Rapidly pay down student loans prior to house?

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SteveKnox6
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Rapidly pay down student loans prior to house?

Post by SteveKnox6 » Sat Nov 11, 2017 3:28 pm

I have been browsing the forums for awhile now but this will be my first post as a bogle head. A little background about myself; I am a Mechanical Engineer and my wife is an Occupational Therapist. She is a recent graduate with approximately $117,000 in student loans with an average rate of 7.2% (We will be refinancing the loans at the beginning of the new year). We have been very fortunate to live with her parents the last several years allowing us to save up approximately $120,000 in a saving account, $30,000 emergency fund (11-mo penalty free CD, APY 1.55%) as well as approximately $70,000 in my retirement fund between my 401k, Roth IRA and taxable investments. (The money in the savings account was being saved for a down payment on a house which is no longer required.) We just started my wife's Roth IRA (maxing out) and when she is eligible for the company's 401k plan we will begin contributing to that as well. I'm going to stop contributing to my taxable accounts until I can max out my 401k in addition to the Roth IRA that I already max out.

My father will be selling me the house I grew up in in approximately 2.5 years so despite being married and 27 years old, we figure best to continue to save rather than get into the housing market with such short-term exposure. I will not have to put a down payment on the house as I will be purchasing it at a reduced price as a gift of equity.

Over the next 2.5 years does it make sense to completely pay off the student loans to increase our cash flow when we move into the house (Only paying from cash flow, not from our savings account) while still contributing approximately ~15-20% pre-tax to retirement accounts. Half of the money in the savings we will invest while the other half goes in a CD and will be used for renovations/furniture/etc. OR do we contribute the maximum to both of our retirement accounts (401k's and Roth IRA's) and put the remainder of the cash flow towards the student loans even though we won't be able to pay off the entire balance prior to moving into the house.

A lot to read for my first post but I wanted to get some second opinions from like-minded people. Looking forward to the responses!

awval999
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Re: Rapidly pay down student loans prior to house?

Post by awval999 » Sat Nov 11, 2017 4:11 pm

117,000$ in student loans at 7.2% is just so outrageous I just would pay them off immediately. Have you considered that?

You already have a $30k emergency fund and are living with parents. So I really don’t know what an emergency would be anyway.

I would then start saving for the next 2-3 years for furniture, renovations, etc out of cash flow.

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dm200
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Re: Rapidly pay down student loans prior to house?

Post by dm200 » Sat Nov 11, 2017 4:22 pm

SteveKnox6 wrote:
Sat Nov 11, 2017 3:28 pm
I have been browsing the forums for awhile now but this will be my first post as a bogle head. A little background about myself; I am a Mechanical Engineer and my wife is an Occupational Therapist. She is a recent graduate with approximately $117,000 in student loans with an average rate of 7.2% (We will be refinancing the loans at the beginning of the new year). We have been very fortunate to live with her parents the last several years allowing us to save up approximately $120,000 in a saving account, $30,000 emergency fund (11-mo penalty free CD, APY 1.55%) as well as approximately $70,000 in my retirement fund between my 401k, Roth IRA and taxable investments. (The money in the savings account was being saved for a down payment on a house which is no longer required.) We just started my wife's Roth IRA (maxing out) and when she is eligible for the company's 401k plan we will begin contributing to that as well. I'm going to stop contributing to my taxable accounts until I can max out my 401k in addition to the Roth IRA that I already max out.
My father will be selling me the house I grew up in in approximately 2.5 years so despite being married and 27 years old, we figure best to continue to save rather than get into the housing market with such short-term exposure. I will not have to put a down payment on the house as I will be purchasing it at a reduced price as a gift of equity.
Over the next 2.5 years does it make sense to completely pay off the student loans to increase our cash flow when we move into the house (Only paying from cash flow, not from our savings account) while still contributing approximately ~15-20% pre-tax to retirement accounts. Half of the money in the savings we will invest while the other half goes in a CD and will be used for renovations/furniture/etc. OR do we contribute the maximum to both of our retirement accounts (401k's and Roth IRA's) and put the remainder of the cash flow towards the student loans even though we won't be able to pay off the entire balance prior to moving into the house.
A lot to read for my first post but I wanted to get some second opinions from like-minded people. Looking forward to the responses!
Do I understand you will purchase (cash and/or mortgage) to completely purchase the other house from your father in 2.5 years? If so, then I agree do not get into the housing market for just a few short years.

What rate will she get for her student loans? The benefit of not paying off such loans completely is that these loans extend for a long time and can give you much more flexibility in consummating a low debt home purchase.

Also, communicate with your father about EXACTLY how much and under what terms you will buy the house in 2.5 years.

Can you continue to live with her parents during the next 2.5 years? Is it a good and "happy" living situation?

Olemiss540
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Re: Rapidly pay down student loans prior to house?

Post by Olemiss540 » Sat Nov 11, 2017 4:27 pm

Pay the loans off and start a new life. Why bother refinancing when you could do away with them entirely?

bubbadog
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Re: Rapidly pay down student loans prior to house?

Post by bubbadog » Sat Nov 11, 2017 4:40 pm

Pay off the $117,000 with the savings you have in hand. It is a guaranteed 7.2% rate of return (much better than you are getting on your savings account).

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dm200
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Re: Rapidly pay down student loans prior to house?

Post by dm200 » Sat Nov 11, 2017 4:42 pm

Olemiss540 wrote:
Sat Nov 11, 2017 4:27 pm
Pay the loans off and start a new life. Why bother refinancing when you could do away with them entirely?
Unless I am missing something, we do not know:

1. Can the current living arrangements continue for the next 2.5 years?

2. What will be the financial arrangements in 2.5 years for purchase of the house from father?

Just paying off this relatively large student debt may not be in their long term best interest (especially at a lower rate).

Olemiss540
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Re: Rapidly pay down student loans prior to house?

Post by Olemiss540 » Sat Nov 11, 2017 5:42 pm

dm200 wrote:
Sat Nov 11, 2017 4:42 pm
Olemiss540 wrote:
Sat Nov 11, 2017 4:27 pm
Pay the loans off and start a new life. Why bother refinancing when you could do away with them entirely?
Unless I am missing something, we do not know:

1. Can the current living arrangements continue for the next 2.5 years?

2. What will be the financial arrangements in 2.5 years for purchase of the house from father?

Just paying off this relatively large student debt may not be in their long term best interest (especially at a lower rate).
I must be missing something. Because i do not see a way for a young couple to have better long term prospects by holding into their student loan debt. Buying a house is nice but adding another 6 figure obligation to an existing 6 figure obligation seems needlessly stressful and potentially handcuffing their cashflow.

petulant
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Re: Rapidly pay down student loans prior to house?

Post by petulant » Sat Nov 11, 2017 5:51 pm

Just pay them off. There is no reason to hold onto that kind of student loan debt in your circumstances.

lakja
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Re: Rapidly pay down student loans prior to house?

Post by lakja » Sat Nov 11, 2017 6:02 pm

petulant wrote:
Sat Nov 11, 2017 5:51 pm
Just pay them off. There is no reason to hold onto that kind of student loan debt in your circumstances.
Agreed. She’ll be paying ~8k in interest a year. Not sure your income brackets, but I’m sure you’re both making more than the amount to deduct the interest. Plus you’ll be freeing up $800-1000 per month from the loan payments to replenish your savings. This is a pretty easy decision.

Nate79
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Re: Rapidly pay down student loans prior to house?

Post by Nate79 » Sat Nov 11, 2017 6:07 pm

Absolutely pay them off. Don't listen to the broke people around you that think there is any value to keeping debt. Kick Sally Mae out!

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badbreath
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Re: Rapidly pay down student loans prior to house?

Post by badbreath » Sat Nov 11, 2017 6:15 pm

Pay the student loan off out of your current savings then start savings for 2.5 years for the house. get at least the match in the 401ks (if you can put in more great). When you get a cost of living adjustment add 1% to your 401k savings till you hit max. If you get a bonus add 30-50% of it to your 401k
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

Olemiss540
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Re: Rapidly pay down student loans prior to house?

Post by Olemiss540 » Sat Nov 11, 2017 9:13 pm

Keep in mind that the recent bull run has led people to increase leverage with decreased fear of market downturns. Don't fall victim to this trap by keeping your student loans so you can invest the banks money in the market.

Also, possibly consider shopping for a nice 1 BR apartment (for RENT) to get out of the folks house and start a life of your own until your finances are right and you have settled enough for home purchase.

Jermbo
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Re: Rapidly pay down student loans prior to house?

Post by Jermbo » Sun Nov 12, 2017 2:14 am

Everyone else is spot on. At that interest rate pay the loan off. I focused on my paying off my student loan debt aggressively when I had them and I will never say I regret it. It's such a good feeling to not owe anyone and then the fun starts with figuring out how to make your money work for you with all that extra cashflow you will have.

SteveKnox6
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Re: Rapidly pay down student loans prior to house?

Post by SteveKnox6 » Sun Nov 12, 2017 10:02 am

First of all, I just wanted to say thank you for the abundance of feedback I have received. I've summarized everyone's questions below. The more I look at this the more it appears evident to just rid myself of this student debt immediately.

I will be completely purchasing the house from my father in 2.5 years as my primary residence. He is going to discount the price of the house enough so that I will not have to put a down payment (may have to cover closing costs but that isn’t a big deal) I will be financing the full discounted price of the house initially. (ie. The appraised value of the home will be approximately $500k and the house will be “sold” to me at $400k. The loan amount will be the full $400k with the $100k gift of equity going towards the down payment.)

I was planning on refinancing the student loans just to get a lower interest rate in the ballpark of ~5.5%. With that lower rate, it made me question if paying the balance of the loans in full was the best option.

Living with my in-laws right now is fantastic and there are no issues whatsoever. They are actually encouraging us to stay until we move into my father’s house so there isn’t really a rush to get out.

Paying off the student loans in full will allow us to both max out our 401k and Roth IRA contributions as well as save a good chunk of change over the next 2.5 years for moving into and renovating the house as needed.

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BolderBoy
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Re: Rapidly pay down student loans prior to house?

Post by BolderBoy » Sun Nov 12, 2017 10:08 am

SteveKnox6 wrote:
Sat Nov 11, 2017 3:28 pm
approximately $117,000 in student loans with an average rate of 7.2% (We will be refinancing the loans at the beginning of the new year)...
Over the next 2.5 years does it make sense to completely pay off the student loans...
Unless your refinance rate on the student loans is going to be rock bottom low, pay 'em off ASAP.
“Where you stand, depends on where you sit” - Rufus Miles | "Never underestimate one's capacity to overestimate one's abilities"

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dm200
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Re: Rapidly pay down student loans prior to house?

Post by dm200 » Sun Nov 12, 2017 10:09 am

SteveKnox6 wrote:
Sun Nov 12, 2017 10:02 am
First of all, I just wanted to say thank you for the abundance of feedback I have received. I've summarized everyone's questions below. The more I look at this the more it appears evident to just rid myself of this student debt immediately.
I will be completely purchasing the house from my father in 2.5 years as my primary residence. He is going to discount the price of the house enough so that I will not have to put a down payment (may have to cover closing costs but that isn’t a big deal) I will be financing the full discounted price of the house initially. (ie. The appraised value of the home will be approximately $500k and the house will be “sold” to me at $400k. The loan amount will be the full $400k with the $100k gift of equity going towards the down payment.)
I was planning on refinancing the student loans just to get a lower interest rate in the ballpark of ~5.5%. With that lower rate, it made me question if paying the balance of the loans in full was the best option.
Living with my in-laws right now is fantastic and there are no issues whatsoever. They are actually encouraging us to stay until we move into my father’s house so there isn’t really a rush to get out.
Paying off the student loans in full will allow us to both max out our 401k and Roth IRA contributions as well as save a good chunk of change over the next 2.5 years for moving into and renovating the house as needed.
Check with mortgage lenders well ahead of time about how to do this. While "logic" (to me) says that you should be able to get a $400k loan on a $500k value house that you buy for $400k (family discount), many (perhaps most) mortgage lenders do not look at it this way. The down payment requirements for mortgages are often a percentage (such as 80%) of the appraised value OR purchase price - whichever is LESS. You may (check with mortgage experts) need to structure this as a $500k purchase.

SteveKnox6
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Re: Rapidly pay down student loans prior to house?

Post by SteveKnox6 » Sun Nov 12, 2017 10:13 am

I have looked into it but I will certainly continue to do my due diligence well ahead of time. With that aside, it appears that paying the student loan debt immediately is still the right decision.

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dm200
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Re: Rapidly pay down student loans prior to house?

Post by dm200 » Sun Nov 12, 2017 10:22 am

SteveKnox6 wrote:
Sun Nov 12, 2017 10:13 am
I have looked into it but I will certainly continue to do my due diligence well ahead of time. With that aside, it appears that paying the student loan debt immediately is still the right decision.
You seem to have sufficient assets to do so. In addition, you have 2+ years to get ready for the house purchase.

What I don't think you want, though, is a "surprise" of not being able to get the $400k mortgage. My "guess" is that to get the $400k, it may need to be a $500k sale - or something else "creative" (BUT 100% legal and legitimate).

Leemiller
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Re: Rapidly pay down student loans prior to house?

Post by Leemiller » Sun Nov 12, 2017 10:40 am

Pay off the student loans and save agreessively to have a smaller mortgage. I sort of get the feeling a 400k mortgage on your salaries is a stretch given that you’ve been living rent free with you in laws for a few years and the amount you’ve saved. Also, you need to be contributing to your wife’s Roth IRA now. Not sure why you have all the retirement savings benefit of living with her family.

SteveKnox6
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Re: Rapidly pay down student loans prior to house?

Post by SteveKnox6 » Sun Nov 12, 2017 11:15 am

My wife has been a full time student the past 3 years which is why we have not been able to save as much as we would have liked (Covering both of our expenses with one salary). I only started her Roth IRA this year which was admittedly a mistake but that’s part of our journey towards FI. We will be making a little over 200k this year so saving for the house over the next 2.5 years and the eventual mortgage payments shouldn’t be an issue.

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Re: Rapidly pay down student loans prior to house?

Post by Caduceus » Mon Nov 13, 2017 5:55 am

Why can't you max out your retirement account and pay off the loans at the same time? Given your OP, the numbers are not adding up. It seems you can definitely do both.

1. You should max out the 401k and IRA instead of just contributing 15%-20% as per your current plan. This is analytically similar to whether you would be willing to borrow at 7.2% in order to re-classify your income from being subject to tax to being tax-exempt. For most people, the benefits of tax-sheltered growth at retirement will far exceed the present value of the 7.2% interest costs that you pay for a few years.

2. Thankfully, you don't even have to worry about that. Why do you need $150,000 in cash earning practically nothing as a savings/emergency buffer? Unless your income is much lower than I'm estimating (was your savings in part the result of cash gifts from family?), you should be able to do all of it, since you managed to save just as much in a few years.

But in terms of priority, I would say that as long as you can pay off the student loans in a few years, max out the retirement accounts first, then aggressively pay off student loans at the same time as fast as you can.

runner540
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Re: Rapidly pay down student loans prior to house?

Post by runner540 » Mon Nov 13, 2017 7:15 am

SteveKnox6 wrote:
Sun Nov 12, 2017 10:02 am

Paying off the student loans in full will allow us to both max out our 401k and Roth IRA contributions as well as save a good chunk of change over the next 2.5 years for moving into and renovating the house as needed.
Great decision. No reason to keep $120k in taxable savings while paying interest on $117k (and 5.5% is NOT a low rate in today's market).

Definitely follow up on dm200's point about the mortgage. If you buy the house for $400k, then that's what the lender will view the value as, and most lenders will require at least 3% down from your funds. And if it's less than 20% down, you'll be paying PMI.

Also consider whether the house you grew up in is really what you want to take a $400k mortgage on. It may seem attractive because you are getting a "deal" from your father, but don't tie yourselves down to a property that doesn't truly suit both your and wife's needs. If you were going to buy a $500k house, would it be this one? Will dad object to selling if you need/want to sell it later?

Miriam2
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Re: Rapidly pay down student loans prior to house?

Post by Miriam2 » Tue Nov 14, 2017 5:34 pm

Olemiss540 wrote: Keep in mind that the recent bull run has led people to increase leverage with decreased fear of market downturns.
This - I fear - is spot on :shock:

hightower
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Re: Rapidly pay down student loans prior to house?

Post by hightower » Tue Nov 14, 2017 5:57 pm

U have done a great job saving so far. Absolutely agree that the best thing to do is get rid of your debt now. Even 5.5% refinanced is not a good rate IMO. You'll be so thankful you got rid of that debt as you get older.

rg422
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Re: Rapidly pay down student loans prior to house?

Post by rg422 » Tue Nov 14, 2017 6:26 pm

If it was me in your shoes I'd also pay off the student loan, as well; the interest rate is just too high.

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