Another pay off student loan or invest

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Reappraiser104
Posts: 48
Joined: Tue Dec 21, 2010 8:58 am

Another pay off student loan or invest

Post by Reappraiser104 » Fri Jul 20, 2012 7:24 am

I've seen these posts before, but I think I have a little different situation. My now wife and I have been paying off her student loans and some other debts for the past 4 years pretty aggressively. We were on the Ramsey plan, but I think it may need to revisit as we have delayed retirement savings. We started with about $210,000 debt which included 120k her student loans, 30k 2nd mortgage(80/20 loan), 30k for 2 cars, and 30k in my student loans. We are now owe 55k. Here are our statistics

Status- Married with a baby
Age-29- Both
Employment- Her employed (Healthcare); Me self employed (real estate);
Gross Income- $175k- 50/50 split
Retirement- ME 50k (lazy portfolio among 401k,sep,and RIRA); Her 15k in 401k with 15% contribution.
Student loans- Private:22k at 3% (adj to 5% in august 13); Sallie Mae $33,149 4.5%
Home- Owe 120k on adj rate currently at 3% (do not want to refi as we will be moving within a few years as we are in bad school district)

Our retirement savings have started slowly mainly due to off paying debt and because my wife has only been working for three years. So after all of that, here is my question: Which option would you choose?

1) Should we go all out and payoff remaining debt (will probably take about 10 months). Benefits are both financial and emotional as the SL debt is source of contention
2) Max out retirement and pay off remaining SL slowly. Benefit- larger egg to grow compounded & tax

I realize that its a wash on the balance sheet, but there are considerable tax advantages to putting money into a self employed retirement plan and that is the main reason I am on the fence about finishing paying off the debt.

Thanks in advance for your help.

Bobby Ingersoll
Posts: 59
Joined: Tue Oct 20, 2009 6:03 pm

Re: Another pay off student loan or invest

Post by Bobby Ingersoll » Fri Jul 20, 2012 9:58 am

My priorities would be:
1) E Fund - larger than usual since you are in real estate and may experience income swings. If you don't have one already, use a Roth as a vehicle to house your E-Fund
2) Max 401ks - capture the tax advantaged space while you can. If her job is stable, maybe take out a 401k loan to help pay down #3.
3) Student Loans - I doubt you qualify for the deduction at your income level, and at your income I bet you can still wipe them out in a year with a solid plan/budget

mlipps
Posts: 892
Joined: Thu Jun 21, 2012 9:35 am

Re: Another pay off student loan or invest

Post by mlipps » Fri Jul 20, 2012 10:53 am

jtodell224 wrote:I've seen these posts before, but I think I have a little different situation. My now wife and I have been paying off her student loans and some other debts for the past 4 years pretty aggressively. We were on the Ramsey plan, but I think it may need to revisit as we have delayed retirement savings. We started with about $210,000 debt which included 120k her student loans, 30k 2nd mortgage(80/20 loan), 30k for 2 cars, and 30k in my student loans. We are now owe 55k. Here are our statistics

Status- Married with a baby
Age-29- Both
Employment- Her employed (Healthcare); Me self employed (real estate);
Gross Income- $175k- 50/50 split
Retirement- ME 50k (lazy portfolio among 401k,sep,and RIRA); Her 15k in 401k with 15% contribution.
Student loans- Private:22k at 3% (adj to 5% in august 13); Sallie Mae $33,149 4.5%
Home- Owe 120k on adj rate currently at 3% (do not want to refi as we will be moving within a few years as we are in bad school district)

Our retirement savings have started slowly mainly due to off paying debt and because my wife has only been working for three years. So after all of that, here is my question: Which option would you choose?

1) Should we go all out and payoff remaining debt (will probably take about 10 months). Benefits are both financial and emotional as the SL debt is source of contention
2) Max out retirement and pay off remaining SL slowly. Benefit- larger egg to grow compounded & tax

I realize that its a wash on the balance sheet, but there are considerable tax advantages to putting money into a self employed retirement plan and that is the main reason I am on the fence about finishing paying off the debt.

Thanks in advance for your help.
I think for most people the biggest problem they have with retirement accounts is that once the tax advantaged space for one year is not used, you can't ever have it again. Since you are self-employed, you are fortunate enough to have significantly more tax advantaged space each year. To me, this means that you should do as Jtodell suggests and pay off the loans this year. It's unlikely that anytime in the near future you'll be maxing out your retirement funds, so you don't have anything to lose there. And, as jtodell and you point out, you can knock this out quite quickly and get rid of a contentious point in your relationship. Hopefully going forward you can be more unified in your financial decisions. :) Gl!

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JupiterJones
Posts: 2686
Joined: Tue Aug 24, 2010 3:25 pm
Location: Nashville, TN

Re: Another pay off student loan or invest

Post by JupiterJones » Fri Jul 20, 2012 11:16 am

I'd choose option 3... both!

I don't know what sort of expenses you guys have, but your income is a pretty darn big shovel with which to dig yourself out of the hole. So I'm thinking you could potentially max out your tax-advantaged investment space and pay off the student loan within 10-12 months. This would likely require more "Gazelle intensity" than you've had up to now, but it's an option worth exploring.

(And I agree with Bobby about the strong need for a good-sized emergency fund if you don't have one already.)

JJ
Stay on target...

Reappraiser104
Posts: 48
Joined: Tue Dec 21, 2010 8:58 am

Re: Another pay off student loan or invest

Post by Reappraiser104 » Fri Jul 20, 2012 11:34 am

Thanks for the input. We have a decent emergency fund and a roth to boot. Luckily the house we live in is really cheap so we have about a years worth of expenses saved up. Although my income may fluctuate, my wife's is pretty stable and I don't see a lack of demand in the future for her industry (Physical Therapy & Elderly Care).

The issue in trying to do both is that with an individual 401k I can bank a majority of my income, but that doesn't leave much left over to pay off debt. I guess somewhere in between the extremes is the best, but it will take the longest.

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