing you to maintain a smaller emergency fund. If you pay half the balance on a loan, the monthly payment due does not change unless you refinance. If you pay off a loan, the monthly payment due disappears.

However, it's still better to pay down higher-rate loans first, as that saves more in interest, allowing future loan payments (both early and scheduled) to eliminate more principal.

[runner540]

Interesting mental process that tells someone it is okay to buy a second home prior to paying for their education.

I'd sell the cabin and pay off the loans and then buy a cabin with cash once I was rich enough that questions like this didn't exist in my life. But I fully acknowledge I'm unusual.

+1, quality post.

-Randy Bo Bandy

+2
They need to clarify what kind of lifestyle they want. Trying to have it all right now is impossible - they need to prioritize among these items:
With Cabin
Debt free
Expanding the family
Starting a business

[White Coat Investor]

Posting for my brother and his new wife!

Their goal is reduce debt aggressively before purchasing a home and starting a family. Recently married with combined income in low 200k range.

Student loans: 90k @ 5.8%
Lake cabin: 175k @ 4.2%

Cash savings 80k

I advised to tackle highest interest debt first but my brother says he’s paying more monthly interest on cabin (due to higher balance). If you were allocating 60k to debt, do we agree to tackle student loans first?

Interesting mental process that tells someone it is okay to buy a second home prior to paying for their education.

I'd sell the cabin and pay off the loans and then buy a cabin with cash once I was rich enough that questions like this didn't exist in my life. But I fully acknowledge I'm unusual.

I can totally understand why they did this. The student loan is going to be history in 2-3 years, the cabin sounds wonderful and maybe was a rare opportunity. With those salaries, they have some leeway.

Like virtually everyone else, I say throw that $60,000 at the student loan, then be reasonably frugal and increase their emergency fund to at least a year's worth of spending and get rid of the rest of the student loan. After that really increase their savings.

That's the problem with high income professionals. The truth is there are very few hard and fast rules because the income can make up for a fair number of "personal finance mistakes." You just can't make all of them.

[Starfish]

It doesn't really matter which one the pay first if they are good savers. Yes, math says student loan first but in reality if they pay all debt in 3 years the difference is peanuts.
If they drag it for tens of years it makes more of a difference.

[chrisdds98]

it would really suck if he did the student loan and that debt is going to be forgiven eventually... The student loan makes sense but its not going to make much difference one way or the other so I don't think its horrible to do the cabin first and hope for loan forgiveness down the road.

I have not heard of any concrete plans to forgive student loan debt. Some folks are trying to have the government forgive their loans because they worked in public sectors, but I have heard that process is going badly. I know of no other loan forgiveness programs for student loans.

No concrete plans but politicians are warming to the idea of forgiving student debt (Liz Warren has a proposal). I think it has a small chance of passing and if that does happen you will be blamed for giving bad advice. The difference in interest rates might be a premium he is willing to pay for the chance of forgiveness

[Toons]

Posting for my brother and his new wife!

Their goal is to reduce debt aggressively before purchasing a home and starting a family. Recently married with combined income in low 200k range.

Student loans: 90k @ 5.8%
Lake cabin: 175k @ 4.2%

Cash savings 80k

I advised to tackle highest interest debt first but my brother says he’s paying more monthly interest on cabin (due to higher balance). If you were allocating 60k to debt, do we agree to tackle student loans first?

Student loans: 90k @ 5.8%
Eliminate ASAP

[TSR]

The math is a no-brainer, as described by everyone above. That said, I could think of at least one scenario where your brother might favor the cabin:

1. He saved up the $60,000, not her. We do not know this to be a fact.
2. She accrued the student-loan debt, not him. We do know this to be a fact.
3. He bought the cabin and it's in his name. We know the first half but perhaps not the second.
4. There are problems in the relationship or your brother does not feel 100% confident about it. We do not have any reason to assume this, but we do know that it is a "new" wife.

I am saying all of the above just because it's possible that your brother might have some of these things in mind that might be blurring the math a bit. I'm not trying to sow dissension where there is none, but I do think it's important to know what motivates people. I agree with everyone else that the right financial answer is to knock out the student loans.

[Thegame14]

is lake cabin primary home or investment?

Either way stil student loans, as they are a higher rate, also they can be paid off faster so then once they are paid off those payments can be added to the debt allocation to pay down cabin faster

[Dottie57]

Get serious. Work extra. Live very frugally. Debt free in <3 years and the interest rate doesnt matter that much in the grand scheme of things. Spending less will have far more impact than the minor interest rate differences.

This.

And I have difficulty understanding buying a cabin before a house.

[Makaveli]

Thanks all, they have elected to square away the student loans first. They truly appreciated all the feedback so hopefully I convince them to become bogleheads!

[JGoneRiding]

Posting for my brother and his new wife!

Their goal is reduce debt aggressively before purchasing a home and starting a family. Recently married with combined income in low 200k range.

Student loans: 90k @ 5.8%
Lake cabin: 175k @ 4.2%

Cash savings 80k

I advised to tackle highest interest debt first but my brother says he’s paying more monthly interest on cabin (due to higher balance). If you were allocating 60k to debt, do we agree to tackle student loans first?

Interesting mental process that tells someone it is okay to buy a second home prior to paying for their education.

I'd sell the cabin and pay off the loans and then buy a cabin with cash once I was rich enough that questions like this didn't exist in my life. But I fully acknowledge I'm unusual.

Long backstory but cutting to the chase, he purchased the cabin before owning a house (rents) and married into the student loans. He’s currently not willing to sell the cabin (lifestyle choice) but there are some scenarios where he’d change his mind (local mine hitting it big and workers relocating to the area that are willing to pay a pretty penny).

Just not in the cards right now.

In that case who has the 60k? This would mater to me because in the event of a divorce the pre marital asset and pre marital debt will stay with that party. If the 60 k is marital assets and used to pay off the pre marital asset then both have a strong claim for that asset. But you can't claim debt pay offs as something you should get refund for. Ianal

[MichCPA]

it would really suck if he did the student loan and that debt is going to be forgiven eventually... The student loan makes sense but its not going to make much difference one way or the other so I don't think its horrible to do the cabin first and hope for loan forgiveness down the road.

I have not heard of any concrete plans to forgive student loan debt. Some folks are trying to have the government forgive their loans because they worked in public sectors, but I have heard that process is going badly. I know of no other loan forgiveness programs for student loans.

No concrete plans but politicians are warming to the idea of forgiving student debt (Liz Warren has a proposal). I think it has a small chance of passing and if that does happen you will be blamed for giving bad advice. The difference in interest rates might be a premium he is willing to pay for the chance of forgiveness

Her plan would max out at 50k of forgiveness and would phase to 0 at this income level. [Trying to stick to facts rather than politics]

[Trader Joe]

Posting for my brother and his new wife!

Their goal is to reduce debt aggressively before purchasing a home and starting a family. Recently married with combined income in low 200k range.

Student loans: 90k @ 5.8%
Lake cabin: 175k @ 4.2%

Cash savings 80k

I advised to tackle highest interest debt first but my brother says he’s paying more monthly interest on cabin (due to higher balance). If you were allocating 60k to debt, do we agree to tackle student loans first?

Student loan. Also, encourage your brother and/or his wife to post here themselves.