Pay off Student loan or save!?

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WilliamRice
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Pay off Student loan or save!?

Post by WilliamRice »

My wife has two outstanding student loans:
1st: 16,000 @ 6.5% - the monthly payment is $200.00 (Private)
2nd: 14,000 @ 6.5% - the monthly payment is $140.00 (Federal)

We have a nice budget and are easily able to make the monthly payments. We have 10,000 in savings and are about to come into about 17,000. We have been trying to have a baby and plan on saving the maximum we can every month until the baby comes which would about $1500. Add that to what would be about $27000 in savings is a nice cushion but all the time I hear people say pay off debt, pat off debt. Which is the smartest choice?

Also - all of our total expenses including rent can be covered by one of our incomes. Any advice would be great, thanks!
inv321
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Post by inv321 »

If you have enough saved up in an emergency fund then @ 6.5% the answer is easy - pay it off. Especially the private loan b/c the interest is not even tax deductible (assuming you are even under the income limit for this in regards to the Federal loan).
slushpuppie
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Post by slushpuppie »

I am almost in the exact same boat as you are right now (except my student loans are a good bit higher, and I'm not looking to have a baby, but otherwise identical down to the interest rate amount). So, I'll be very interested to see what the experts have to say.

I *think* what I have decided for myself is that, after getting the company match, I will throw everything I have at the loan (I can afford something like 15% of my gross income to throw at the loan). The way I figure it, you can't really beat a guaranteed 6.5% return on your investment.
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Toons
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Post by Toons »

Without a doubt start paying off Debt ,you won't regret it(debt free here) :D
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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Taylor Larimore
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Pay student loans or invest?

Post by Taylor Larimore »

Hi Bill:

The return on guaranteed investments today is less than 3%. By paying off your student loans, you receive an automatic guaranteed return of 6%.

In my opinion, you should probably pay off your student loan(s) as soon as possible, but hold enough cash for expected expenses and emergencies.
"Simplicity is the master key to financial success." -- Jack Bogle
sjb19
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Post by sjb19 »

I think you will be overwhelmingly advised to pay off the debt, but I would actually stash it in savings. Your life and finances will change so much, and possibly in unpredictable ways, after having a baby. We had a great budget/work/daycare plan in place before each of our kids and both required lots of tweaking as time progressed. Luckily, neither required a huge cash outlay, but you never know. The advice to pay off the debt if you have enough emergency savings is good, but the problem is knowing how much is enough with such a big change coming up.

If all goes well you can pay off the debt in full a year or 2 from now when your life hits more of a steady state. The interest paid in the meantime is the price of peace of mind. Just my opinion.
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Ilovevolleyball
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Post by Ilovevolleyball »

Two Ideas:

One, see if she can consolidate loans.... if can and at a much lower rate, consider consolidating. One thing I regret is that when I consolidated, I could have left one loan out so that I could have consolidated loans one more time....

Two, effective rates are lower on loan where interest is tax deductible.


Mike
JordanIB
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Post by JordanIB »

I know every person's circumstances are different, but at what rate do people start to change their advice from pay it off to invest, or vice versa?

My wife and I are debating the same question on her student loans, which are at 5.375%, and tax deductible. This feels like it's very much in the grey area, where it's not clear cut as to whether it should be paid off or not.
Tramper Al
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Post by Tramper Al »

JordanIB wrote:I know every person's circumstances are different, but at what rate do people start to change their advice from pay it off to invest, or vice versa?

My wife and I are debating the same question on her student loans, which are at 5.375%, and tax deductible. This feels like it's very much in the grey area, where it's not clear cut as to whether it should be paid off or not.
A grey area or a gamble maybe. I think that in comparing the cost of borrowing to investment returns, probably the most reasonable thing is to consider only risk-free or very low risk investment. I mean, paying off the loan is a risk-free 5.375% (actually less after deduction as you suggest), right? So if you can earn more than this cost with say T-Bills, a MMF, I-Bond, short term CD, I'd say go for in and take on the carry. If you have to aim at stocks or longer term bonds to project a profit in this, then no.

And of course in any event, you have to know the terms of the loan. Can the rate ever go up, for example.

Many Bogleheads draw strict and absolute distinction between borrowing for housing, investment, or education. Once the loan is out there, however, it comes down to the terms and your alternatives.
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Quidnam
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Post by Quidnam »

Tramper Al wrote:Many Bogleheads draw strict and absolute distinction between borrowing for housing, investment, or education. Once the loan is out there, however, it comes down to the terms and your alternatives.
Yes, it seems to me the critical question is whether the OP might still be in "building savings" mode, or has conclusively moved on to the more secure "investment" phase.

Many commenters have already made the appropriate comparisons in terms of return on investment -- however, these ROI comparisons would not apply in the case of someone who may still require leverage for short-term cash needs. It's entirely possible that the 6.5% rate of interest on the student loans is more favorable than any consumer credit that would otherwise be available in the event they needed to claw back some liquidity.

The OP is probably the only one who can truly determine whether or not they are in a secure enough position to "invest" their extra cash at this stage (toward debt repayment, which is most likely the best available investment).
TRC
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Post by TRC »

Pay it off ASAP and be done with them.
redlbj01
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Post by redlbj01 »

(1) Priority-6 months of living expenses if you lose your job(will 10k do this?)
(2) Baby Fund: Do you have enough cash on hand to cover 6 months of living expenses AND the baby's medical bills, checkups, etc?
(3) Debt: Once the first two are done, kill the debt.

If the baby was already here and safe, I'd just pay off the debt. Untill that time, I'd have extra cash on hand for the little one.

Congrats!
The Dude Abides
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Post by The Dude Abides »

In a very similar boat. Wife and I struggling with same issue (but much greater school debt).

The way I see it, for every dollar I ever earn during my career, a certain percentage, a minimum of 10%, must be invested for retirement. Period. Its very easy to get in the habit of paying off debts, or paying for private school, or whatever. Saving for retirement should be automatic...not even a conscious decision. In my world, panhandlers would invest 10% of their earnings with vanguard. Pay yourself 10% first, then pay off debts with the rest.
DTSC
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Post by DTSC »

Pay it off! I found it very liberating to be debt free, except for my mortgage.
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