Student Loans (100k+ with Sallie Mae) & Retirement

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theJet2014
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Joined: Tue Aug 05, 2014 9:55 am

Student Loans (100k+ with Sallie Mae) & Retirement

Post by theJet2014 »

Hello all,

Long story short, I made some irrational decisions as a 17 year old when choosing my college. Do not feel bad for me, I got past that stage years ago (I turn 28 this year) and want to focus solely on making sure I make the best decisions for my future.

Image

Thats a total of 113k at varying interest rates. My question is, what is the best way to attack this beast while still contributing towards retirement? At the current rate of paying around 1300 a month, the loan should be repayed sometime in 2024. (Sallie Mae will not consolidate, Sofi rejected consolidating all loans - I still need to call asking why)

My yearly income (pre-tax): 60k
I hope to find a better job in the very near future, but assume a constant yearly income of 60k (worst cast scenario).

My plan of action:
1) Continue investing enough in 401k to get the company match
2) Work towards paying off the 34k loan with a 9.25% interest rate (on top of the 1300 monthly payment).
3) Once 2 is done, start making additional payments to the smaller loans
4) Once loans are bearable start contributing more towards retirement.

Does this sound like the right thing to do? Should I be investing more into retirement via 401k and Roth?

Any advice is appreciated.

Additional Information:
Very frugal with my money and I do not have any other major bills. I do wish to get married in the future, have a kid or two (will forego the second if I cannot provide a good life), and possibly own a house.
TSR
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Re: Student Loans (100k+ with Sallie Mae) & Retirement

Post by TSR »

I'm a big fan of doing "both," (and I agree with jimb_fromATL in his posts here and elsewhere: http://www.bogleheads.org/forum/viewtop ... 2&t=136385), but you've got a real wall of loans there (I started with about $100,000, so I feel you). I think if I were you, I would be really tempted to knock out the $6K loan at 9.25% before the $34K loan, just so I would have SOME sense of accomplishment in all of this and some improvement in my monthly cash flow.

The only change I would make to your proposed plan is that I would start to increase my 401k contributions (or start Roth contributions if your 401k plan is bad) immediately after you knock out the two 9.25% loans. In other words, once you whittle down your montly required loan payments to something more manageable, perhaps consider splitting the "extra" money you have between aggressive loan repayment and investing. In addition to being a sound choice IMO, that will also give you a good "goal" to incentivize paying down those 9.25% loans: you get to start really investing at that point.

Again, as you'll see from the link above, there is an argument to be made that you should invest more right now, but I think at 9.25% you're more in the "debt emergency" territory than the "manageable monthly expense" territory. Once you get it down into the manageable territory, go after the savings as well.

Good luck!
music_man
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Re: Student Loans (100k+ with Sallie Mae) & Retirement

Post by music_man »

I would attack them in this order (after making your minimum on all of them first):

1. $6,434.36 @ 9.25%
2. $34,372.79 @ 9.25%
3. $6,475.70 @ 5.25%
4. $28,748.27 @ 5.25%
5. $22,461.47 @ 4.75%
6. $15,006.89 @ 4.25%

Just running the #'s alone, you would pay the least amount of interest possible. By paying the smaller balance first between loans with the same rate, you get the added psychological benefit of paying an additional loan off along with easier maintenance (one less loan to account for).
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JonnyDVM
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Re: Student Loans (100k+ with Sallie Mae) & Retirement

Post by JonnyDVM »

Have you tried to refinance? You should be able to do way better than 9.25% with SOFI. They may be able to refi at least some of your absurd 9% loans.
I’d trade it all for a little more | -C Montgomery Burns
Crow Hunter
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Re: Student Loans (100k+ with Sallie Mae) & Retirement

Post by Crow Hunter »

Can you still do consolidations?

I consolidated my wife's student loans back a decade or so ago with Key Bank. At the time they were running a deal if you would consolidate they would knock off 5% of the principal if you made X number of consecutive payments as well as .25% interest if you would do an automatic payment. I think we got somewhere around a 3.25% interest rate.

Again, this was 10 or 12 years ago.
dickenjb
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Re: Student Loans (100k+ with Sallie Mae) & Retirement

Post by dickenjb »

Yes focus on the 6K loan at 9% before the 34K loan at 9%. In addition to the psychic benefits, it will improve your cash flow more when the 6K loan is paid off and that is $84 more per month to now direct at the 34K, 9% loan.
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ray.james
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Re: Student Loans (100k+ with Sallie Mae) & Retirement

Post by ray.james »

I started at ~40k, 2 loans at 9 and 11%.
I would second to payoff 6k loan for psychological benefit and also cash flow. I also used a 0% apr CC to put off living expenses on card for 1.3 years to focus on loans. Hope it helps.

Also, when you pay off one of the loan, you can scout for interest reduction better as it shows commitment and good planning to lenders. In my case it helped. I refi my second loan of 20k to 5% at a local bank after I finished first one.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939
jms7
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Re: Student Loans (100k+ with Sallie Mae) & Retirement

Post by jms7 »

You've got a good plan and are getting good advice. Pay the smaller 9.25% loan, then attack the big 9.25% loan. Contribute up to match, but not more, while doing so. Once the 9.25% loans are done, I'd split the freed up money between loans and retirement savings. The rates on your remaining loans aren't terrible.

Make a spreadsheet and chart to document your payments. Watching the balance go down monthly will give you some satisfaction (though if you're like me, you'll agonize over ways to make it happen faster).

If possible, and this will make the biggest difference, try to get a job that pays more. I know it's easier said than done. But you're in a big hole, and you need a big shovel to fill it with.
Rob Bertram
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Re: Student Loans (100k+ with Sallie Mae) & Retirement

Post by Rob Bertram »

Do you have an emergency fund? I would build that up before aggressively paying down the loans. Keep some of your emergency funds liquid (in a bank), then place the rest in a short/intermediate bond fund in your Roth IRA. There is more information on the wiki: http://www.bogleheads.org/wiki/Roth_IRA ... gency_fund

I would suggest the following approach. The goal is to maximize your future net worth.

1) Contribute to your 401k up to the match.
2) Build up emergency funds, place in Roth if space is available.
3) Pay down 9% loans.
4) Max Roth
5) Pay down other loans, highest interest first.
HMan768
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Re: Student Loans (100k+ with Sallie Mae) & Retirement

Post by HMan768 »

Just some words of encouragement: You can do it! It will be worth it in the end! Think about all the people who spent $100k on something way worse than education like a silly car or boat.
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jimb_fromATL
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Re: Student Loans (100k+ with Sallie Mae) & Retirement

Post by jimb_fromATL »

Definitely do contribute to get all the employer match; build up your emergency fund; and if you pay anything extra on the debts pay off the high interest rate loans faster first. I also agree that paying the smallest one off first makes sense.

However, reducing your retirement contributions to anything less than 15% to 20% of your income in order to pay off the debts faster is probably not the best use of your spare money. So it might be good for you to know how much it might cost out of your potential future retirement income if you direct money to pay down the debts too fast instead of investing more for retirement.

THIS THREAD is one of several where you'll see differing opinions about investing versus paying down debt. There are more reasons and differing opinions and feelings expressed in this thread ... along with some relatively objective numeric examples I've put there to consider. My post in THIS THREAD also shows an example illustrating how losing even a short time for investing and compounding can cost a lot of money. And here's another example

With $60K income and single, you're paying 25% federal tax on any extra income that you don't contribute to your 401(k), and even more if you're in a state that has an income tax. That money isn't doing anything for you if you pay it to the gubbament several decades earlier than necessary.

The opportunity to contribute to a Roth IRA is also a once-per-year use-it-or-lose it chance to put some of your money where it will earn compound interest for the rest of your life tax-free. At the same time, a Roth IRA leaves your contributions available at any time with no tax or penalty in case you have a dire financial emergency. So forfeiting the tax advantages by reducing your retirement contributions to both types of retirement plans (or not increasing them) can negate a lot of the savings that any extra after-tax money will give you for paying off the debts faster.

Even if you do decide to eliminate the 9.25% rate debts faster, you'll still most likely be better off to reapply those freed-up payments to investing more for retirement instead of using the money to pay off the lower-rate debts faster. I've never known anybody who actually continued to sacrifice and live on lower income after paying of some of their most burdensome. So it doesn't really seem very likely that you will either, especially if you expect to get married and/or buy a home before you have the debts paid off. But if you don't reinvest the freed-up payments it can cost you a sometimes mind-boggling amount out of your probable future retirement.


Do you have a state income tax? If so, does your state allow tax deductions for 401(k) and IRA contributions?

Do you qualify for income-based repayments, and/or work in a job that might qualify for any Student Loan Forgiveness program?

Do you anticipate having any big increases in income that might be well above keeping up with inflation for the rest of your career?

Do you have at least 6 months to a year of living expenses saved up in liquid assets? (Bear in mind that some of that can be in a Roth IRA).

After paying all the bills, contributing to retirement and to an emergency fund, and making all your payments every month, how much do you have to spare to either pay down the debt faster or invest for additional retirement contributions?

jimb
Topic Author
theJet2014
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Re: Student Loans (100k+ with Sallie Mae) & Retirement

Post by theJet2014 »

Thank you for all the replies so far, I greatly appreciate it!

As per the advice of the majority, I'll adjust my plan so that I clear the 6k 9% IR loan first, followed by the 34k loan.
JonnyDVM wrote:Have you tried to refinance? You should be able to do way better than 9.25% with SOFI. They may be able to refi at least some of your absurd 9% loans.
Crow Hunter wrote:Can you still do consolidations?

I consolidated my wife's student loans back a decade or so ago with Key Bank. At the time they were running a deal if you would consolidate they would knock off 5% of the principal if you made X number of consecutive payments as well as .25% interest if you would do an automatic payment. I think we got somewhere around a 3.25% interest rate.

Again, this was 10 or 12 years ago.
ray.james wrote:I started at ~40k, 2 loans at 9 and 11%.
I would second to payoff 6k loan for psychological benefit and also cash flow. I also used a 0% apr CC to put off living expenses on card for 1.3 years to focus on loans. Hope it helps.

Also, when you pay off one of the loan, you can scout for interest reduction better as it shows commitment and good planning to lenders. In my case it helped. I refi my second loan of 20k to 5% at a local bank after I finished first one.
Sofi has rejected my two applications so far claiming "Adverse Action - Income Insufficient for debt servicing" even though I have never missed a payment (credit is around 760). I may call for further details or see if another company can help me out.
Rob Bertram wrote:Do you have an emergency fund?
I do have an emergency fund, but I am thinking of cutting into it to pay off the 6k 9% interest rate loan completely. A good general rule is enough money to survive a few months with no incoming income right?
HMan768 wrote:Just some words of encouragement: You can do it! It will be worth it in the end! Think about all the people who spent $100k on something way worse than education like a silly car or boat.
Thank you :)
Topic Author
theJet2014
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Re: Student Loans (100k+ with Sallie Mae) & Retirement

Post by theJet2014 »

jimb_fromATL wrote:Definitely do contribute to get all the employer match; build up your emergency fund; and if you pay anything extra on the debts pay off the high interest rate loans faster first. I also agree that paying the smallest one off first makes sense.

However, reducing your retirement contributions to anything less than 15% to 20% of your income in order to pay off the debts faster is probably not the best use of your spare money. So it might be good for you to know how much it might cost out of your potential future retirement income if you direct money to pay down the debts too fast instead of investing more for retirement.

THIS THREAD is one of several where you'll see differing opinions about investing versus paying down debt. There are more reasons and differing opinions and feelings expressed in this thread ... along with some relatively objective numeric examples I've put there to consider. My post in THIS THREAD also shows an example illustrating how losing even a short time for investing and compounding can cost a lot of money. And here's another example

With $60K income and single, you're paying 25% federal tax on any extra income that you don't contribute to your 401(k), and even more if you're in a state that has an income tax. That money isn't doing anything for you if you pay it to the gubbament several decades earlier than necessary.

The opportunity to contribute to a Roth IRA is also a once-per-year use-it-or-lose it chance to put some of your money where it will earn compound interest for the rest of your life tax-free. At the same time, a Roth IRA leaves your contributions available at any time with no tax or penalty in case you have a dire financial emergency. So forfeiting the tax advantages by reducing your retirement contributions to both types of retirement plans (or not increasing them) can negate a lot of the savings that any extra after-tax money will give you for paying off the debts faster.

Even if you do decide to eliminate the 9.25% rate debts faster, you'll still most likely be better off to reapply those freed-up payments to investing more for retirement instead of using the money to pay off the lower-rate debts faster. I've never known anybody who actually continued to sacrifice and live on lower income after paying of some of their most burdensome. So it doesn't really seem very likely that you will either, especially if you expect to get married and/or buy a home before you have the debts paid off. But if you don't reinvest the freed-up payments it can cost you a sometimes mind-boggling amount out of your probable future retirement.


Do you have a state income tax? If so, does your state allow tax deductions for 401(k) and IRA contributions?
I do have income tax here in Massachusetts, I will need to look into deductions...

Do you qualify for income-based repayments, and/or work in a job that might qualify for any Student Loan Forgiveness program?
No unfortunately.

Do you anticipate having any big increases in income that might be well above keeping up with inflation for the rest of your career?
I will be looking for a new job in the near future, I cannot really estimate what the increase will be though.

Do you have at least 6 months to a year of living expenses saved up in liquid assets? (Bear in mind that some of that can be in a Roth IRA).
I do, sitting in my bank account

After paying all the bills, contributing to retirement and to an emergency fund, and making all your payments every month, how much do you have to spare to either pay down the debt faster or invest for additional retirement contributions?
Lot of factors here. After matching my company for 401k I get roughly 3100-3200 per month. 3200 - 1350 (minimum loan payment) - 1200 (rent + misc bills + other living expenses) = $650 leftover. I was going to start applying all the extra cash to the 9% loans. This means no additional funds added to emergency fund or investing... Would you change that?

jimb
Comments are bolded in your quoted post. Thank you for the links for additional reading, I will check them out tonight.
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torius71
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Re: Student Loans (100k+ with Sallie Mae) & Retirement

Post by torius71 »

"A new truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it."-MP
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Re: Student Loans (100k+ with Sallie Mae) & Retirement

Post by grabiner »

jimb_fromATL wrote:Definitely do contribute to get all the employer match; build up your emergency fund; and if you pay anything extra on the debts pay off the high interest rate loans faster first. I also agree that paying the smallest one off first makes sense.

However, reducing your retirement contributions to anything less than 15% to 20% of your income in order to pay off the debts faster is probably not the best use of your spare money. So it might be good for you to know how much it might cost out of your potential future retirement income if you direct money to pay down the debts too fast instead of investing more for retirement.
And I disagree with this, at least for the highest-rate loans. Once these loans are gone, direct all of the spare cash which would have gone towards these loans to your 401(k) and IRA; you'll be able to save more for retirement because you have fewer loan payments. Paying down a 9.25% loan is an investment with a risk-free return of 9.25% (not deductible since you pay more interest than the maximum deductible amount), and you can then turn the money into a more conventional investment.

I agree that keeping the lower-rate loans while contributing more to retirement may be a good deal, particularly if interest rates rise by the time this happens. If you are paying 3.94% on the 5.25% loan after tax (deducting interest in a 25% bracket) and bond yields in your 401(k) are 5%, your net worth grows faster by making 401(k) contributions than by making extra loan payment.
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grsimmon
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Re: Student Loans (100k+ with Sallie Mae) & Retirement

Post by grsimmon »

I hope the original author will check back and read this. I don't know what your major was in college or graduate school, but you may be eligible for student loan forgiveness programs. These are totally separate from anything you have read about in the news lately. There are different programs out there for teachers, medical staff, mental health & substance abuse counselors, dentists/optometrists, etc. I participated with the Indian Health Services starting when I was age 29 and they took a major chunk off my loans, around $60k. Worth checking into this or other programs if you think there's even a remote chance you may qualify.
TSR
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Re: Student Loans (100k+ with Sallie Mae) & Retirement

Post by TSR »

I just wanted to chime back in here and comment on your emergency fund. As tempting as it might be just to use it to knock out your small-ish loan at 9.25%, you need to recognize that that's essentially a big gamble -- i.e., a gamble that you won't be in an emergency for the period of time that it would take you to re-save that money. I think that's too much risk.

Here's a smaller gamble: Instead of keeping that money in a bank account, put it in a Roth IRA. Some people use those as an emergency fund because they allow you to withdraw all contributions (but not interest) at any time without penalty. You would want to keep this money safe, so bonds or some conservative mix of stocks and bonds. This would allow you to start "investing" in use-it-or-lose-it Roth space even while you're being fairly conservative and paying your debts. The only real "gamble" is that you would lose the yearly contribution if you had to withdraw it, but you lose it if you don't invest in it as well.

Good luck!
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