Student debt vs investing

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wahoocoug
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Student debt vs investing

Post by wahoocoug » Tue May 19, 2020 5:46 pm

Hi there! First-time poster here, although I've been lurking on and off for a while. My wife and I are having to rework our budget after a (hopefully temporary) pay cut due to Covid-19, so I thought I would ask for the Boglehead community's advice on my constant internal debate on how to balance paying off student debt vs saving/investing. I graduated from law school last year with $220k student loan debt and was fortunate to get a job at a big law firm in a relatively low cost of living area. It pays well but is quite demanding. I've paid off about $55k so far. Current situation is as follows:

Student loan debt: ~$165k (5 yr, 3.2% private loan, ~3k min pmt)
Retirement accounts (HSA and Roth IRAs, mostly VTSAX)): ~$20k
Emergency fund: ~$10k

Monthly Income (after tax): ~$12k
Student loan payments: $5k
Emergency fund: $500
HSA/Roth IRA contributions: $1400
Expenses: ~$5100

(These numbers look a little different after the pay cut, but the overall allocations are similar and it's what we'll go back to after normal pay is restored)

As you can see, we've clearly been prioritizing paying off the debt over saving/investing. This is in part motivated by my desire to be able to take a less demanding and lower paying job sometime in the next few years. I'm not unhappy at my current job, and it is great foundational experience for a young attorney, but it's not a lifestyle I want to have to keep up for more than a few more years.

My question is whether I should just go all in on paying off the debt and forget about saving for retirement until it's paid off (but miss out on higher returns in the market), or keep up my current allocation of debt payoff to savings. Or adopt a different allocation I suppose. I realize that a lot of you might say this is largely a matter of personal preference and goals, but any insights on whether such an aggressive debt payoff strategy on such a low interest rate debt is worth not investing at all would be appreciated!

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grabiner
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Re: Student debt vs investing

Post by grabiner » Tue May 19, 2020 7:45 pm

I would suggest maxing out your HSA, Roth IRAs and 401(k)s, and putting extra money against the student loans.

The reason to do this is that tax-favored space is lost if you don't use it, so you get a long-term benefit from maxing out. It's better to pay the 3.2% interest for a bit longer while you accumulate the tax-advantaged savings.
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sd323232
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Re: Student debt vs investing

Post by sd323232 » Tue May 19, 2020 8:53 pm

i would always pay of all debt before investing. i know you can play percentage game, but thats what i would do.

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Re: Student debt vs investing

Post by HawkeyePierce » Tue May 19, 2020 9:49 pm

I was in a similar situation, with a six-figure student loan balance and high income. I chose to max out all tax-advantaged space but forgo taxable investing. I was able to pay it off in a few years.

Those early retirement contributions are the most valuable. If you can maintain them, it's probably worth it to do so.

masha12
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Re: Student debt vs investing

Post by masha12 » Tue May 19, 2020 11:18 pm

HawkeyePierce wrote:
Tue May 19, 2020 9:49 pm
I was in a similar situation, with a six-figure student loan balance and high income. I chose to max out all tax-advantaged space but forgo taxable investing. I was able to pay it off in a few years.

Those early retirement contributions are the most valuable. If you can maintain them, it's probably worth it to do so.
I did the same 20 years ago. My first employer didn’t have a 401(k) so I funded the IRA and threw everything else towards paying off the student debt. I agree that you can’t get that space back. Your 50-year—old future self will thank you.

I wouldn’t do after-tax investing until loans are paid off. If nothing else, it may motivate you to pay off the loans even faster. And, if you are maxing out pre-tax investments, you are already sufficiently in the market.

You won’t regret paying student loans off.

Cyanide123
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Re: Student debt vs investing

Post by Cyanide123 » Wed May 20, 2020 4:28 am

I was in a similar situation about a year ago. I paid off 195k in about a year and I'm glad i did that. In hindsight, the markets feel and now i have a better buying opportunity. But really if my salary is decreased due to the pandemic or anything catastrophic happens, at least i don't have a 195k debt burden over my shoulders. There was significant mental relief and financial security that was achieved the moment i was debt free. I was able to make some quality of life decisions too in favor of a slight paycut because the need for a very high income decreased.

It might not be numerically the best answer, but man it feels really good to not have that debt burden over your head.

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CyclingDuo
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Re: Student debt vs investing

Post by CyclingDuo » Wed May 20, 2020 8:06 am

wahoocoug wrote:
Tue May 19, 2020 5:46 pm
Hi there! First-time poster here, although I've been lurking on and off for a while. My wife and I are having to rework our budget after a (hopefully temporary) pay cut due to Covid-19, so I thought I would ask for the Boglehead community's advice on my constant internal debate on how to balance paying off student debt vs saving/investing. I graduated from law school last year with $220k student loan debt and was fortunate to get a job at a big law firm in a relatively low cost of living area. It pays well but is quite demanding. I've paid off about $55k so far. Current situation is as follows:

Student loan debt: ~$165k (5 yr, 3.2% private loan, ~3k min pmt)
Retirement accounts (HSA and Roth IRAs, mostly VTSAX)): ~$20k
Emergency fund: ~$10k

Monthly Income (after tax): ~$12k
Student loan payments: $5k
Emergency fund: $500
HSA/Roth IRA contributions: $1400
Expenses: ~$5100

(These numbers look a little different after the pay cut, but the overall allocations are similar and it's what we'll go back to after normal pay is restored)

As you can see, we've clearly been prioritizing paying off the debt over saving/investing. This is in part motivated by my desire to be able to take a less demanding and lower paying job sometime in the next few years. I'm not unhappy at my current job, and it is great foundational experience for a young attorney, but it's not a lifestyle I want to have to keep up for more than a few more years.

My question is whether I should just go all in on paying off the debt and forget about saving for retirement until it's paid off (but miss out on higher returns in the market), or keep up my current allocation of debt payoff to savings. Or adopt a different allocation I suppose. I realize that a lot of you might say this is largely a matter of personal preference and goals, but any insights on whether such an aggressive debt payoff strategy on such a low interest rate debt is worth not investing at all would be appreciated!
If it were me, I would throw the extra $500 going to your ER fund and the $1400 going to your HSA/IRA at the student loan debt along with the current $5K per month. You'll be done with it in two years time and the debt boat anchor will be removed from your necks.

Two years is such a small blip in your entire investing lifetime that it is not going to make or break your wealth accumulation over an entire career of working, saving and investing. If the debt was paid off, then two years from now you would have the money that was formerly going to your ER fund, HSA, Roth IRA and student loan to invest to the tune of $82K a year. You would catch up rather quickly at that rate. :beer

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tashnewbie
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Re: Student debt vs investing

Post by tashnewbie » Wed May 20, 2020 8:15 am

I agree with CyclingDuo that it probably won't make much difference in your long investing life if you don't invest for the next 2-3 years. But you'll have more options without that huge debt looming over you.

My question is do you have a workplace 401k plan? After the debt is paid off, I would prioritize maxing 401k, HSA, and Roth each year, and then throwing the rest of your discretionary income into a taxable account.

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Re: Student debt vs investing

Post by grabiner » Wed May 20, 2020 8:56 am

CyclingDuo wrote:
Wed May 20, 2020 8:06 am
If it were me, I would throw the extra $500 going to your ER fund and the $1400 going to your HSA/IRA at the student loan debt along with the current $5K per month. You'll be done with it in two years time and the debt boat anchor will be removed from your necks.
Strongly disagree on the HSA, which should always be maxed out, just as an employer match on a 401(k) should. If you are in a 24% tax bracket and use $760 to pay down a loan rather than $1000 to contribute to an HSA, you have permanently lost a 32% immediate return on the HSA contribution; there is no way to turn $760 in your pocket into $1000 growing tax-free except an HSA.

An unmatched contribution to a 401(k) doesn't worth the same way; while you can only use $760 to pay down a loan if you could instead contribute $1000 to the 401(k), the 401(k) money is not all yours because the IRS will take part of it when you withdraw the money. If you retire in a 24% bracket, you get only the tax-free returns on $760. Thus it is sometimes desirable to avoid unmatched 401(k) contributions in order to pay down a loan.
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wahoocoug
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Re: Student debt vs investing

Post by wahoocoug » Wed May 20, 2020 9:23 am

tashnewbie wrote:
Wed May 20, 2020 8:15 am
I agree with CyclingDuo that it probably won't make much difference in your long investing life if you don't invest for the next 2-3 years. But you'll have more options without that huge debt looming over you.

My question is do you have a workplace 401k plan? After the debt is paid off, I would prioritize maxing 401k, HSA, and Roth each year, and then throwing the rest of your discretionary income into a taxable account.
Thanks everyone for the perspectives so far! My work does have a 401k plan that offers a Roth option, but no match.

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wahoocoug
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Re: Student debt vs investing

Post by wahoocoug » Wed May 20, 2020 9:28 am

grabiner wrote:
Wed May 20, 2020 8:56 am
CyclingDuo wrote:
Wed May 20, 2020 8:06 am
If it were me, I would throw the extra $500 going to your ER fund and the $1400 going to your HSA/IRA at the student loan debt along with the current $5K per month. You'll be done with it in two years time and the debt boat anchor will be removed from your necks.
Strongly disagree on the HSA, which should always be maxed out, just as an employer match on a 401(k) should. If you are in a 24% tax bracket and use $760 to pay down a loan rather than $1000 to contribute to an HSA, you have permanently lost a 32% immediate return on the HSA contribution; there is no way to turn $760 in your pocket into $1000 growing tax-free except an HSA.

An unmatched contribution to a 401(k) doesn't worth the same way; while you can only use $760 to pay down a loan if you could instead contribute $1000 to the 401(k), the 401(k) money is not all yours because the IRS will take part of it when you withdraw the money. If you retire in a 24% bracket, you get only the tax-free returns on $760. Thus it is sometimes desirable to avoid unmatched 401(k) contributions in order to pay down a loan.
That's a great point about the HSA - I knew it was a great deal that it was triple tax-advantaged, but I hadn't thought about it as an immediate 32% tax-free return.

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Re: Student debt vs investing

Post by CyclingDuo » Wed May 20, 2020 10:01 am

grabiner wrote:
Wed May 20, 2020 8:56 am
CyclingDuo wrote:
Wed May 20, 2020 8:06 am
If it were me, I would throw the extra $500 going to your ER fund and the $1400 going to your HSA/IRA at the student loan debt along with the current $5K per month. You'll be done with it in two years time and the debt boat anchor will be removed from your necks.
Strongly disagree on the HSA, which should always be maxed out, just as an employer match on a 401(k) should. If you are in a 24% tax bracket and use $760 to pay down a loan rather than $1000 to contribute to an HSA, you have permanently lost a 32% immediate return on the HSA contribution; there is no way to turn $760 in your pocket into $1000 growing tax-free except an HSA.

An unmatched contribution to a 401(k) doesn't worth the same way; while you can only use $760 to pay down a loan if you could instead contribute $1000 to the 401(k), the 401(k) money is not all yours because the IRS will take part of it when you withdraw the money. If you retire in a 24% bracket, you get only the tax-free returns on $760. Thus it is sometimes desirable to avoid unmatched 401(k) contributions in order to pay down a loan.
Everyone who graduates with a student loan has to deal with the beta or risk of having student loan debt. It's not attached to an asset that can be immediately sold (such as a house with a mortgage where you could sell the house), so therefore in the OP's case and stated goal in italics below puts his household at a much higher risk than if the debt was retired as quickly as possible to remove the risk.

This is in part motivated by my desire to be able to take a less demanding and lower paying job sometime in the next few years. I'm not unhappy at my current job, and it is great foundational experience for a young attorney, but it's not a lifestyle I want to have to keep up for more than a few more years.

Based on that, as I said in my original response - if it were me, I would throw everything at it that I could to leverage the shortness of time to be rid of it so that moving on to the goal of a less demanding/lower paying job that meets more of the lifestyle the OP is envisioning while being debt free would trump the rest. So yes, I would trade off the mathematical benefits of sending money into the HSA, and Roth IRA for 2 years and as the OP said - there is no 401k match - to attack the larger, more critical albatross of the student loan debt risk. The OP is simply in too high of a risk situation financially at the moment.

That's my opinion and we can simply agree to disagree.

CyclingDuo
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Re: Student debt vs investing

Post by grabiner » Wed May 20, 2020 10:36 am

CyclingDuo wrote:
Wed May 20, 2020 10:01 am
Everyone who graduates with a student loan has to deal with the beta or risk of having student loan debt. It's not an asset that can be sold (such as a house with a mortgage), so therefore in the OP's case and stated goal in italics below puts his household at a much higher risk than if the debt was retired as quickly as possible to remove the risk.
This is a common misconception about the effect of debt. You are at greater risk if you have $30K in debt rather than no debt and all else is equal, but at no more risk if you have $30K in debt and $30K in bonds rather than no debt and no bonds. If you have both debt and bonds, you have the option of paying off the debt and avoiding the payments.

And along the way, you are at less risk if you don't pay off the debt early; you are better off if you have $60K in debt and $30K in bonds rather than $30K in debt and no bonds. You owe the same amount in loan payments either way, but if you have the bonds, you have a source of money to continue to make the payments. (This would be the same issue if you had a mortgage; if you have $60K mortgage debt and $30K in bonds, you have a long time to make the payments before you are forced to sell the home or have the bank foreclose.)

So this goes back to the mathematics. The easiest case is a matched 401(k); if you have to withdraw from the 401(k) to make debt payments, you will get back more than you put in, because the employer match gains you more than the tax penalty costs you. Therefore, you should always invest in a matched 401(k) in preference to paying down the debt.

If you invest in a Roth IRA rather than paying down the debt, you can withdraw your contributions from the Roth IRA to pay down the debt at any time, so you are no worse off, except for the difference between the value of investing in the Roth IRA (using bond returns, not stock returns) versus paying down the debt.

If you invest in an HSA rather than paying down the debt, there is a big penalty if you withdraw from the HSA to make debt payments, but some of the money will have been freed from the HSA because it was used for medical expenses. If you contribute $10,000 to an HSA rather than using $7600 to pay down debt over several years, and you have $3000 of medical expenses, you have missed out on $4600 of debt repayments but have $2400 of free money. (And the remaining $7000 in your HSA is not useless before retirement; it can cover medical costs in an emergency.) Even for the OP's situation, I would consider this a good deal.
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Re: Student debt vs investing

Post by willthrill81 » Wed May 20, 2020 10:40 am

I agree that maxing out all tax-advantage accounts, especially the HSA, should likely be priority #1 for the OP.
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Re: Student debt vs investing

Post by galeno » Wed May 20, 2020 10:56 am

We expect a real CAGR = 2% from our 50/50 port. 4% real for stocks. 0% real for FI.

If the interest rate on your student loans is greater than 2% real then pay those down first.
USA-NRA. 50/50. TER = 0.40%. Exp real CAGR = 2.0%. AWR = 4.0%.: Port: 40% VWRD + 05% VDEM + 05% WSML + 15% IDTP + 15% VDCP + 15% VDTY + 05% CASH.

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Re: Student debt vs investing

Post by LittleMaggieMae » Wed May 20, 2020 11:26 am

My advise based on personal hindsight would suggest that you max out any appropriate tax advantaged accounts for both you and your wife before paying additional towards your student loan. You DO want to keep the goal of paying off your SL in a reasonable amount of time. But, in the big long term picture - any tax advantaged accounts that you can stuff as much $$ into now will give you a bigger "bang for your buck" 20 or more years from now. I'd also add in - especially since you foresee your income NOT increasing into the future indefinitely. It might be harder in the future to get as much $$ into your tax advantaged retirement accounts. A bigger amount in the accounts at the beginning - may mean you do not have to save as aggressively in the future when you have a smaller income to save from.

of course, the future is un forseeable. But everyone talks about the power of compounding. And it's better to start out with a good sized chunk of money which can then compound long term.
Last edited by LittleMaggieMae on Wed May 20, 2020 11:31 am, edited 1 time in total.

enclee
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Re: Student debt vs investing

Post by enclee » Wed May 20, 2020 11:29 am

Knock out the student loan debt. I've never woken up and regretted that I paid them off. It's a huge relief.

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Re: Student debt vs investing

Post by LittleMaggieMae » Wed May 20, 2020 11:40 am

Wait, that student loan will be paid off in 5 years.... that's short term debt. My "hindsight" advice still holds. With that kind of payoff horizon I would absolutely max any appropriate tax advantaged accounts for both spouses before paying any extra on that loan. I'd work my financial plans around that scheduled pay off date - so I'd have 1/2/3 and 5 years plans for how I would allocate my income. I'd max retirement/tax advantaged and if I had extra money I'd put it towards other goals (a house? future kids? the move to a lower paying job? ) I would not put my life on hold for a year or two to pay off a debt that will be paid off in 5 years (or less at this point) I would be working towards moving my life ahead over the regularly scheduled pay down period.


(Don't get caught in the trap of always paying off short/middle/long term debt ASAP - you might not ever have the chance to put money on the side for future things you want. Since you might always wind up paying off debt serially ASAP through out the course of your life... first SL, then Mortgage and car loans then college expenses for your kids (because you didn't save enough because you paid off other debts ASAP). it's a balancing act. )

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Re: Student debt vs investing

Post by celia » Wed May 20, 2020 11:47 am

NEITHER!

You need to build up your Emergency Fund faster (unless you can live on $1,000 per month). What if your pay is cut further--like to $0?

You need a minimum of 6 months of living expenses in there, likely more in times like this.

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Re: Student debt vs investing

Post by whereskyle » Wed May 20, 2020 11:59 am

grabiner wrote:
Tue May 19, 2020 7:45 pm
I would suggest maxing out your HSA, Roth IRAs and 401(k)s, and putting extra money against the student loans.

The reason to do this is that tax-favored space is lost if you don't use it, so you get a long-term benefit from maxing out. It's better to pay the 3.2% interest for a bit longer while you accumulate the tax-advantaged savings.
I agree with this one-hundred percent. Currently paying student debt myself but my number-one financial priority is maxing out all tax-advantaged space. No penalty/hurt to your credit score as far as I can tell for taking your time with your student debt. Always better to have no debt, but student debt to me (at least the federal kind) ranks below maxing out tax-advantaged space in my order of priorities. Shouldn't count on it, of course, but there is serious political will behind many different forms of student-loan relief. I see no reason to rush. I just pay my bills on time. (Of course, they've been suspended until September due to COVID).
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Re: Student debt vs investing

Post by grabiner » Wed May 20, 2020 12:27 pm

celia wrote:
Wed May 20, 2020 11:47 am
NEITHER!

You need to build up your Emergency Fund faster (unless you can live on $1,000 per month). What if your pay is cut further--like to $0?

You need a minimum of 6 months of living expenses in there, likely more in times like this.
This can be saved in a Roth IRA, though. If you have a need for the money in an emergency, you can withdraw contributions from the Roth IRA penalty-free at any time. If you don't need it, you get the money growing permanently tax-deferred.

I do agree that until you have built up a proper emergency fund, it's best not to give up liquidity (such as making extra loan payments) except for a very large benefit. It's still worth maxing out an HSA (which is itself partly an emergency fund), and contributing to get the employer match in a 401(k).
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Re: Student debt vs investing

Post by wahoocoug » Wed May 20, 2020 1:52 pm

grabiner wrote:
Wed May 20, 2020 12:27 pm
celia wrote:
Wed May 20, 2020 11:47 am
NEITHER!

You need to build up your Emergency Fund faster (unless you can live on $1,000 per month). What if your pay is cut further--like to $0?

You need a minimum of 6 months of living expenses in there, likely more in times like this.
This can be saved in a Roth IRA, though. If you have a need for the money in an emergency, you can withdraw contributions from the Roth IRA penalty-free at any time. If you don't need it, you get the money growing permanently tax-deferred.

I do agree that until you have built up a proper emergency fund, it's best not to give up liquidity (such as making extra loan payments) except for a very large benefit. It's still worth maxing out an HSA (which is itself partly an emergency fund), and contributing to get the employer match in a 401(k).
We've been using our HSA as purely an investment vehicle so far, and in the last year or two we've had some large medical expenses that we've paid for out of our budget (which we keep track of and retain receipts for), so it should be easy to use most to all of the value of the HSA as an emergency fund by just reimbursing ourselves for these expenses. Between the HSA, Roth contributions to date, and our "emergency fund" in a high-yield savings account, we should be able to handle close to 6 months of expenses if it came to that.

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Re: Student debt vs investing

Post by grabiner » Wed May 20, 2020 2:09 pm

wahoocoug wrote:
Wed May 20, 2020 1:52 pm
grabiner wrote:
Wed May 20, 2020 12:27 pm
I do agree that until you have built up a proper emergency fund, it's best not to give up liquidity (such as making extra loan payments) except for a very large benefit. It's still worth maxing out an HSA (which is itself partly an emergency fund), and contributing to get the employer match in a 401(k).
We've been using our HSA as purely an investment vehicle so far, and in the last year or two we've had some large medical expenses that we've paid for out of our budget (which we keep track of and retain receipts for), so it should be easy to use most to all of the value of the HSA as an emergency fund by just reimbursing ourselves for these expenses. Between the HSA, Roth contributions to date, and our "emergency fund" in a high-yield savings account, we should be able to handle close to 6 months of expenses if it came to that.
This is the correct strategy only if you are maxing out your retirement accounts, so that keeping money in the HSA gives you more tax-deferred growth. If you aren't maxing out, it is better to withdraw current medical expenses from an HSA, and use the money that wasn't needed for medical bills to contribute more to a 401(k) or IRA.
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wahoocoug
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Re: Student debt vs investing

Post by wahoocoug » Wed May 20, 2020 4:58 pm

grabiner wrote:
Wed May 20, 2020 2:09 pm
wahoocoug wrote:
Wed May 20, 2020 1:52 pm
grabiner wrote:
Wed May 20, 2020 12:27 pm
I do agree that until you have built up a proper emergency fund, it's best not to give up liquidity (such as making extra loan payments) except for a very large benefit. It's still worth maxing out an HSA (which is itself partly an emergency fund), and contributing to get the employer match in a 401(k).
We've been using our HSA as purely an investment vehicle so far, and in the last year or two we've had some large medical expenses that we've paid for out of our budget (which we keep track of and retain receipts for), so it should be easy to use most to all of the value of the HSA as an emergency fund by just reimbursing ourselves for these expenses. Between the HSA, Roth contributions to date, and our "emergency fund" in a high-yield savings account, we should be able to handle close to 6 months of expenses if it came to that.
This is the correct strategy only if you are maxing out your retirement accounts, so that keeping money in the HSA gives you more tax-deferred growth. If you aren't maxing out, it is better to withdraw current medical expenses from an HSA, and use the money that wasn't needed for medical bills to contribute more to a 401(k) or IRA.
In that case I imagine we should reimburse ourselves now, contribute it to a Roth, and then we still have access to it as a contribution in case of an emergency.

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Re: Student debt vs investing

Post by gr7070 » Wed May 20, 2020 5:56 pm

HawkeyePierce wrote:
Tue May 19, 2020 9:49 pm
I was in a similar situation, with a six-figure student loan balance and high income. I chose to max out all tax-advantaged space but forgo taxable investing. I was able to pay it off in a few years.

Those early retirement contributions are the most valuable. If you can maintain them, it's probably worth it to do so.
This.

While I'm a big fan of paying off all debt aggressively, including a mortgage, that's after maxing all your tax-advantaged savings.

Any money leftover after maxing your *traditional* 401k, Roth IRA, and HSA I would put towards debt payment and probably some for a house down payment.

I'd prefer to pay down debt over taxable investing, though taxable investing is good, too.

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Re: Student debt vs investing

Post by wahoocoug » Thu May 21, 2020 8:24 am

gr7070 wrote:
Wed May 20, 2020 5:56 pm


Any money leftover after maxing your *traditional* 401k, Roth IRA, and HSA I would put towards debt payment and probably some for a house down payment.
What’s your thinking behind traditional as opposed to Roth 401k? Is it solely the tax rate today vs later bet? Some info I didn’t give is that I currently live in a city with no state or local income tax, but I don’t necessarily plan to when I retire. Between that, no RMDs (after eventually converting to a Roth IRA), the prospect of keeping taxable income lower in retirement, and the ability to put away “more” tax advantaged income since it’s after tax, I was thinking of using the Roth 401k option (assuming I max out retirement accounts before paying off debt). I’m not necessarily set on that though so I’m interested in other perspectives.

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Re: Student debt vs investing

Post by grabiner » Thu May 21, 2020 8:55 am

wahoocoug wrote:
Thu May 21, 2020 8:24 am
gr7070 wrote:
Wed May 20, 2020 5:56 pm


Any money leftover after maxing your *traditional* 401k, Roth IRA, and HSA I would put towards debt payment and probably some for a house down payment.
What’s your thinking behind traditional as opposed to Roth 401k? Is it solely the tax rate today vs later bet? Some info I didn’t give is that I currently live in a city with no state or local income tax, but I don’t necessarily plan to when I retire. Between that, no RMDs (after eventually converting to a Roth IRA), the prospect of keeping taxable income lower in retirement, and the ability to put away “more” tax advantaged income since it’s after tax, I was thinking of using the Roth 401k option (assuming I max out retirement accounts before paying off debt).
You have raised the right issues. If you expect to retire at the same marginal tax rate as you have now, traditional and Roth are break-even, except in the two scenarios you indicate: RMDs which are higher than you need (although you can eliminate this issue if you donate them to charity), or maxing out the Roth 401(k) rather than having to do more taxable investing. Thus, if you expect your marginal tax rate to be close (24% versus 22%), and you are a long way from retirement, you might use the Roth 401(k) if you can max it out.

The reason for "a long way from retirement" is that you have a third option if you are close to retirement: contribute to a traditional 401(k), invest the savings in a taxable account, and then after you retire in a lower tax bracket, use those savings to convert the traditional 401(k) to a Roth IRA. Roth 401(k) in a 28% bracket thoughts (based on the pre-2018 tax rates, but the principle is the same) estimated that it is better to use a traditional 401(k) at a 28% marginal rate and convert at a 25% marginal rate if you are within 15 years of retirement and bonds yield 3%.
Wiki David Grabiner

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Re: Student debt vs investing

Post by hoffse » Thu May 21, 2020 9:44 am

Double-lawyer household here that also started with about $250k in student loans.

My suggestion is to max out your tax-advantaged space first, because it is use it or lose it.

Also take advantage of opportunities to refinance your student loans when rates drop.

Get you e-fund to a comfortable level. This crises has shifted our thinking on this to be about 3 months of expenses in cash. I am a first-year partner and my husband is a 7th year bankruptcy associate, so our jobs aren’t going anywhere. But like you our household can experience income fluctuations based on the overall revenue at our firms. 3 months would let us ride a 20-25% cut in revenue for around 12 months (or more) without changing our spending at all.

So today our student loans are down to about $65k because we followed the advice above and took the scenic route, leveraging our low interest loans to prioritize other financial goals. It has paid off in spades, with our retirement accounts at more than half a million in our early 30’s. We should have a million in retirement accounts before we turn 40 because of the time value.

We also saved separately for a house before paying down the loans. This got us in our starter home when I was 26. 4 years later we sold it for a 25% gain. We bought our “forever” house when I was 30. We locked a fixed low-3% rate for 30 years, so it will be paid off right as I turn 60 and getting ready to retire. If we need to sell it before then, we have already had about $80k in appreciated value since we bought it 2 years ago, based on comps.

We are going to let our student loans naturally run out sometime around the end of 2022. We could have buckled down and paid them off early years ago. But our rates are in the mid-3%, similar to yours. I thought we could do better than that in retirement and real estate, and we have.

It’s worked out great for us. YMMV.

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Re: Student debt vs investing

Post by The Broz » Thu May 21, 2020 9:49 am

sd323232 wrote:
Tue May 19, 2020 8:53 pm
i would always pay of all debt before investing. i know you can play percentage game, but thats what i would do.
This

I know people don't like to hear it, but you appear to have a negative net worth. Correct me if I am wrong. If I am wrong, that means you have money somewhere and should be getting out of debt.
Broke people should not go gambling in the stock market. Can you imagine if you didn't have that loan payment anymore? Your account balances would skyrocket with that income.

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Re: Student debt vs investing

Post by gr7070 » Thu May 21, 2020 10:52 am

wahoocoug wrote:
Thu May 21, 2020 8:24 am
gr7070 wrote:
Wed May 20, 2020 5:56 pm


Any money leftover after maxing your *traditional* 401k, Roth IRA, and HSA I would put towards debt payment and probably some for a house down payment.
What’s your thinking behind traditional as opposed to Roth 401k? Is it solely the tax rate today vs later bet? Some info I didn’t give is that I currently live in a city with no state or local income tax, but I don’t necessarily plan to when I retire. Between that, no RMDs (after eventually converting to a Roth IRA), the prospect of keeping taxable income lower in retirement, and the ability to put away “more” tax advantaged income since it’s after tax, I was thinking of using the Roth 401k option (assuming I max out retirement accounts before paying off debt). I’m not necessarily set on that though so I’m interested in other perspectives.
Yes, essentially just the future bet, with probably a little nuance. Such as where you might live, what, 40? years from now. I'd give zero consideration to where I might live in retirement. That is so far away. Plus some states that tax heavily favor less tax for retirement. So there's no telling.

Granted where you now is zero, so there's certainly a bird in hand potential; which is partly why I like traditional. So that's a slight conflict.

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Re: Student debt vs investing

Post by grabiner » Thu May 21, 2020 11:18 am

The Broz wrote:
Thu May 21, 2020 9:49 am
sd323232 wrote:
Tue May 19, 2020 8:53 pm
i would always pay of all debt before investing. i know you can play percentage game, but thats what i would do.
This

I know people don't like to hear it, but you appear to have a negative net worth. Correct me if I am wrong. If I am wrong, that means you have money somewhere and should be getting out of debt.
Broke people should not go gambling in the stock market.
This shows a common confusion of two different questions: should you pay down the debt or invest, and how should you invest?

If you are considering paying down a debt, you can invest in a high-quality bond fund instead, without taking more risk; one or the other may be better for your finances. You can then decide, based on your risk tolerance, whether to move money from bonds to stock or vice versa, whether you paid down the loan or not.

If you put money in a bond fund in an HSA, that increases your net worth more than using the same money to pay down the loan, because of the tax deduction. Likewise if you invest in a 401(k) with an employer match (not available to the OP, apparently), because your money gets multiplied.

If you put money in a bond fund in a Roth IRA, that makes a short-term increase in your net worth which is slightly less than paying down the loan, as the yield on bond funds in a Roth IRA is lower than loan rates. The long-term benefit of having more money growing tax-free once the loan is paid off may still make it worthwhile, depending on the rates.

If you put money in a bond fund in a traditional 401(k), that doesn't increase your after-tax net worth immediately. Contributing $10,000 to a 401(k) does take only $7600 out of pocket, but you will never get that $10,000 out of the 401(k) tax-free, so it shouldn't be counted as creating a $2400 increase in your net worth. If you treat the 401(k) as worth 76% of its nominal value, then this is equivalent to the Roth IRA decision in its effect on your net worth, but inferior because of the loss of liquidity; you can keep an emergency fund in a Roth IRA but not in a 401(k).

And the last choice, if you put money in a bond fund in a taxable account, is a simple comparison of interest rates. If you can earn more on your taxable account on bonds of the same duration as your loan term, you come out ahead, but this is a rare situation. Therefore, it is usually better to pay down a loan rather than make taxable investments, unless you need the money in a taxable account for liquidity (for example, not paying down a loan so that you will have a down payment available when you buy a new house).
Wiki David Grabiner

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wahoocoug
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Re: Student debt vs investing

Post by wahoocoug » Thu May 21, 2020 11:28 am

grabiner wrote:
Thu May 21, 2020 11:18 am
The Broz wrote:
Thu May 21, 2020 9:49 am
sd323232 wrote:
Tue May 19, 2020 8:53 pm
i would always pay of all debt before investing. i know you can play percentage game, but thats what i would do.
This

I know people don't like to hear it, but you appear to have a negative net worth. Correct me if I am wrong. If I am wrong, that means you have money somewhere and should be getting out of debt.
Broke people should not go gambling in the stock market.
This shows a common confusion of two different questions: should you pay down the debt or invest, and how should you invest?

If you are considering paying down a debt, you can invest in a high-quality bond fund instead, without taking more risk; one or the other may be better for your finances. You can then decide, based on your risk tolerance, whether to move money from bonds to stock or vice versa, whether you paid down the loan or not.

If you put money in a bond fund in an HSA, that increases your net worth more than using the same money to pay down the loan, because of the tax deduction. Likewise if you invest in a 401(k) with an employer match (not available to the OP, apparently), because your money gets multiplied.

If you put money in a bond fund in a Roth IRA, that makes a short-term increase in your net worth which is slightly less than paying down the loan, as the yield on bond funds in a Roth IRA is lower than loan rates. The long-term benefit of having more money growing tax-free once the loan is paid off may still make it worthwhile, depending on the rates.

If you put money in a bond fund in a traditional 401(k), that doesn't increase your after-tax net worth immediately. Contributing $10,000 to a 401(k) does take only $7600 out of pocket, but you will never get that $10,000 out of the 401(k) tax-free, so it shouldn't be counted as creating a $2400 increase in your net worth. If you treat the 401(k) as worth 76% of its nominal value, then this is equivalent to the Roth IRA decision in its effect on your net worth, but inferior because of the loss of liquidity; you can keep an emergency fund in a Roth IRA but not in a 401(k).

And the last choice, if you put money in a bond fund in a taxable account, is a simple comparison of interest rates. If you can earn more on your taxable account on bonds of the same duration as your loan term, you come out ahead, but this is a rare situation. Therefore, it is usually better to pay down a loan rather than make taxable investments, unless you need the money in a taxable account for liquidity (for example, not paying down a loan so that you will have a down payment available when you buy a new house).
Any recommendations on a high quality bond fund with an expected return greater than 3.2% (after taking into account HSA deduction)? This seems difficult right now with rates so low (at the moment and over the last decade).

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Re: Student debt vs investing

Post by whereskyle » Thu May 21, 2020 11:36 am

The Broz wrote:
Thu May 21, 2020 9:49 am
sd323232 wrote:
Tue May 19, 2020 8:53 pm
i would always pay of all debt before investing. i know you can play percentage game, but thats what i would do.
This

I know people don't like to hear it, but you appear to have a negative net worth. Correct me if I am wrong. If I am wrong, that means you have money somewhere and should be getting out of debt.
Broke people should not go gambling in the stock market. Can you imagine if you didn't have that loan payment anymore? Your account balances would skyrocket with that income.
I disagree due to the value of time in the market and hopefully a steady stream of income for the OP. The only reliable way to increase returns is to invest earlier. If you put off investing for a year or two so that you can pay down debt, the long-term returns sacrificed can be huge. Obviously one needs at least a few months of expenses saved in a HYS account for a buffer if things go south, but I think the old guard on here discounts how debt-ridden younger people are. I have manageable interest rates on my debt and I'm paying down debt in a ratio to how much I'm investing of 3:1 with 3 months of expenses in the bank and income coming in every 2 weeks. For many young people, devoting every dollar to debt would postpone investing by 3, 5, maybe even 10 years. The cost of not investing anything for that amount of time, so long as one has a proper emergency fund, is too high in my view.
"I am better off than he is – for he knows nothing, and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle

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Re: Student debt vs investing

Post by grabiner » Thu May 21, 2020 11:52 am

wahoocoug wrote:
Thu May 21, 2020 11:28 am
grabiner wrote:
Thu May 21, 2020 11:18 am
If you are considering paying down a debt, you can invest in a high-quality bond fund instead, without taking more risk; one or the other may be better for your finances. You can then decide, based on your risk tolerance, whether to move money from bonds to stock or vice versa, whether you paid down the loan or not.
Any recommendations on a high quality bond fund with an expected return greater than 3.2% (after taking into account HSA deduction)? This seems difficult right now with rates so low (at the moment and over the last decade).
There are no low-risk funds with expected return anywhere near 3.2%, which is why you should only invest in bonds in preference to paying down a loan if there are other benefits.

If you invest your HSA at Fidelity (a common recommendation on this forum), you could hold US Bond Index, with its 1.53% yield; you will fall 1.67% behind the 3.2% return from paying down the loan; if you invest it elsewhere, you could use other bond index ETFs or mutual funds at similar rates. But it would take 16 years for the difference between the 1.53% and 3.2% returns to make up for the immediate 32% benefit from the HSA contribution, and your student loan will be gone anyway before that happens. And once the loans are gone, you get the benefit of further tax-free growth on the HSA.

The case is not quite as clear for a 401(k) or Roth IRA; you will lose 1.7% per year while you are still paying off your loan, but you will gain the benefit of avoiding the dividend tax on your bond funds after the loans are gone, because the money is in the 401(k) or Roth IRA and would otherwise need to be invested in a taxable account. I believe that the Roth IRA is still worthwhile because you can hold your emergency fund there, but whether the 401(k) is worthwhile depends on how much value you put on paying off the loan early.
Wiki David Grabiner

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Re: Student debt vs investing

Post by CyclingDuo » Thu May 21, 2020 12:16 pm

whereskyle wrote:
Thu May 21, 2020 11:36 am
The Broz wrote:
Thu May 21, 2020 9:49 am
sd323232 wrote:
Tue May 19, 2020 8:53 pm
i would always pay of all debt before investing. i know you can play percentage game, but thats what i would do.
This

I know people don't like to hear it, but you appear to have a negative net worth. Correct me if I am wrong. If I am wrong, that means you have money somewhere and should be getting out of debt.
Broke people should not go gambling in the stock market. Can you imagine if you didn't have that loan payment anymore? Your account balances would skyrocket with that income.
I disagree due to the value of time in the market and hopefully a steady stream of income for the OP. The only reliable way to increase returns is to invest earlier. If you put off investing for a year or two so that you can pay down debt, the long-term returns sacrificed can be huge. Obviously one needs at least a few months of expenses saved in a HYS account for a buffer if things go south, but I think the old guard on here discounts how debt-ridden younger people are. I have manageable interest rates on my debt and I'm paying down debt in a ratio to how much I'm investing of 3:1 with 3 months of expenses in the bank and income coming in every 2 weeks. For many young people, devoting every dollar to debt would postpone investing by 3, 5, maybe even 10 years. The cost of not investing anything for that amount of time, so long as one has a proper emergency fund, is too high in my view.
In the case of the OP, we are talking about the potential to knock it all out in 2 years. Not 3, 5, or 10 years. Just 2 years.

Meanwhile, Vanguard Total Stock Market Index is about the same price as it was 28 months ago. Who knows where it will be 25 months from now for the time period the OP could pay off his debt? There is always the risk that could involve loss.

It's good to provide a variety of angles for the OP.

Here's what one of our fellow BH forum members who has his own blog, The White Coat Investor, says about the student loans (similar amounts for professions such as doctors, lawyers, PhD's):

Image
https://www.whitecoatinvestor.com/ultim ... rs/#really
"Everywhere is within walking distance if you have the time." ~ Steven Wright

whereskyle
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Re: Student debt vs investing

Post by whereskyle » Thu May 21, 2020 12:21 pm

CyclingDuo wrote:
Thu May 21, 2020 12:16 pm
whereskyle wrote:
Thu May 21, 2020 11:36 am
The Broz wrote:
Thu May 21, 2020 9:49 am
sd323232 wrote:
Tue May 19, 2020 8:53 pm
i would always pay of all debt before investing. i know you can play percentage game, but thats what i would do.
This

I know people don't like to hear it, but you appear to have a negative net worth. Correct me if I am wrong. If I am wrong, that means you have money somewhere and should be getting out of debt.
Broke people should not go gambling in the stock market. Can you imagine if you didn't have that loan payment anymore? Your account balances would skyrocket with that income.
I disagree due to the value of time in the market and hopefully a steady stream of income for the OP. The only reliable way to increase returns is to invest earlier. If you put off investing for a year or two so that you can pay down debt, the long-term returns sacrificed can be huge. Obviously one needs at least a few months of expenses saved in a HYS account for a buffer if things go south, but I think the old guard on here discounts how debt-ridden younger people are. I have manageable interest rates on my debt and I'm paying down debt in a ratio to how much I'm investing of 3:1 with 3 months of expenses in the bank and income coming in every 2 weeks. For many young people, devoting every dollar to debt would postpone investing by 3, 5, maybe even 10 years. The cost of not investing anything for that amount of time, so long as one has a proper emergency fund, is too high in my view.
In the case of the OP, we are talking about the potential to knock it all out in 2 years. Not 3, 5, or 10 years. Just 2 years.

Meanwhile, Vanguard Total Stock Market Index is about the same price as it was 28 months ago. Who knows where it will be 25 months from now for the time period the OP could pay off his debt? There is always the risk that could involve loss.

It's good to provide a variety of angles for the OP.

Here's what one of our fellow BH forum members who has his own blog, The White Coat Investor, says about the student loans (similar amounts for professions such as doctors, lawyers, PhD's):

Image
https://www.whitecoatinvestor.com/ultim ... rs/#really
All good points.
"I am better off than he is – for he knows nothing, and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle

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wahoocoug
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Re: Student debt vs investing

Post by wahoocoug » Sat May 23, 2020 4:35 pm

grabiner wrote:
Wed May 20, 2020 8:56 am
CyclingDuo wrote:
Wed May 20, 2020 8:06 am
If it were me, I would throw the extra $500 going to your ER fund and the $1400 going to your HSA/IRA at the student loan debt along with the current $5K per month. You'll be done with it in two years time and the debt boat anchor will be removed from your necks.
Strongly disagree on the HSA, which should always be maxed out, just as an employer match on a 401(k) should. If you are in a 24% tax bracket and use $760 to pay down a loan rather than $1000 to contribute to an HSA, you have permanently lost a 32% immediate return on the HSA contribution; there is no way to turn $760 in your pocket into $1000 growing tax-free except an HSA.

An unmatched contribution to a 401(k) doesn't worth the same way; while you can only use $760 to pay down a loan if you could instead contribute $1000 to the 401(k), the 401(k) money is not all yours because the IRS will take part of it when you withdraw the money. If you retire in a 24% bracket, you get only the tax-free returns on $760. Thus it is sometimes desirable to avoid unmatched 401(k) contributions in order to pay down a loan.
Alternatively, what about contributing to the HSA to get the immediate 32% return, and then when we incur medical expenses, we pay off student loans from the HSA up to the amount of the medical expenses? (Assuming we can afford the medical expenses out of our own budget.)

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Re: Student debt vs investing

Post by grabiner » Sat May 23, 2020 4:57 pm

wahoocoug wrote:
Sat May 23, 2020 4:35 pm
Alternatively, what about contributing to the HSA to get the immediate 32% return, and then when we incur medical expenses, we pay off student loans from the HSA up to the amount of the medical expenses? (Assuming we can afford the medical expenses out of our own budget.)
This is equivalent to HSA spending using the fungibility of money. If you contribute to the HSA, and then incur medical expenses, you can pay your medical expenses from the HSA, and then have more money to use for other purposes since the medical expenses were not paid out of pocket. This is equivalent to spending an equal amount on some other purpose, and then reimbusing yourself from the HSA.

Which is better depends on the HSA, and on what the providers accept. Some HSAs will charge a fee for check withdrawals from the HSA, but not charge a fee for medical expenses paid directly with the HSA debit card; this creates an advantage for paying directly. On the other hand, if your provider demands payment up front and the up-front payment may exceed the actual amount due, paying up front from the HSA will require you to reimburse the HSA for the overcharge if it turns out to be an overpayment, and this may also incur a fee.
Wiki David Grabiner

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