Pay off Parent Plus Loan or Save/Invest

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
PurdueGrad23
Posts: 3
Joined: Tue Apr 02, 2024 11:01 am

Pay off Parent Plus Loan or Save/Invest

Post by PurdueGrad23 »

I am staring my financial journey and am looking at the best place to put my extra income. I make 90k a year. My current savings and loans are:

Savings:

- 12k emergency fund (in traditional and want to move to HYSE but don’t know about hidden costs)

- 10k in savings (want to get to 30k) for an eventual house down payment (would like to increase but don’t know if in the meantime to keep this in a HYSE or a brokerage account)

Loans:

- 28k personal student loan @ 4.49%

-50k parent plus student loan in parents name that I agreed to pay back @ 6.85%

My main question is I see a lot of people on this forum talk about paying off the loans if they are higher than the rate of return on investment.

However how does that work with a loan that is in someone else’s name that you are paying off? I know logically that the 6.85% should probably be what I focus on but seeing as this is a loan that wouldn’t be transferred if the worst was to happen to my family should I prioritize knocking out my own loans in my name or investing in brokerage/401k accounts? Or should I treat it as if it’s something that is in my name since I’m the one paying it back and attack that since I feel like it would be hard to find a return better than 6.85%. Also should I forget about saving for a house for the time being and use that money to more aggressively attack the student loans.

Any advice is helpful! Thanks in Advance!
terran
Posts: 3134
Joined: Sat Jan 10, 2015 9:50 pm

Re: Pay off Parent Plus Loan or Save/Invest

Post by terran »

Unless you're willing to go back on your word and stick your parents with the loan I would consider it the same as a loan in your name. Other than the requirement to repay being moral and not legal there's no difference -- you're accruing interest at a high rate compared to your investment options. If you haven't seen it you might find the Prioritizing investments wiki useful, which would put paying off high interest debt after establishing an emergency fund (which you've done) and contributing enough to get any employer match on a retirement plan. What high interest means is up for interpretation, but 6.85% is at least approaching high interest though not insanely high (like a credit card).
Topic Author
PurdueGrad23
Posts: 3
Joined: Tue Apr 02, 2024 11:01 am

Re: Pay off Parent Plus Loan or Save/Invest

Post by PurdueGrad23 »

Yeah I’m for sure not willing to go back on my word. And thank you for that link it was definitely helpful to have a visual chart like that!
User avatar
Metsfan91
Posts: 1090
Joined: Sat Jan 11, 2020 11:33 am
Location: Rust Belt

Re: Pay off Parent Plus Loan or Save/Invest

Post by Metsfan91 »

Invest part of the extra income. Time in the market matters. Use the remaining to pay off Parent Plus loan.
"Know what you own, and know why you own it." — Peter Lynch
Olemiss540
Posts: 2156
Joined: Fri Aug 18, 2017 8:46 pm

Re: Pay off Parent Plus Loan or Save/Invest

Post by Olemiss540 »

I would chase those student loans away ASAP with every extra cent, lower my emergency fund to $5k, and throw all of the cash I could at them until they are gone in a year and a half.

Then start building your future by building up house savings and contributing 20% of your income to your retirement plans. Do not miss out on any employer matching while paying off your loans though.

Housing is getting too expensive to try and carry a mortgage and multiple loan payments at the same time. Your cashflow is precious, try and keep loans completely out of your life and it will allow you to build your future savings goals MUCH quicker IMO.

3 items to focus on aside from the above: stick around here and read threads every weekend while you learn, do your own taxes and learn what impacts your marginal tax rate, get a Fidelity CMA account and use it as your checking/savings, investing your excess cash in a high yield money market account.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
deltaneutral83
Posts: 2467
Joined: Tue Mar 07, 2017 3:25 pm

Re: Pay off Parent Plus Loan or Save/Invest

Post by deltaneutral83 »

This is BH, where the financial literacy is significantly higher than the average, but the amount of people who have close to a <$0 NW (this is an assumption as a fresh graduate starting out so please update if incorrect) and use leverage successfully at 6+% to invest is probably well less than 50%. You will see a number of people who have a nice NW who have a mortgage less than 3.5% where they could easily stroke a check but even treasuries and HYSA are beating that virtually making it mathematically (not necessarily emotionally) suitable to invest with leverage. I personally would be sweating bullets with debt at 6% fresh out of school and electing to invest instead of pay down.
Jack FFR1846
Posts: 18569
Joined: Tue Dec 31, 2013 6:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: Pay off Parent Plus Loan or Save/Invest

Post by Jack FFR1846 »

This is a subject where I both agree and disagree with Dave Ramsey. He would say attack the smallest loan amount first, then go to the next. Being an engineer, the math is obvious and simple. Attack the highest INTEREST rate loan first, then go on to the next. If you have matching on your 401k, put that much in to get the 100% free gain. Then attack the highest interest loan and it doesn't matter that it's in your parents' names. It's your loan, you need to pay it off. The end.
Bogle: Smart Beta is stupid
User avatar
retired@50
Posts: 12983
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Pay off Parent Plus Loan or Save/Invest

Post by retired@50 »

PurdueGrad23 wrote: Tue Apr 02, 2024 3:49 pm Yeah I’m for sure not willing to go back on my word.
Good for you. Keeping your word is important in my book. :happy

With that being the case, pay the minimum on the 4.49% loan, and pay much more than the minimum on the 6.85% loan. Once the 6.85% loan is extinguished, pay more than the minimum on the 4.49% loan.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
KrisNC
Posts: 92
Joined: Fri Jul 09, 2021 1:41 pm

Re: Pay off Parent Plus Loan or Save/Invest

Post by KrisNC »

If you are a recent grad, you have a great salary and good job on savings.
You should prioritize paying off both the student loans ASAP. Parent plus loans cannot be discharged in bankruptcy and you have to uphold the agreement before taking this loan.

This is what I would advise:
1. Use 10k in Savings to Parent plus, that will make a big difference as % is higher.
2. Contribute to 401k up to the employer match (If you have this option, this is free money)
3. Contribute to Roth IRA (you can contribute 6.5k for 2023 until next week) and continue save/investing in Roth for 2024 and beyond.
4. Start paying off Student Loans with as much as possible, and you should be able to pay off within 1-2 years.
5. Start saving for House or new car etc.

Good luck!
User avatar
Hector
Posts: 1887
Joined: Fri Dec 24, 2010 1:21 pm
Contact:

Re: Pay off Parent Plus Loan or Save/Invest

Post by Hector »

I would pay 50k parent plus student loan in parents' name that you agreed to pay back @ 6.85% first.
I would not save for down payment till I am done with this first.
Fresh Air
Posts: 79
Joined: Thu May 19, 2016 9:04 am

Re: Pay off Parent Plus Loan or Save/Invest

Post by Fresh Air »

I’d also go for the parent loans first. You may be able to get a tax deduction for the ones in your name. So, both the lower interest rate & tax incentives favor going in that direction.
Atomsplitter
Posts: 70
Joined: Fri Mar 22, 2024 12:35 pm

Re: Pay off Parent Plus Loan or Save/Invest

Post by Atomsplitter »

PurdueGrad23 wrote: Tue Apr 02, 2024 11:12 am - 10k in savings (want to get to 30k) for an eventual house down payment (would like to increase but don’t know if in the meantime to keep this in a HYSE or a brokerage account) ............. @ 6.85%
I will echo the use the $10K now and save for house later concept. Think of it like this you are currently borrowing that 10K @6.85% until the loan is paid off (acutally that only buys a rate drop to 4.49% :annoyed ). Any savings the 10K generates is at that cost! Is 12K emergency fund adaquate/to large/to small that is up to you, can you safely make it smaller? Then do it.

Are you living in mom & dads basement? They might more desirous of you saving for a house :wink: but the time for that will come!

BTW $90K starting job on $70K student debit seem like pretty darn good investment in your self! These days there so many horrors stories about 6 figures of debt for 5 figure (maybe they can find one) jobs!

Congratulations and welcome to show, keep asking questions and never stop listening! :beer
EricGold
Posts: 191
Joined: Sat Mar 16, 2024 4:19 pm

Re: Pay off Parent Plus Loan or Save/Invest

Post by EricGold »

PurdueGrad23 wrote: Tue Apr 02, 2024 3:49 pm Yeah I’m for sure not willing to go back on my word.
Then what is there to discuss ? A plan to 'pay back' that takes backseat to whatever priority suits your fancy is a broken promise.
User avatar
Silentnight
Posts: 153
Joined: Sat Oct 24, 2020 11:51 am

Re: Pay off Parent Plus Loan or Save/Invest

Post by Silentnight »

This is not a financial comment.
And your parents could think very differently than I do.

Were you my child, I would want you to get me out of debt ASAP. I would want you to have a small emergency fund b/c cars will break down, lap tops will die, but otherwise, I want to be released from the debt I incurred for you. If I saw you doing this, that, and the other thing with your money (and it is your money so you do get to decide) while owing me money, I would be irritated, hurt, upset. But then, your parents may be better off than I am and they might not care. I would care and it would affect my attitude toward you (and I hope I could keep that concealed as I smiled sweetly and told you not to worry about it, that I trust you to repay it). (Yes, I am not confrontational and I would lie.)
Topic Author
PurdueGrad23
Posts: 3
Joined: Tue Apr 02, 2024 11:01 am

Re: Pay off Parent Plus Loan or Save/Invest

Post by PurdueGrad23 »

Thank you everyone who has been responding. My parents are in a good financial situation and the loans that my brother and I have on their name do not dip their credit to a concerning point so they have stressed they are fine with whatever pay off method we want to use as long as we meet the minimums (very blessed to have them as parents).

However while they don’t have an emotional tie to the loan (at least they say they don't but they could be hiding their emotions as mentioned above) I do feel a little weird whenever I spend money at this point and would like that separation from owing them and just be parent/son relationship again.

After reading the replies and many of the blogs in this forum. I have decided that I was trying to run before I walked and that the saving for a house should definitely take a back seat. I saw the housing prices increase and wanted to get in as quick as possible before they became even more out of reach. However as someone mentioned above, any monthly payment for a house I got would push me over when adding in these monthly payments as well. So I will be putting that savings into the loan and using a debt payoff calculator it looks like it should be fully paid off in a little over 2 years at which point I can start saving back up again for a house and investing (outside of the 401k match that will be done through out). Hopefully by then interests rates or prices have dropped back into a reasonable number. Will also be staying on this forum to learn more of the wisdom everyone has about finances in hopes that when the next step comes I will be even better informed!

Thanks again to all who responded!
albireo13
Posts: 131
Joined: Wed Jun 24, 2015 6:35 am

Re: Pay off Parent Plus Loan or Save/Invest

Post by albireo13 »

Good for you. You seem very responsible.
If it was me … forget the numbers and interest rates.

I would put it my priority to pay off the parent plus loan.
It would make a positive statement to my parents. Also,
you get to affirm your goal for independence and self sufficiency.

I have adult kids who I have helped out.
My biggest sense of pride is when I see them
do what it takes to make their way in the world.
I don’t want them beholden to anyone, parents included.
Post Reply