Would you pay off a 1.5% school loan

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EnjoyIt
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Would you pay off a 1.5% school loan

Post by EnjoyIt »

The details:
We are in our mid 40s and have saved up around 25x expenses but still looking to work part time and still contributing.
We are maxing out all retirement space (401k, HSA, backdoor Roth.)
529 is well funded, we hope, but willing to cashflow extra college expenses if needed.
I have about $75k left in my school loans at 1.5% At current rate it will be another 13 years before it is paid off.
For those that will ask, yes we invest in bonds though recently diverted new bond contributions towards the 2.75% mortgage. New contributions include: dividends, bond interest, and savings from income.

Options:
1) With new contributions get back to our desired AA then divert back to paying down the 1.5% debt.
2) Keep diverting new contributions towards debt and pay off the 1.5% loan. Once paid off send new contributions to get back to our desired AA
3) 1.5% is way too low to pay down and just keep investing based on our desired AA.

I'm leaning towards getting back to our desired AA and then let the loan ride for a few more years while we are still employed part time. I guess I already know what I plan on doing but want to spitball it with someone. It is not like we have anyone else to discuss these things other than this forum.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
mhalley
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Re: Would you pay off a 1.5% school loan

Post by mhalley »

FINANCIALLY, paying off the debt is a mistake. BUT this is PERSONAL finance and has a lot to do with you YOU feel about debt. The mathematical answer is to never pay a penny extra on this. Whether that is right for you is your gut feeling on how you will feel to wake up with no debt whatsoever. Of course it doesn't all have to be one way or another. You could always say, instead of paying this off in 13 years, I will pay it off tomorrow, or in 3, 5, 7 years. I would pay on the mortgage instead of this if you want to become debt free.
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FiveK
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Re: Would you pay off a 1.5% school loan

Post by FiveK »

EnjoyIt wrote: Sat Sep 26, 2020 4:47 pm ...school loans at 1.5%
...2.75% mortgage.
Short answer to the thread title: no.

Longer answer: if you want to pay off any debt, paying the 2.75% mortgage makes more sense - and even that depends on your expected bond returns when answering the "invest vs. pay debt" question.
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EnjoyIt
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Re: Would you pay off a 1.5% school loan

Post by EnjoyIt »

FiveK wrote: Sat Sep 26, 2020 5:29 pm
EnjoyIt wrote: Sat Sep 26, 2020 4:47 pm ...school loans at 1.5%
...2.75% mortgage.
Short answer to the thread title: no.

Longer answer: if you want to pay off any debt, paying the 2.75% mortgage makes more sense - and even that depends on your expected bond returns when answering the "invest vs. pay debt" question.
Maybe I misrepresented but we paid off the mortgage last week. We did this by diverting funds that would be going into bonds towards the mortgage. This phenomena occurred because we rebalance in March and stocks grew. We ended up being a bit out of balance and equity heavy so that new contributions should go towards bonds but instead we put that towards our mortgage and paid the mortgage off. We were fortunate to come into some cash mid summer from some work I did allowing us to really hit the mortgage hard and finally pay it down.

Today, we are still equites heavy on our asset allocation and need to decide if we should keep plowing along and pay off the school loan or instead invest in bonds to get our AA back in line. As you stated I think paying down the loan early is not ideal and therefore I think we will get out AA back in balance with new contributions and once there allow a bit more growth before we start hitting the school debt.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
renter
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Re: Would you pay off a 1.5% school loan

Post by renter »

My student loan rates were a tad higher than yours at 1.875%. I paid for 14 years all the while vowing never to prepay. Then it started to feel like an annoyance, and one day just lump sum paid it off. If yours is a large sum to you, if it has the death benefit like mine did, and if you have dependents, you might consider keeping it, and consider it part of your life insurance.
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Re: Would you pay off a 1.5% school loan

Post by grabiner »

Paying down a 13-year loan is equivalent to buying a 13-year risk-free bond; paying it off in full is equivalent to buying a bond portfolio with a 6-year duration.

The best bond comparison in a taxable account is Admiral shares of Vanguard Long-Term Tax-Exempt, with a 1.59% yield. Thus, if you sold enough in those Admiral shares to pay off the loan, you would only break even at the same duration, although you would benefit from eliminating the small amount of credit risk. If you cannot pay off the loan in full, you take more interest-rate risk by paying off the loan than by buying bonds. Thus I would say that it is essentially break-even to pay the loan off entirely if you can do so, and a small net cost to pay down the loan.

By paying the loan down or off, you give up the option of keeping the loan in future years; if rates rise, you can lend at a higher return than you can borrow. However, if you hold munis instead, the muni issuers have the benefit of the same option; if rates rise, the bonds that they were intending to call will not be called, so you will lose more than is indicated by the duration.
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bhtomj
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Re: Would you pay off a 1.5% school loan

Post by bhtomj »

I would pay it off. Not necessarily to have the guaranteed 1.5% savings (that looks good in current environment), but to close it out and simplify my financial life.
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Re: Would you pay off a 1.5% school loan

Post by TIAX »

bhtomj wrote: Sat Sep 26, 2020 11:33 pm I would pay it off. Not necessarily to have the guaranteed 1.5% savings (that looks good in current environment), but to close it out and simplify my financial life.
Assuming it's on automatic repayment, what would the simplification be exactly?
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Re: Would you pay off a 1.5% school loan

Post by inbox788 »

EnjoyIt wrote: Sat Sep 26, 2020 4:47 pmI'm leaning towards getting back to our desired AA and then let the loan ride for a few more years while we are still employed part time. I guess I already know what I plan on doing but want to spitball it with someone. It is not like we have anyone else to discuss these things other than this forum.
MegaRoth?

How much of the 25x is emergency fund? Liquid cash (CDs to short term bonds)? And is that in addition?

Which account are you adding bonds on a marginal basis? What kind of bonds and current yields?

What's your current AA and desired AA? You can afford to be very aggressive.

IMO, from current vantage, years 0-2 at 1.5% is high (relatively vs. 0), but years 3-13 is low (or could be).

I believe in loan adjusted AA, so while your nominal AA may have been close to your desired, after you adjust for student loan and mortgage, I think your adjust AA was far away from your desired and you've been inching towards it. You've lived with a much higher adjust AA, why not permanently adjust it upwards a little?

I would have a hard time paying down a 1.5% loan and even harder time finding an appropriate bond for the next year or even 2-3 years. Basically, my choices would be pay down the 1.5% loan, pay the 1.5% interest and keep cash for 2-3 years and reevaluate, or throw it into equities. None of the choices is appealing, but avoiding the least desirable, I'm pushed into equities.
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Re: Would you pay off a 1.5% school loan

Post by JBTX »

mhalley wrote: Sat Sep 26, 2020 5:25 pm FINANCIALLY, paying off the debt is a mistake. BUT this is PERSONAL finance and has a lot to do with you YOU feel about debt. The mathematical answer is to never pay a penny extra on this. Whether that is right for you is your gut feeling on how you will feel to wake up with no debt whatsoever. Of course it doesn't all have to be one way or another. You could always say, instead of paying this off in 13 years, I will pay it off tomorrow, or in 3, 5, 7 years. I would pay on the mortgage instead of this if you want to become debt free.
Paying off near zero debt is "personal finance"

Having an EF, bucketing, DCA, etc are "mental errors".

Go figure.

OP, no don't pay it down. If nothing else, put the money in ibonds over several years.
000
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Re: Would you pay off a 1.5% school loan

Post by 000 »

I wouldn't. I think stocks and actually most bonds will beat 1.5% nominal over the next decade.
inbox788
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Re: Would you pay off a 1.5% school loan

Post by inbox788 »

JBTX wrote: Sun Sep 27, 2020 12:27 amOP, no don't pay it down. If nothing else, put the money in ibonds over several years.
Why iBonds? Does it matter if you expect inflation to be 1% or 2%? Return on everything cash/bond is so low these days that it doesn't make much of a difference. And risk mitigation isn't that different either. Risk of inflation with all the spending is what everyone is talking about, but I welcome conditions that would drive inflation to over 2% and wages higher.

https://en.wikipedia.org/wiki/Demand-pull_inflation

I'm more afraid that 3 years from now, interest rate conditions won't be much higher, and you wish you had paid off 1.5% loans or locked in 1.5% 10 year CDs.
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burgrat
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Re: Would you pay off a 1.5% school loan

Post by burgrat »

renter wrote: Sat Sep 26, 2020 10:02 pm My student loan rates were a tad higher than yours at 1.875%. I paid for 14 years all the while vowing never to prepay. Then it started to feel like an annoyance, and one day just lump sum paid it off. If yours is a large sum to you, if it has the death benefit like mine did, and if you have dependents, you might consider keeping it, and consider it part of your life insurance.
I did exactly the same thing. I had about $150k at 2% fixed and eventually I just wanted to be debt free and paid it off. I would consider the death benefit as well (ie the loan is forgiven if you pass away) and if it is a factor in your situation. All this said, it feels incredible to have that final piece of debt gone. I think that was the ultimate reason for me to pay off. The sense of relief and satisfaction was worth it for me. Whatever you choose, it sounds like you are in a good situation!
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Re: Would you pay off a 1.5% school loan

Post by inbox788 »

burgrat wrote: Sun Sep 27, 2020 1:09 am
renter wrote: Sat Sep 26, 2020 10:02 pm My student loan rates were a tad higher than yours at 1.875%. I paid for 14 years all the while vowing never to prepay. Then it started to feel like an annoyance, and one day just lump sum paid it off. If yours is a large sum to you, if it has the death benefit like mine did, and if you have dependents, you might consider keeping it, and consider it part of your life insurance.
I did exactly the same thing. I had about $150k at 2% fixed and eventually I just wanted to be debt free and paid it off. I would consider the death benefit as well (ie the loan is forgiven if you pass away) and if it is a factor in your situation. All this said, it feels incredible to have that final piece of debt gone. I think that was the ultimate reason for me to pay off. The sense of relief and satisfaction was worth it for me. Whatever you choose, it sounds like you are in a good situation!
You can say that again. OP led with,
EnjoyIt wrote: Sat Sep 26, 2020 4:47 pmWe are in our mid 40s and have saved up around 25x expenses
That's over the line in my book. https://en.wikipedia.org/wiki/FIRE_movement

What Is Fat FIRE?
https://www.financialsamurai.com/what-i ... ire-early/

https://www.theretirementmanifesto.com/ ... o-fatfire/

Some people need to complete the task, others just need to know they can complete it or don't have to.
JBTX
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Re: Would you pay off a 1.5% school loan

Post by JBTX »

inbox788 wrote: Sun Sep 27, 2020 1:06 am
JBTX wrote: Sun Sep 27, 2020 12:27 amOP, no don't pay it down. If nothing else, put the money in ibonds over several years.
Why iBonds? Does it matter if you expect inflation to be 1% or 2%? Return on everything cash/bond is so low these days that it doesn't make much of a difference. And risk mitigation isn't that different either. Risk of inflation with all the spending is what everyone is talking about, but I welcome conditions that would drive inflation to over 2% and wages higher.

https://en.wikipedia.org/wiki/Demand-pull_inflation

I'm more afraid that 3 years from now, interest rate conditions won't be much higher, and you wish you had paid off 1.5% loans or locked in 1.5% 10 year CDs.
I prefaced ibonds with "if nothing else". That is just one option.

You always have the option to pay it off. You almost certainly won't have the opportunity to borrow at that rate again.

I probably wouldn't have paid off the 2.75% either. We are currently working on a cash out that would be 2.25%, for no other reasons than to ensure sufficient liquidity between now and retirement and to make sure we have enough to fully fund tax advantaged opportunities.
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EnjoyIt
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Re: Would you pay off a 1.5% school loan

Post by EnjoyIt »

inbox788 wrote: Sun Sep 27, 2020 12:16 am
EnjoyIt wrote: Sat Sep 26, 2020 4:47 pmI'm leaning towards getting back to our desired AA and then let the loan ride for a few more years while we are still employed part time. I guess I already know what I plan on doing but want to spitball it with someone. It is not like we have anyone else to discuss these things other than this forum.
MegaRoth?
We max 401k to $57k. I work as a 1099 and do a solo401k
inbox788 wrote: Sun Sep 27, 2020 12:16 am How much of the 25x is emergency fund? Liquid cash (CDs to short term bonds)? And is that in addition?
$0. I don't really keep much of an emergency fund. My portfolio is my emergency fund and can always sell bonds if I need extra cash in an emergency. I do keep about 1-1.5 months expenses in a revolving action in my personal checking account. I also keep quarterly tax payments in a savings account. But that money belongs to Uncle Sam and I am keeping it warm for him until the end of each quarter.
inbox788 wrote: Sun Sep 27, 2020 12:16 am Which account are you adding bonds on a marginal basis? What kind of bonds and current yields?
I use a 3 fund portfolio. Most of my bonds are in my 401k as Vanguard Total Bond. I also keep some bonds in my taxable account at Vanguard Tax Exempt Municipal bonds.
inbox788 wrote: Sun Sep 27, 2020 12:16 am What's your current AA and desired AA? You can afford to be very aggressive.
Our AA is 70/30 though currently sitting closer 75/25, probably even more aggressive. I have not checked in about 2 months. Our part time employment is secure and therefor I'm ok with where we are at now, though new contributions should be heading towards bonds.
inbox788 wrote: Sun Sep 27, 2020 12:16 am IMO, from current vantage, years 0-2 at 1.5% is high (relatively vs. 0), but years 3-13 is low (or could be).

I believe in loan adjusted AA, so while your nominal AA may have been close to your desired, after you adjust for student loan and mortgage, I think your adjust AA was far away from your desired and you've been inching towards it. You've lived with a much higher adjust AA, why not permanently adjust it upwards a little?
I very strongly do not believe in adjusting my AA based on my loans. Let me explain, I think it adds unnecessary complexity. Personal finance is personal and if I can comfortably stay the course ignoring it, then why add it in? Most financial advisors don't take debt into account when figure out one's AA. Vanguard and Fidelity Target date funds don't take debt into account either. Although debt being a negative bond is financially accurate, I believe it is a useless exercise for most investors. Regardless, if I was to choose to follow your recommendation, this school loan barely moves the AA needle.
inbox788 wrote: Sun Sep 27, 2020 12:16 am I would have a hard time paying down a 1.5% loan and even harder time finding an appropriate bond for the next year or even 2-3 years. Basically, my choices would be pay down the 1.5% loan, pay the 1.5% interest and keep cash for 2-3 years and reevaluate, or throw it into equities. None of the choices is appealing, but avoiding the least desirable, I'm pushed into equities.
I'm having a hard time paying it off as well and so far have not seen a compelling reason from others who have chimed in to pay it off quicker. So far I think I'm going to rebalance my AA with new contributions and maybe in 1-3 years re-evaluate the school debt.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
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EnjoyIt
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Re: Would you pay off a 1.5% school loan

Post by EnjoyIt »

JBTX wrote: Sun Sep 27, 2020 12:27 am
mhalley wrote: Sat Sep 26, 2020 5:25 pm FINANCIALLY, paying off the debt is a mistake. BUT this is PERSONAL finance and has a lot to do with you YOU feel about debt. The mathematical answer is to never pay a penny extra on this. Whether that is right for you is your gut feeling on how you will feel to wake up with no debt whatsoever. Of course it doesn't all have to be one way or another. You could always say, instead of paying this off in 13 years, I will pay it off tomorrow, or in 3, 5, 7 years. I would pay on the mortgage instead of this if you want to become debt free.
Paying off near zero debt is "personal finance"

Having an EF, bucketing, DCA, etc are "mental errors".

Go figure.

OP, no don't pay it down. If nothing else, put the money in ibonds over several years.
Ughhh....I wish I was buying ibonds for the last 10 years. I have not. Back then I thought, $10k a year, whatever. Today that would have been $100k. Right now I am thinking, $10k a year, meh, whatever. What will I think 10 years from now?
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
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EnjoyIt
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Re: Would you pay off a 1.5% school loan

Post by EnjoyIt »

burgrat wrote: Sun Sep 27, 2020 1:09 am
renter wrote: Sat Sep 26, 2020 10:02 pm My student loan rates were a tad higher than yours at 1.875%. I paid for 14 years all the while vowing never to prepay. Then it started to feel like an annoyance, and one day just lump sum paid it off. If yours is a large sum to you, if it has the death benefit like mine did, and if you have dependents, you might consider keeping it, and consider it part of your life insurance.
I did exactly the same thing. I had about $150k at 2% fixed and eventually I just wanted to be debt free and paid it off. I would consider the death benefit as well (ie the loan is forgiven if you pass away) and if it is a factor in your situation. All this said, it feels incredible to have that final piece of debt gone. I think that was the ultimate reason for me to pay off. The sense of relief and satisfaction was worth it for me. Whatever you choose, it sounds like you are in a good situation!
One of the reasons I paid of the 2.75% mortgage is because we expect to sell our home in about 1-2 years. A guaranteed 2.75% in the 1-2 year time frame was a very good return on investment. When we buy a new house, we may end up taking out another mortgage or we may pay cash. Not there yet to make the decision. That does remind me to get in touch with my bank and to open up a HELOC just in case.

I suspect at some point I will have some extra cash on hand which will be a large chunk of the debt and will decide to just pay it off to get it over with.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
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EnjoyIt
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Re: Would you pay off a 1.5% school loan

Post by EnjoyIt »

inbox788 wrote: Sun Sep 27, 2020 2:24 am
burgrat wrote: Sun Sep 27, 2020 1:09 am
renter wrote: Sat Sep 26, 2020 10:02 pm My student loan rates were a tad higher than yours at 1.875%. I paid for 14 years all the while vowing never to prepay. Then it started to feel like an annoyance, and one day just lump sum paid it off. If yours is a large sum to you, if it has the death benefit like mine did, and if you have dependents, you might consider keeping it, and consider it part of your life insurance.
I did exactly the same thing. I had about $150k at 2% fixed and eventually I just wanted to be debt free and paid it off. I would consider the death benefit as well (ie the loan is forgiven if you pass away) and if it is a factor in your situation. All this said, it feels incredible to have that final piece of debt gone. I think that was the ultimate reason for me to pay off. The sense of relief and satisfaction was worth it for me. Whatever you choose, it sounds like you are in a good situation!
You can say that again. OP led with,
EnjoyIt wrote: Sat Sep 26, 2020 4:47 pmWe are in our mid 40s and have saved up around 25x expenses
That's over the line in my book. https://en.wikipedia.org/wiki/FIRE_movement

What Is Fat FIRE?
https://www.financialsamurai.com/what-i ... ire-early/

https://www.theretirementmanifesto.com/ ... o-fatfire/

Some people need to complete the task, others just need to know they can complete it or don't have to.
Thanks,
As noted above, we still work part time and adding to our stash. Once hitting 25x, work became much less of a chore and more enjoyable. Every week we have more off days than work days, even a bad day at work is not that big of a deal because odds are we are off the next few days. Who knows how long we will keep up with this part time work lifestyle. I realize that our 25x will compound significantly if we do it for long enough. All I know is that tomorrow I can quit and never work another day in my life. As nice as that sounds, following through with that sentiment is rather scary. Especially since we are in our 40s, we still having kids who are not even close to attending college and we have 20 years of health insurance payments that we must cover.
Last edited by EnjoyIt on Mon Sep 28, 2020 2:23 pm, edited 1 time in total.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
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Re: Would you pay off a 1.5% school loan

Post by gr7070 »

Are your cars paid off? If yes, why don't you take out car loans at roughly that same rate?
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Re: Would you pay off a 1.5% school loan

Post by inbox788 »

EnjoyIt wrote: Sun Sep 27, 2020 7:50 amI very strongly do not believe in adjusting my AA based on my loans. Let me explain, I think it adds unnecessary complexity. Personal finance is personal and if I can comfortably stay the course ignoring it, then why add it in? Most financial advisors don't take debt into account when figure out one's AA. Vanguard and Fidelity Target date funds don't take debt into account either. Although debt being a negative bond is financially accurate, I believe it is a useless exercise for most investors. Regardless, if I was to choose to follow your recommendation, this school loan barely moves the AA needle.
Investment professionals, can't do much with your pension, SS or mortgages, so they don't have any interest in them, even Vanguard, it comes down to AUM. Young borrowers, where mortgage and other loans is a majority or major component of personal finance, should be more attune to the real risks they're taking. In your case, if it doesn't move the needle, it's no longer a factor.

Also, don't get me wrong, you don't necessary adjust your "AA based on the loan", but in the way you look at it. Your desired AA may be the same, but your actual AA, differs greatly from the loan adjust AA, ask yourself, which one reflects reality more? I'm not an accountant, but there's GAAP and non-GAAP earnings, and sometimes big differences. https://www.investopedia.com/articles/f ... uation.asp
EnjoyIt wrote: Sun Sep 27, 2020 7:52 amUghhh....I wish I was buying ibonds for the last 10 years. I have not. Back then I thought, $10k a year, whatever. Today that would have been $100k. Right now I am thinking, $10k a year, meh, whatever. What will I think 10 years from now?
Where did the $10k go each year? And what would have been the ibonds return vs total bond or equities? I think those that bought ibonds instead of equities are wishing differently. Now if you spent it...well, that's a spending and budgeting question, not investing. With returns so low these days, spending is an option. What if you bought that vacation home 10 years ago? Not only would you have enjoyed it for 10 years, but might have turned it into an investment, despite vacation homes underperforming the real estate market. It's been a good decade for real estate recovery.

Mean: 3.25%
Median: 2.83%
http://www.ibonds.info/I-Bond-Rates/I-B ... -Rate.aspx

https://www.zillow.com/research/vacatio ... ust-20232/
Last edited by inbox788 on Mon Sep 28, 2020 11:08 am, edited 1 time in total.
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Re: Would you pay off a 1.5% school loan

Post by hudson »

EnjoyIt wrote: Sat Sep 26, 2020 4:47 pm The details:
We are in our mid 40s and have saved up around 25x expenses but still looking to work part time and still contributing.
We are maxing out all retirement space (401k, HSA, backdoor Roth.)
529 is well funded, we hope, but willing to cashflow extra college expenses if needed.
I have about $75k left in my school loans at 1.5% At current rate it will be another 13 years before it is paid off.
For those that will ask, yes we invest in bonds though recently diverted new bond contributions towards the 2.75% mortgage. New contributions include: dividends, bond interest, and savings from income.

Options:
1) With new contributions get back to our desired AA then divert back to paying down the 1.5% debt.
2) Keep diverting new contributions towards debt and pay off the 1.5% loan. Once paid off send new contributions to get back to our desired AA
3) 1.5% is way too low to pay down and just keep investing based on our desired AA.

I'm leaning towards getting back to our desired AA and then let the loan ride for a few more years while we are still employed part time. I guess I already know what I plan on doing but want to spitball it with someone. It is not like we have anyone else to discuss these things other than this forum.
You look to be in good shape. You can do it anyway you want.
I would personally go with no-debt by age 50.
For my childrens' student loans, we doubled, tripled, or quadrupled payments until the loans went away.
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EnjoyIt
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Re: Would you pay off a 1.5% school loan

Post by EnjoyIt »

inbox788 wrote: Mon Sep 28, 2020 10:59 am
EnjoyIt wrote: Sun Sep 27, 2020 7:50 amI very strongly do not believe in adjusting my AA based on my loans. Let me explain, I think it adds unnecessary complexity. Personal finance is personal and if I can comfortably stay the course ignoring it, then why add it in? Most financial advisors don't take debt into account when figure out one's AA. Vanguard and Fidelity Target date funds don't take debt into account either. Although debt being a negative bond is financially accurate, I believe it is a useless exercise for most investors. Regardless, if I was to choose to follow your recommendation, this school loan barely moves the AA needle.
Investment professionals, can't do much with your pension, SS or mortgages, so they don't have any interest in them, even Vanguard, it comes down to AUM. Young borrowers, where mortgage and other loans is a majority or major component of personal finance, should be more attune to the real risks they're taking. In your case, if it doesn't move the needle, it's no longer a factor.

Also, don't get me wrong, you don't necessary adjust your "AA based on the loan", but in the way you look at it. Your desired AA may be the same, but your actual AA, differs greatly from the loan adjust AA, ask yourself, which one reflects reality more? I'm not an accountant, but there's GAAP and non-GAAP earnings, and sometimes big differences. https://www.investopedia.com/articles/f ... uation.asp
EnjoyIt wrote: Sun Sep 27, 2020 7:52 amUghhh....I wish I was buying ibonds for the last 10 years. I have not. Back then I thought, $10k a year, whatever. Today that would have been $100k. Right now I am thinking, $10k a year, meh, whatever. What will I think 10 years from now?
Where did the $10k go each year? And what would have been the ibonds return vs total bond or equities? I think those that bought ibonds instead of equities are wishing differently. Now if you spent it...well, that's a spending and budgeting question, not investing. With returns so low these days, spending is an option. What if you bought that vacation home 10 years ago? Not only would you have enjoyed it for 10 years, but might have turned it into an investment, despite vacation homes underperforming the real estate market. It's been a good decade for real estate recovery.

Mean: 3.25%
Median: 2.83%
http://www.ibonds.info/I-Bond-Rates/I-B ... -Rate.aspx

https://www.zillow.com/research/vacatio ... ust-20232/
Sure, if a young investor is severely over leveraged it can be a big risk. But, a young investor, especially one who lives below their means and saves for retirement will be much better off being ignorant of “debt belongs as a negative on AA.” If they can stay the course being 90/10 while holding 30% in debt effectively being 120/0 then they will so far better compared to trying to get themselves to a real 90/10 and paying down low interest rate debt.

Personal finance is personal which is why the debt is a negative bond is useless If not deleterious noise that can harm an investor. I hate how some push that concept around here.

On the other hand, when the debt is a small portion of investment assets, considering as a negative bond is a great exercise that may very well increase wealth as on will pay down debt as opposed to adding towards bonds.

To answer your question, that $10k went towards vanguard tax exempt muni bond fund in my taxable.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
Topic Author
EnjoyIt
Posts: 4661
Joined: Sun Dec 29, 2013 8:06 pm

Re: Would you pay off a 1.5% school loan

Post by EnjoyIt »

hudson wrote: Mon Sep 28, 2020 11:08 am
EnjoyIt wrote: Sat Sep 26, 2020 4:47 pm The details:
We are in our mid 40s and have saved up around 25x expenses but still looking to work part time and still contributing.
We are maxing out all retirement space (401k, HSA, backdoor Roth.)
529 is well funded, we hope, but willing to cashflow extra college expenses if needed.
I have about $75k left in my school loans at 1.5% At current rate it will be another 13 years before it is paid off.
For those that will ask, yes we invest in bonds though recently diverted new bond contributions towards the 2.75% mortgage. New contributions include: dividends, bond interest, and savings from income.

Options:
1) With new contributions get back to our desired AA then divert back to paying down the 1.5% debt.
2) Keep diverting new contributions towards debt and pay off the 1.5% loan. Once paid off send new contributions to get back to our desired AA
3) 1.5% is way too low to pay down and just keep investing based on our desired AA.

I'm leaning towards getting back to our desired AA and then let the loan ride for a few more years while we are still employed part time. I guess I already know what I plan on doing but want to spitball it with someone. It is not like we have anyone else to discuss these things other than this forum.
You look to be in good shape. You can do it anyway you want.
I would personally go with no-debt by age 50.
For my childrens' student loans, we doubled, tripled, or quadrupled payments until the loans went away.
Thanks,
We will definitely be helping the kids with school debt. I still want them to take the max subsidized loan and we will cover the rest. We will probably help them pay that off as well, but that is a whole future discussion.

Currently I pay $x per month on the kids. When they go to college some of that cash will go towards college expenses. I figure if I spend $10k a year on our kids (it’s actually more) and I already have 25X expenses, that means I have $250k sitting there to cover kids expenses which can be payed down to help pay college or whatever as they come off our dole.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
inbox788
Posts: 7584
Joined: Thu Mar 15, 2012 5:24 pm

Re: Would you pay off a 1.5% school loan

Post by inbox788 »

EnjoyIt wrote: Mon Sep 28, 2020 2:15 pmSure, if a young investor is severely over leveraged it can be a big risk. But, a young investor, especially one who lives below their means and saves for retirement will be much better off being ignorant of “debt belongs as a negative on AA.” If they can stay the course being 90/10 while holding 30% in debt effectively being 120/0 then they will so far better compared to trying to get themselves to a real 90/10 and paying down low interest rate debt.

Personal finance is personal which is why the debt is a negative bond is useless If not deleterious noise that can harm an investor. I hate how some push that concept around here.

On the other hand, when the debt is a small portion of investment assets, considering as a negative bond is a great exercise that may very well increase wealth as on will pay down debt as opposed to adding towards bonds.

To answer your question, that $10k went towards vanguard tax exempt muni bond fund in my taxable.
would you take a new mortgage to invest in stock market?
viewtopic.php?t=222383

Why not 15% debt or 45% debt? How is the poor young investor to know he's severely overleveraged without considering debt and investment balance? What's the difference between mortgage loan and margin loan (if the after tax rates are the same)? Mortgage loan good, margin loan bad or debt is debt? The whole point of considering debt as negative bond is that it provides a transparency that isn't noise; it's real data. Ignorance isn't bliss, even if it's sometimes beneficial. I can't tell you which is the real mirror and which is the skinny mirror, but I'd rather consider there are 2 types of reflections to get a more accurate picture of the whole.

https://www.wsj.com/articles/my-shamele ... 1539703095

And that's the whole point. If you were 120/0 (I'd call it 120/-20) paying down debt to 100/0, you risk tolerance has been higher than the "real 90/10". Paying off debt can change your AA risk, whether intentional or not. You may not care, but some people like myself want to make those choices aware, intentional and transparent. Being informed is a benefit, not harm.

Don't you have $100k in muni bonds instead of ibonds now? And didn't munibond returns exceed ibonds performance? Knowing this hindsight 20/20, why do you wish you had chosen ibonds instead?

https://www.thebalance.com/municipal-bo ... rns-417161
Last edited by inbox788 on Mon Sep 28, 2020 3:19 pm, edited 1 time in total.
Jack FFR1846
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Joined: Tue Dec 31, 2013 7:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: Would you pay off a 1.5% school loan

Post by Jack FFR1846 »

I'm going to say to keep the loan.

Why?

Because it's very low cost and will help keep your credit score up. The biggest think keeping my score down is the lack of an installment payment loan. I can't get a 1.5% loan. A higher credit score might help you in car loans or insurance cost.
Bogle: Smart Beta is stupid
inbox788
Posts: 7584
Joined: Thu Mar 15, 2012 5:24 pm

Re: Would you pay off a 1.5% school loan

Post by inbox788 »

Jack FFR1846 wrote: Mon Sep 28, 2020 3:18 pm I'm going to say to keep the loan.

Why?

Because it's very low cost and will help keep your credit score up. The biggest think keeping my score down is the lack of an installment payment loan. I can't get a 1.5% loan. A higher credit score might help you in car loans or insurance cost.
So, you keep the loan; where would you put the extra payments instead? (expected after tax rate of return?)

Not that you'd want to, but if you have equities, margin rates 1.59-0.86 (with risks and consequences)
https://www1.interactivebrokers.com/en/ ... hp?f=44427
Topic Author
EnjoyIt
Posts: 4661
Joined: Sun Dec 29, 2013 8:06 pm

Re: Would you pay off a 1.5% school loan

Post by EnjoyIt »

inbox788 wrote: Mon Sep 28, 2020 3:11 pm
EnjoyIt wrote: Mon Sep 28, 2020 2:15 pmSure, if a young investor is severely over leveraged it can be a big risk. But, a young investor, especially one who lives below their means and saves for retirement will be much better off being ignorant of “debt belongs as a negative on AA.” If they can stay the course being 90/10 while holding 30% in debt effectively being 120/0 then they will so far better compared to trying to get themselves to a real 90/10 and paying down low interest rate debt.

Personal finance is personal which is why the debt is a negative bond is useless If not deleterious noise that can harm an investor. I hate how some push that concept around here.

On the other hand, when the debt is a small portion of investment assets, considering as a negative bond is a great exercise that may very well increase wealth as on will pay down debt as opposed to adding towards bonds.

To answer your question, that $10k went towards vanguard tax exempt muni bond fund in my taxable.
would you take a new mortgage to invest in stock market?
viewtopic.php?t=222383

Why not 15% debt or 45% debt? How is the poor young investor to know he's severely overleveraged without considering debt and investment balance? What's the difference between mortgage loan and margin loan (if the after tax rates are the same)? Mortgage loan good, margin loan bad or debt is debt? The whole point of considering debt as negative bond is that it provides a transparency that isn't noise; it's real data. Ignorance isn't bliss, even if it's sometimes beneficial. I can't tell you which is the real mirror and which is the skinny mirror, but I'd rather consider there are 2 types of reflections to get a more accurate picture of the whole.

https://www.wsj.com/articles/my-shamele ... 1539703095

And that's the whole point. If you were 120/0 (I'd call it 120/-20) paying down debt to 100/0, you risk tolerance has been higher than the "real 90/10". Paying off debt can change your AA risk, whether intentional or not. You may not care, but some people like myself want to make those choices aware, intentional and transparent. Being informed is a benefit, not harm.

Don't you have $100k in muni bonds instead of ibonds now? And didn't munibond returns exceed ibonds performance? Knowing this hindsight 20/20, why do you wish you had chosen ibonds instead?

https://www.thebalance.com/municipal-bo ... rns-417161
I’ll tell you a joke:
3 cowboys are riding through the land to Wichita. Cowboy Bob turns to cowboy Ted and asks him, “what is 2 times 3?”
Ted quickly replies “6 of coarse.”
Bob quickly pulls out his Winchester and shoots Ted between his eyes.
The third Cowboy, John asks Bill “Why did you shoot Ted.”
Bill replies “he knew too much.”

This is you. You are smart enough to understand the details and don’t feel comfortable unless you account for it in a systematic way. Most people should just invest in a 3 fund portfolio without doing the detailed analysis you would do for yourself. Taking on debt as a negative bonds complicates the picture without any real benefit for the most of us. You have to realize that we are all not like you and don’t need the added complexity. As Bogle said, “keep things simples.

As for how much debt is too much? Simple. If one is having a hard time saving 15-20% of their income and servicing their low interest rate debt, they are over leveraged.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
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