Paying off Student Loans vs Investing

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Topic Author
capostatus
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Joined: Thu Feb 18, 2021 12:10 pm

Paying off Student Loans vs Investing

Post by capostatus »

Hey. I was wondering if it would be better to pay off my student loans vs invest that money into my 401k instead.

Here's my total portfolio breakdown if that helps as well: viewtopic.php?f=1&t=340795&p=5832613#p5832613

I'm 37 years old.

Private Loan: $18,487.74 at 2.75% variable. I'm assuming it could go up to 8% but it never has. Navient couldnt tell me either. Over the past 10 years I think my payment was $200 at the highest.

Current Monthly payment: $147. It's under extended repayment

Pay off date: 6/4/33

Through Earnest I can refinance to 2.98% Fixed with a $323 monthly payment that would pay it off in 5 years.

Salary: 91k
Emergency fund: 17k about 4 months.
Savings: 120k Thinking about house down payment in a year or 2 but not sure.
Extra cash: $4200. Debating on whether to put towards emergency fund, 401k or principle of loan.
401k: 32k at 9-12k contribution a year. Still deciding on the %
IRA:85k
Roth IRA: 14k at 6k contributions a year
Taxable: 10k at betterment and 10k individual stocks.

We're also planning on getting a new apartment in the next few months that would bring my rent to 1500+ from around 1000 a month. Including the increased monthly if I refinance at $323 that would bring my total fixed costs to about 50% of my salary which is the max for my 50/20/30 plan.

Questions: 1) Do you think its a good idea to refinace to 5 years, pay off the loan entirely, or keep paying the minimums and put more into my 401k instead over the next 12 years?

2) What should i do with the extra 4200 cash? Put it into emergency fund, loan principle, or increase contributions to 401k for a few months?

I was thinking maybe using the house money to pay it off but then I'd be putting money that could go into my 401k instead into rebuilding the house fund.

Thanks for your help!
Last edited by capostatus on Thu Feb 25, 2021 2:10 pm, edited 1 time in total.
flyfishers83
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Re: Paying off Student Loans vs Investing

Post by flyfishers83 »

You have some competing goals. Part of the equation is figuring out how badly you want to get rid of your student loans. If you want to pay it off, you could pay it off tomorrow. Or you could pay a chunk and increase your monthly payments. Or, you could hit pause on that decision while waiting for the student loan forgiveness debate to be settled. I'm in the boat of waiting for now. I had planned to pay off the remainder of my student loans last year. However, the interest freeze and possibility of a forgiveness program convinced me to wait.

Ultimately, I expect your interest rate won't matter that much if you decide to aggressively pay off.

I took a quick look at your portfolio post. I'm sure you'll get some specific feedback, but my general feedback is to take a step back and focus on simplifying things. Keeping track of like 50 small dollar investments seems like too much work. You can't really tell the composition of your portfolio, and it gets more complicated when you add in your significant other. You'll also have ongoing questions about where to put new money. A simplified approach streamlines investing.
TSR
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Re: Paying off Student Loans vs Investing

Post by TSR »

1. I'm not sure I understand the benefit of the refi. If you just voluntarily started paying $323 every month without doing a refi then you would also kill your debt in five years. The only benefit you'd get is in locking in a rate that is currently higher than the one you already have. Given that you could pay this thing down immediately (or just pay it all off the minute rates start going up), I don't see why you're even considering this option.

2. The most financially optimal thing you can do is increase your 401k contributions*. You're paying taxes on every dollar you're not maxing out in that 401k, and you'll pay "double" taxes on every dollar you don't put in the 401k and instead contribute to your taxable savings. Just max that sucker out!

3. What I would do if I were you is to (1) empty your emergency fund and pay off the student loan; (2) *temporarily* treat your Roth as your emergency fund while you build up some cash reserves over a five year period (see the wiki for "using a Roth as an emergency fund"); (3) take the monthly payments you would have made toward your student loans, including the extra money you would have put toward that refi payment, and shove those into your 401k; (4) figure out why you're doing taxable investing through Betterment and find a way to get that money into your 401k; and (5) see what you have left over to pay for that fancy new apartment. I suspect that there are places you could tighten the belt to make that easier to swallow, or you might reevaluate whether you need to upgrade that much.

good luck!

*note that the one exception to this would be if you have a truly terrible workplace 401k. but we're talking expense ratios over, say, 0.75% here. I'm guessing yours is better than that.
Topic Author
capostatus
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Re: Paying off Student Loans vs Investing

Post by capostatus »

flyfishers83 wrote: Thu Feb 25, 2021 1:05 pm You have some competing goals. Part of the equation is figuring out how badly you want to get rid of your student loans. If you want to pay it off, you could pay it off tomorrow. Or you could pay a chunk and increase your monthly payments. Or, you could hit pause on that decision while waiting for the student loan forgiveness debate to be settled. I'm in the boat of waiting for now. I had planned to pay off the remainder of my student loans last year. However, the interest freeze and possibility of a forgiveness program convinced me to wait.

Ultimately, I expect your interest rate won't matter that much if you decide to aggressively pay off.

I took a quick look at your portfolio post. I'm sure you'll get some specific feedback, but my general feedback is to take a step back and focus on simplifying things. Keeping track of like 50 small dollar investments seems like too much work. You can't really tell the composition of your portfolio, and it gets more complicated when you add in your significant other. You'll also have ongoing questions about where to put new money. A simplified approach streamlines investing.
Thanks! Yeah unfortunately mine is a private loan so I dont think it qualifies for forgiveness. I do like the idea of paying off the loan but I wanted to make sure that it wouldnt be better to invest as the return on that would hopefully be higher from that than the 2.75% interest rate.

I really appreciate the feedback and I definitely need to simplify my portfolio into a 3 fund.
Topic Author
capostatus
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Re: Paying off Student Loans vs Investing

Post by capostatus »

TSR wrote: Thu Feb 25, 2021 1:36 pm 1. I'm not sure I understand the benefit of the refi. If you just voluntarily started paying $323 every month without doing a refi then you would also kill your debt in five years. The only benefit you'd get is in locking in a rate that is currently higher than the one you already have. Given that you could pay this thing down immediately (or just pay it all off the minute rates start going up), I don't see why you're even considering this option.

2. The most financially optimal thing you can do is increase your 401k contributions*. You're paying taxes on every dollar you're not maxing out in that 401k, and you'll pay "double" taxes on every dollar you don't put in the 401k and instead contribute to your taxable savings. Just max that sucker out!

3. What I would do if I were you is to (1) empty your emergency fund and pay off the student loan; (2) *temporarily* treat your Roth as your emergency fund while you build up some cash reserves over a five year period (see the wiki for "using a Roth as an emergency fund"); (3) take the monthly payments you would have made toward your student loans, including the extra money you would have put toward that refi payment, and shove those into your 401k; (4) figure out why you're doing taxable investing through Betterment and find a way to get that money into your 401k; and (5) see what you have left over to pay for that fancy new apartment. I suspect that there are places you could tighten the belt to make that easier to swallow, or you might reevaluate whether you need to upgrade that much.

good luck!

*note that the one exception to this would be if you have a truly terrible workplace 401k. but we're talking expense ratios over, say, 0.75% here. I'm guessing yours is better than that.
Thanks for your detailed response! I wasn't sure if the amount in interest I'd be saving by paying off the loan completely would outweigh what I could get from putting it into my 401k instead. In my mind, no matter where I take the money from to pay off the loan, (emergency fund, house payment, cash etc) I would then have to spend a year or 2 trying to save it back up and that would be money that wouldn't be going into my 401k.

I'm kind of hesitant to use my Roth IRA as an emergency fund even if its temp. I read the wiki and it seems a little advanced for me haha. It's been kind of ingrained in me to never take out anything from your retirements or I guess risk potentially having to do that. Especially now with covid and who knows about job security.

Do you think I could instead take 14k from the house fund and then 4k from my cash? I guess that would kind of defeat the purpose because I'd have to save $583 a month to get back to 14k in 2 years which wouldn't be going into my 401k.

Yeah my plan is to either transfer the betterment to a vanguard taxable or sell it and add that to my 401k over time. I originally wanted the taxable accounts to just be able to sell whenever I wanted to fund a possible side business/new career. However that was when I knew even less than I do now about investing lol.

I really appreciate your help and taking the time to respond so thoroughly.
SuperTrooper87
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Re: Paying off Student Loans vs Investing

Post by SuperTrooper87 »

Write a check tomorrow. You have more than enough cash. No point in paying that interest over the next 10-12 years. Get that burden off your back. Write a check today and earn 2.75 on your cash.
tashnewbie
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Re: Paying off Student Loans vs Investing

Post by tashnewbie »

I assume your $120k non-EF savings and the $4200 cash are sitting in accounts earning less than 1%.

Seems like a no-brainer to me to take $18k from those pots and pay off the student loan tomorrow.

Then you can divert the student loan payment to refilling the house down payment fund. Over 2 years, you'll easily have put $5k back. I'm sure you can cut your budget somewhere to come up with another $10k if it's needed for a house down payment (or buy a slightly cheaper house!). Your house down payments are a significant portion of your overall net worth. If you really want to buy in 1-2 years, then I think it's smart to have that money out of the market, but it's a big drag on your portfolio.
ohboy!
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Re: Paying off Student Loans vs Investing

Post by ohboy! »

SuperTrooper87 wrote: Thu Feb 25, 2021 4:01 pm Write a check tomorrow. You have more than enough cash. No point in paying that interest over the next 10-12 years. Get that burden off your back. Write a check today and earn 2.75 on your cash.
Agree. And if not paying it off then refi to fixed rate, because that variable junk could get funky quick according to rising treasuries.
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CyclingDuo
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Re: Paying off Student Loans vs Investing

Post by CyclingDuo »

capostatus wrote: Thu Feb 25, 2021 12:43 pm I'm 37 years old.

Private Loan: $18,487.74 at 2.75% variable. I'm assuming it could go up to 8% but it never has. Navient couldnt tell me either. Over the past 10 years I think my payment was $200 at the highest.

Current Monthly payment: $147. It's under extended repayment

Pay off date: 6/4/33

Emergency fund: 17k about 4 months.
Savings: 120k Thinking about house down payment in a year or 2 but not sure.
Extra cash: $4200. Debating on whether to put towards emergency fund, 401k or principle of loan.
Taxable: 10k at betterment and 10k individual stocks.
Pay off your student loan and be done with it. Gone. Forever. You have the funds available to do this and remove that debt monkey from your back.

Write the check.

CyclingDuo
"Save like a pessimist, invest like an optimist." - Morgan Housel | "Pick a bushel, save a peck!" - Grandpa
TSR
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Re: Paying off Student Loans vs Investing

Post by TSR »

capostatus wrote: Thu Feb 25, 2021 3:56 pm
[snip]

In my mind, no matter where I take the money from to pay off the loan, (emergency fund, house payment, cash etc) I would then have to spend a year or 2 trying to save it back up and that would be money that wouldn't be going into my 401k.

I'm kind of hesitant to use my Roth IRA as an emergency fund even if its temp. I read the wiki and it seems a little advanced for me haha. It's been kind of ingrained in me to never take out anything from your retirements or I guess risk potentially having to do that. Especially now with covid and who knows about job security.

Do you think I could instead take 14k from the house fund and then 4k from my cash? I guess that would kind of defeat the purpose because I'd have to save $583 a month to get back to 14k in 2 years which wouldn't be going into my 401k.
Like others have suggested, I think the real problem that you're on the road to discovering here is not that wherever you take from you have to put back, but rather that you haven't quite identified where your priorities ought to be and you're sort of "playing around" with different financial strategies. (E.g., refinancing, seeing what you can do in taxable, maybe upgrading your apartment but ALSO buying a house?) Once you simplify a little you won't have to worry about that $583 a month going back to your emergency fund or whatever. So what should those priorities be? For me it's (1) maxing out the 401k with all of its tax advantages, and (2) paying off debt. If we assume that everything else is secondary, you've got a ton of options. I suggested the "Roth-as-emergency-fund" move just because I have no idea how much you value the future house savings, but as others have suggested you could just pull money out of the house fund and it would get you out of debt tomorrow. Given that you don't really know if you're going to stick with the upgraded the apartment or buy a house, it really doesn't matter when you top that fund back up. I suspect that once you prioritize the 401k and get rid of the student debt, you'll have a better feel for what you can and can't do with the "rest" of your money. At the very least, paying off the debt will simplify the mental math and optimizing that you are currently doing, which I suspect is kind of paralyzing you at the moment.

Keep up the good work, and keep it simple!
checkyourmath
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Re: Paying off Student Loans vs Investing

Post by checkyourmath »

I second that about writing the check to pay off the loans. It is a waste of your time and energy to think about. I only had about 24k in loans when I graduated and paid them off as quickly as possible. Nothing is certain except Interest on student loans/medical bills, taxes, and death! Benny Franklin used to say that all the time.
MishkaWorries
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Re: Paying off Student Loans vs Investing

Post by MishkaWorries »

TSR wrote: Fri Feb 26, 2021 8:58 am
capostatus wrote: Thu Feb 25, 2021 3:56 pm
[snip]

In my mind, no matter where I take the money from to pay off the loan, (emergency fund, house payment, cash etc) I would then have to spend a year or 2 trying to save it back up and that would be money that wouldn't be going into my 401k.

I'm kind of hesitant to use my Roth IRA as an emergency fund even if its temp. I read the wiki and it seems a little advanced for me haha. It's been kind of ingrained in me to never take out anything from your retirements or I guess risk potentially having to do that. Especially now with covid and who knows about job security.

Do you think I could instead take 14k from the house fund and then 4k from my cash? I guess that would kind of defeat the purpose because I'd have to save $583 a month to get back to 14k in 2 years which wouldn't be going into my 401k.
Like others have suggested, I think the real problem that you're on the road to discovering here is not that wherever you take from you have to put back, but rather that you haven't quite identified where your priorities ought to be and you're sort of "playing around" with different financial strategies. (E.g., refinancing, seeing what you can do in taxable, maybe upgrading your apartment but ALSO buying a house?) Once you simplify a little you won't have to worry about that $583 a month going back to your emergency fund or whatever. So what should those priorities be? For me it's (1) maxing out the 401k with all of its tax advantages, and (2) paying off debt. If we assume that everything else is secondary, you've got a ton of options. I suggested the "Roth-as-emergency-fund" move just because I have no idea how much you value the future house savings, but as others have suggested you could just pull money out of the house fund and it would get you out of debt tomorrow. Given that you don't really know if you're going to stick with the upgraded the apartment or buy a house, it really doesn't matter when you top that fund back up. I suspect that once you prioritize the 401k and get rid of the student debt, you'll have a better feel for what you can and can't do with the "rest" of your money. At the very least, paying off the debt will simplify the mental math and optimizing that you are currently doing, which I suspect is kind of paralyzing you at the moment.

Keep up the good work, and keep it simple!
Excellent advice. Identify your priorities and simplify your life. Why in the world would you consider increasing your rent by 33% when you are paying a student loan and saving for a house in a year or two? That makes no sense. Are you planning on buying a house with a girlfriend? You'll need to have a talk with an attorney about drafting up the proper paperwork or get married.

That 2.75% rate is going to go up very soon with the recent spike in bond yields.

Payoff the student loan from your house fund. Why pay 2.75% when your probably earning less than that on your savings?

You may also be showing other signs of lifestyle creep. I'd sit down and create a budget that hurts and stick to it. The worse mistake to make when young is to get your lifestyle ahead of your finances.
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CyclingDuo
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Re: Paying off Student Loans vs Investing

Post by CyclingDuo »

checkyourmath wrote: Fri Feb 26, 2021 9:33 am I second that about writing the check to pay off the loans. It is a waste of your time and energy to think about. I only had about 24k in loans when I graduated and paid them off as quickly as possible. Nothing is certain except Interest on student loans/medical bills, taxes, and death! Benny Franklin used to say that all the time.
^^Bravo!

I work with quite a few 22-35 year olds who carry student loans and much of the discussion at work that I overhear from them in terms of finances is usually about their want to buy a house and get out of apartment renting. The OP mentioned the house purchase goal, which is why I am posting.

For those of us that are homeowners - we know what the monthly and annual maintenance and upkeep expenses are that come with home ownership. Not only the structure itself, but the taxes, the insurance, the appliances, the driveway/sidewalks, pest control, yard/landscaping, and all the little things that break or wear out and need replacing.

Having that student loan debt out of the way before even considering getting into a home helps with the cash flow. Ditto on auto debt, CC debt, etc... .

Anyway, that helps explain why adamant posts from those of us who own homes may be a standard response of "pay off the student loan debt pronto"... . We know how much it takes to own and maintain a property. It's not just the mortgage (PITI), but all of the other expenses and costs that will make the OP glad he dumped the student loan debt.

CyclingDuo
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neverpanic
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Re: Paying off Student Loans vs Investing

Post by neverpanic »

capostatus wrote: Thu Feb 25, 2021 12:43 pm I'm 37 years old.

Private Loan: $18,487.74 at 2.75% variable. I'm assuming it could go up to 8% but it never has. Navient couldnt tell me either. Over the past 10 years I think my payment was $200 at the highest.

Through Earnest I can refinance to 2.98% Fixed with a $323 monthly payment that would pay it off in 5 years.
I suggest refinancing to lock in that rate. There's no reason to expect the market to continue to roar, but I'd be comfortable making a bet on that sub-3%. If you end up finding a great home to buy sooner than expected, you can roll that student loan balance into the mortgage if you wish.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.
musher
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Re: Paying off Student Loans vs Investing

Post by musher »

neverpanic wrote: Fri Feb 26, 2021 10:03 am I suggest refinancing to lock in that rate. There's no reason to expect the market to continue to roar, but I'd be comfortable making a bet on that sub-3%. If you end up finding a great home to buy sooner than expected, you can roll that student loan balance into the mortgage if you wish.
This is terrible advice.

Every day you keep the loan is a day that you are deciding to borrow money for other purposes: investing, saving for house down payment, etc.

If you wouldn't go borrow 15K for those purposes today, then pay the thing off.
SuperTrooper87
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Re: Paying off Student Loans vs Investing

Post by SuperTrooper87 »

Some have mentioned lifestyle creep and making a budget. You’ve done a great job saving so far.

Might be worth setting a budget for what it would be like to own a home while you’re still renting. Try living off the imaginary budget a few months.

My wife and I did this and we immediately adjusted our desired house purchase down by 15%+. Thankfully we did this, as we had a few kids and made the decision for her to be full time stay at home mom with covid. We have a wonderful modest home, extra cash that doesn’t require her to work, and more to invest into retirement.

I sleep a lot better at night knowing we’re secure and saving a TON. Paying off my 40k in loans with a single check was a great feeling. Having no debts outside of mortgage is life changing.

I work with plenty of folks 22-42 that let lifestyle creep bury them right out of school. Those same folks in their 40s are finally unburying themselves and don’t have much to show for it.
SuperTrooper87
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Re: Paying off Student Loans vs Investing

Post by SuperTrooper87 »

musher wrote: Fri Feb 26, 2021 10:28 am
neverpanic wrote: Fri Feb 26, 2021 10:03 am I suggest refinancing to lock in that rate. There's no reason to expect the market to continue to roar, but I'd be comfortable making a bet on that sub-3%. If you end up finding a great home to buy sooner than expected, you can roll that student loan balance into the mortgage if you wish.
This is terrible advice.

Every day you keep the loan is a day that you are deciding to borrow money for other purposes: investing, saving for house down payment, etc.

If you wouldn't go borrow 15K for those purposes today, then pay the thing off.
Agreed.
LittleMaggieMae
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Re: Paying off Student Loans vs Investing

Post by LittleMaggieMae »

I'm not a big fan of "pull off the band-aid by using money, you will just turn around and "re save" monthly to rebuild".

The refi of the Student Loan doesn't look like a good idea. you can accomplish paying it off in 5 years on your own.

I would do some "homework" - see how your spending plan looks if you bump up your 401K contributions so it maxes out by year end 2021. Keep doing the 6K to the Roth. Add in your daily/monthly living expenses. What's left? This is the $$ you can allocate to your your debt or savings.

Can you redirect some of the $$ you are sending to your EF/house fund/whatever else you are saving for long term that is not retirement to the student loan. How long will it take you to pay it off in full if you "cash flow" the increased payment? How does that pay off date effect your future plans? If it's onerous can you skim some off your other 'savings' - like your EF or house fund to get the pay off date into a more manageable time frame? (I would probably be ok with not adding to my ef or house fund for 12 or 18 months if that is what it would take to get the SL paid off. )

A year goes by really quickly. Maybe now is the time to start thinking in terms of "future goals" as in where you want to be financially in 1/2/3/5 years - rather than what should I do "right now!" with what I've got? Having a "goal" makes making the what should I do right now - much easier (since the right now decision is based on how it moves or pushes you back from your future goal).

If you don't know where you are going - any road will get you there. If that's the way you go thru life - I guess I'd vote for the "rip off the band-aid" and pay off the student loan ASAP. At least you'd have "I paid it off!" and could say you paid less /saved on the interest (even if you paid more in income taxes on the money you will use to pay it off)

PS: at a minimum I would change your 401K contributions to max the account by the end of 2021. I would continue to max the roth ira. I would work my spending plan around have those two things done. I might also come up with a rule for "windfall" money (like your upcoming tax refund) I'd wouldn't just spend it. I would allocate some of windfall $$ to your debt/savings/and then fun. maybe a 60/30/10 percent break out. or something along those lines. you might be surprised by how many "windfalls" fall your way during the year. Change how you handle them if you are considering them "fun money".
LittleMaggieMae
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Re: Paying off Student Loans vs Investing

Post by LittleMaggieMae »

How expensive is it to liquidate invested money to pay off the 18K debt?

Isn't that what this all comes down to? Either cash flow a bigger monthly payment (for some amount of time not more than 60 payments) OR liquidate invested money and then spend some amount of time (not more than 60 months) to rebuild the 'savings'?

I hate parting with Big Piles of invested $$ for something I could "cash flow" and payoff in 36 or 48 or 60 months. Especially when I'm going to turn around and "resave up the money" immediately after the payoff. I'd rather hold $$ and spend future $$ on the debt.
neverpanic
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Re: Paying off Student Loans vs Investing

Post by neverpanic »

musher wrote: Fri Feb 26, 2021 10:28 am
neverpanic wrote: Fri Feb 26, 2021 10:03 am I suggest refinancing to lock in that rate. There's no reason to expect the market to continue to roar, but I'd be comfortable making a bet on that sub-3%. If you end up finding a great home to buy sooner than expected, you can roll that student loan balance into the mortgage if you wish.
This is terrible advice.

Every day you keep the loan is a day that you are deciding to borrow money for other purposes: investing, saving for house down payment, etc.

If you wouldn't go borrow 15K for those purposes today, then pay the thing off.
There's limited downside risk. I'd gladly pay 3% to get 7% and a chance at 10%. The current low-rate environment creates an entirely different opportunity sphere than we've experienced at any other time in our lives. There's always some degree of overlap - certain truisms - in debt vs equity management regardless of interest rates, but the things that make sense today were unconscionable 10-20 years ago. Fixed financial thinking can be good, but flexible thinking is better.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.
tashnewbie
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Re: Paying off Student Loans vs Investing

Post by tashnewbie »

LittleMaggieMae wrote: Fri Feb 26, 2021 11:08 am How expensive is it to liquidate invested money to pay off the 18K debt?

Isn't that what this all comes down to? Either cash flow a bigger monthly payment (for some amount of time not more than 60 payments) OR liquidate invested money and then spend some amount of time (not more than 60 months) to rebuild the 'savings'?

I hate parting with Big Piles of invested $$ for something I could "cash flow" and payoff in 36 or 48 or 60 months. Especially when I'm going to turn around and "resave up the money" immediately after the payoff. I'd rather hold $$ and spend future $$ on the debt.
It's unclear from OP's post (and his original portfolio review post) where the non-EF/down payment fund is saved (is it invested in the market or sitting in a HYSA?).

OP has already foregone tax savings on the money in his DP fund, by not maxing his trad. 401k. With his income, he should be able to afford to max the 401k without needing to use his EF/DP fund to cash flow regular expenses. I don't know what additional tax savings he could get on that money now.
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capostatus
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Re: Paying off Student Loans vs Investing

Post by capostatus »

tashnewbie wrote: Fri Feb 26, 2021 11:39 am
LittleMaggieMae wrote: Fri Feb 26, 2021 11:08 am How expensive is it to liquidate invested money to pay off the 18K debt?

Isn't that what this all comes down to? Either cash flow a bigger monthly payment (for some amount of time not more than 60 payments) OR liquidate invested money and then spend some amount of time (not more than 60 months) to rebuild the 'savings'?

I hate parting with Big Piles of invested $$ for something I could "cash flow" and payoff in 36 or 48 or 60 months. Especially when I'm going to turn around and "resave up the money" immediately after the payoff. I'd rather hold $$ and spend future $$ on the debt.
It's unclear from OP's post (and his original portfolio review post) where the non-EF/down payment fund is saved (is it invested in the market or sitting in a HYSA?).

OP has already foregone tax savings on the money in his DP fund, by not maxing his trad. 401k. With his income, he should be able to afford to max the 401k without needing to use his EF/DP fund to cash flow regular expenses. I don't know what additional tax savings he could get on that money now.
So the emergency fund is in betterment at a ratio of 15/85 stock bonds. The 20k or so for house closing costs is also in betterment at a 37/63 ratio. I had been contributing monthly to both of them so to use either of those would cause taxes for at least a year. The 100k for DP is in betterment savings at .40% apy so its kind of a money market. I also have 4k from a bonus that I could use with the Down payment that i wouldn't have to pay any taxes on.
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capostatus
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Re: Paying off Student Loans vs Investing

Post by capostatus »

LittleMaggieMae wrote: Fri Feb 26, 2021 11:08 am How expensive is it to liquidate invested money to pay off the 18K debt?

Isn't that what this all comes down to? Either cash flow a bigger monthly payment (for some amount of time not more than 60 payments) OR liquidate invested money and then spend some amount of time (not more than 60 months) to rebuild the 'savings'?

I hate parting with Big Piles of invested $$ for something I could "cash flow" and payoff in 36 or 48 or 60 months. Especially when I'm going to turn around and "resave up the money" immediately after the payoff. I'd rather hold $$ and spend future $$ on the debt.
Thanks for your advice! If i used the house payment and a 4k bonus i just got then it wouldnt cost anything from a tax perspective. The emergency fund and 20k for house closing costs are partially in stocks so that would cause me to pay taxes.
Last edited by capostatus on Fri Feb 26, 2021 8:15 pm, edited 1 time in total.
Topic Author
capostatus
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Re: Paying off Student Loans vs Investing

Post by capostatus »

LittleMaggieMae wrote: Fri Feb 26, 2021 10:52 am I'm not a big fan of "pull off the band-aid by using money, you will just turn around and "re save" monthly to rebuild".

The refi of the Student Loan doesn't look like a good idea. you can accomplish paying it off in 5 years on your own.

I would do some "homework" - see how your spending plan looks if you bump up your 401K contributions so it maxes out by year end 2021. Keep doing the 6K to the Roth. Add in your daily/monthly living expenses. What's left? This is the $$ you can allocate to your your debt or savings.

Can you redirect some of the $$ you are sending to your EF/house fund/whatever else you are saving for long term that is not retirement to the student loan. How long will it take you to pay it off in full if you "cash flow" the increased payment? How does that pay off date effect your future plans? If it's onerous can you skim some off your other 'savings' - like your EF or house fund to get the pay off date into a more manageable time frame? (I would probably be ok with not adding to my ef or house fund for 12 or 18 months if that is what it would take to get the SL paid off. )

A year goes by really quickly. Maybe now is the time to start thinking in terms of "future goals" as in where you want to be financially in 1/2/3/5 years - rather than what should I do "right now!" with what I've got? Having a "goal" makes making the what should I do right now - much easier (since the right now decision is based on how it moves or pushes you back from your future goal).

If you don't know where you are going - any road will get you there. If that's the way you go thru life - I guess I'd vote for the "rip off the band-aid" and pay off the student loan ASAP. At least you'd have "I paid it off!" and could say you paid less /saved on the interest (even if you paid more in income taxes on the money you will use to pay it off)

PS: at a minimum I would change your 401K contributions to max the account by the end of 2021. I would continue to max the roth ira. I would work my spending plan around have those two things done. I might also come up with a rule for "windfall" money (like your upcoming tax refund) I'd wouldn't just spend it. I would allocate some of windfall $$ to your debt/savings/and then fun. maybe a 60/30/10 percent break out. or something along those lines. you might be surprised by how many "windfalls" fall your way during the year. Change how you handle them if you are considering them "fun money".
Thanks! That's great advice. I'm definitely going to have to calculate the different payment timeframes and see how it works out. Right now I'm trying to do the 50/20/30 plan and its more like 50/42/8 lol. I could use the house downpayment and some other funds without taxes but like you said then id be putting money immediately into saving it back that I could invest into 401k instead.

We are looking to upgrade the apartment because even though its very cheap for our area and rent controlled we've been living super cramped for 10 years and its having major issues with the floor and other stuff that cant be easily fixed.
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Wiggums
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Re: Paying off Student Loans vs Investing

Post by Wiggums »

If you are looking for a house, I would not increase my apt cost by $6,000+ a year. That money would be better spent on debt, saving for house snd house related items.
"I started with nothing and I still have most of it left."
Dottie57
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Re: Paying off Student Loans vs Investing

Post by Dottie57 »

Simplify your life - pay off the loan. Now you have fewer financial goals.
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capostatus
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Re: Paying off Student Loans vs Investing

Post by capostatus »

Thanks everyone for all the advice! It sounds like the general consensus is to just pay it off. That was my original plan but I was worried that I'd be losing out on any investment gains because I'd be putting money instead into refilling the savings used to pay it.
SuperTrooper87
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Re: Paying off Student Loans vs Investing

Post by SuperTrooper87 »

capostatus wrote: Sat Feb 27, 2021 9:34 am Thanks everyone for all the advice! It sounds like the general consensus is to just pay it off. That was my original plan but I was worried that I'd be losing out on any investment gains because I'd be putting money instead into refilling the savings used to pay it.
You still have plenty of earning years and good income to get investment gains.

Paying off 3% certainly isn’t a loss. You’re making more on that cash than you would from it sitting in savings.
ArtsyProf
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Re: Paying off Student Loans vs Investing

Post by ArtsyProf »

Instead of increasing your rent by $500 per month, direct that additional $500 per month towards your student loan… Or just pay it off. And: doesn't make sense to move to more expensive apartment if you're trying to save for a house downpayment :confused
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