Help with massive debt repayment

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
yo gabbapentin
Posts: 46
Joined: Wed Mar 28, 2012 6:25 pm

Help with massive debt repayment

Post by yo gabbapentin »

This may seem like common sense to most of you however I'm still relatively new.

I have a mountain of debt to pay off and I'm looking for advice on repayment order.

My current debt: 230k student loan at 3.75%
510k mortgage at 4.5%
15k wifes student loan at 1.9%
30k auto loan 36 months at 3%

All in all, I have about 5k per month to put towards this debt after maxing 401k. Looking at the calculators, it seems like the most interest would be saved by tackling the mortgage first. However, this is my only tax deductible interest. The other option would be investing a little bit in a taxable account.

Which should I start with???
bs010101
Posts: 290
Joined: Thu Feb 13, 2014 12:08 pm

Re: Help with massive debt repayment

Post by bs010101 »

How recently was all this debt taken on, and what made you decide to accelerate paying it back? I'm asking because if your goal is to make serious headway on the student loans, you may want to rethink decisions like going 30K into debt on a car. If you don't live within your means, you'll end up paying down some debt but then taking on more elsewhere.

I'm guessing you are in a high tax bracket, so the 4.5% on the mortgage with the tax deduction is probably about equal to 3%, making the monster student loan the highest interest. Again guessing, but you probably make too much to deduct student loan interest. Dave Ramsey would say to pay off the lowest balance first - since you have an extra $5K a month, you can pay off your wife's loan and the car in nine months which should be pretty satisfying. If you like how that's going, start going after the big student loan. The interest rates are all pretty close so I don't think that's a major issue either way.
Traveler
Posts: 849
Joined: Fri Aug 30, 2013 9:07 pm

Re: Help with massive debt repayment

Post by Traveler »

In about 5 years you could have all of the debt except the mortgage paid off. As the previous poster said, the large student loan rate is likely higher than the mortgage when you take into account the tax write off. If it were me, and I had an extra $5000 a month, I would have bought a $5000 car (instead of $30K+) until the non-mortgage debt was paid off. You could sell the car and still do that.
User avatar
grabiner
Advisory Board
Posts: 29160
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Help with massive debt repayment

Post by grabiner »

yo gabbapentin wrote:My current debt: 230k student loan at 3.75%
510k mortgage at 4.5%
15k wifes student loan at 1.9%
30k auto loan 36 months at 3%

All in all, I have about 5k per month to put towards this debt after maxing 401k.
This suggests that your income is too high to deduct interest on that 3.75% student loan. Even if you can deduct interest, you are currently paying much more interest than the limit, so you get a 3.75% return on any payments, which is more than you get on the mortgage.

However, can you refinance the mortgage now into a lower-rate loan (possibly for a 15-year term), or can you refinance it if you pay it down to $417,000 (which you could do in a year and a half)? If you need to pay down the mortgage in order to refinance it, this might make mortgage prepayments more attractive; then, when you have a $417,000 15-year loan at 3% deductible, you probably won't pay it down early at all, and certainly won't touch it until all other debts are gone.
Wiki David Grabiner
Topic Author
yo gabbapentin
Posts: 46
Joined: Wed Mar 28, 2012 6:25 pm

Re: Help with massive debt repayment

Post by yo gabbapentin »

I tried to be simple and vague, however realize that I should probably go into more detail.

The 30k is for two cars. Both same interest rate. 20k for one and 10k for the other. I realize that it is a stupid financial move and that driving $1000 hoopti rides would be better for the budget, however is not really practical. I will pay them off even if it is not the best financial decision.

Salary: 250k with bonuses I do not count on.

I'm in the medical field and continually worry that this house of cards is ready to fall. I want to pay off as much debt as possible ASAP.

Basically, I'm trying to figure out which loans I should pay off first. I've read all the Ramsey stuff, and it just seems backwards to my thinking to pay off little loans first, as they accrue so much less interest.

Also, I understand the importance of compounding interest and want to make sure that I would not be better off doing something like 3k to debt repayment and 2k to taxable investment account.

Thanks so much for your help.
Last edited by yo gabbapentin on Mon Aug 11, 2014 9:17 am, edited 1 time in total.
Jack FFR1846
Posts: 13264
Joined: Tue Dec 31, 2013 7:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: Help with massive debt repayment

Post by Jack FFR1846 »

Join digital credit union and refinance the car for 5 years at 1.24%
Bogle: Smart Beta is stupid
User avatar
telemark
Posts: 2823
Joined: Sat Aug 11, 2012 6:35 am

Re: Help with massive debt repayment

Post by telemark »

yo gabbapentin wrote: I've read all the Ramsey stuff, and it just seems backwards to my thinking to pay off little loans first, as they accrue so much less interest.
I think Ramsey's advice is mostly behavioral, but paying off a loan completely also improves your liquidity. Probably neither of
these applies to you.
User avatar
market timer
Posts: 6390
Joined: Tue Aug 21, 2007 1:42 am

Re: Help with massive debt repayment

Post by market timer »

I'd pay off the car loans first, then invest the monthly surplus in taxable.
MathWizard
Posts: 4643
Joined: Tue Jul 26, 2011 1:35 pm

Re: Help with massive debt repayment

Post by MathWizard »

I would suggest the car loans first. They are not much cheaper than the student loans.

With a 250K salary, you can handle the cash flow. What appears to concern you is if
your income drops dramatically.

To guard against that you should have disability insurance, and
if you are married or had someone cosign on any of the notes,
you should have term life.

To guard against "the house of cards falling down" , you would want better cash flow.
To that end, I would pay off the cars first, since that improves cash flow the fastest.
Also, if your income drops substantially, the student loan interest will become tax deductible.

Then I'd work on wiping out your 3.75% student loan, using the $5K plus
the payments from the cars.
Student loans cannot be discharged through bankruptcy.
User avatar
dbCooperAir
Posts: 1107
Joined: Tue Jan 07, 2014 10:13 pm

Re: Help with massive debt repayment

Post by dbCooperAir »

With the amount you are using to pay down the debt just start with the smallest loan and work your way down. Its going to go fast and its just less paper work to keep track of. Remember its $5,000 this month towards debt but in month 2 or 3 its going to be $5,000 + whatever loan payment you just got rid of.

As Van Morrison would say in "Keep it Simple"
Mocked me when I tried to get back
Said the train was completely off the track
And we got to get back to something simple to save ourselves
Neither a wise man nor a brave man lies down on the tracks of history to wait for the train of the future to run over him. | -Dwight D. Eisenhower-
Ron Ronnerson
Posts: 1925
Joined: Sat Oct 26, 2013 6:53 pm
Location: Bay Area

Re: Help with massive debt repayment

Post by Ron Ronnerson »

I'm assuming you have enough in emergency savings. If not, build that up first as all your loans are at low rates. In addition to the 401k, consider investing in a Roth as well. After both your and your wife's retirement accounts are maxed, I'd work on quickly paying off the auto loans and her student loan. They should both be gone within a year if you have 5k extra per month to put toward these. Once these two debts are gone, your cash flow will improve and you'll have even more extra money each month to work with.

At that stage, you can certainly direct the extra money toward the two larger remaining debts. However, personally, I would not be in such a huge hurry to do that exclusively. I'd use maybe half toward paying off the remaining debts and invest the rest in a taxable account. Your interest rates are low while the loans are big. This means they'll take time to pay off but you're not going to lose too much to interest (particularly after you account for inflation). Don't let these debts make you feel bad. You have more than enough to pay back what you owe at your income level and save plenty at the same time for your future. You're not in a bad place at all so give yourself permission to relax a little bit.
JimmyD
Posts: 897
Joined: Fri Sep 27, 2013 4:03 pm

Re: Help with massive debt repayment

Post by JimmyD »

Any chance of enrolling in something like the Public Service Loan Forgiveness program to take care of the student loan debt? I know it's not guaranteed, but I can tell you that we have nearly a quarter million in student loan debt as well (wife's a doctor) and we're paying a very reasonable monthly payment on it since we're also utilizing the Income Based Repayment option (and max out her 403b, thereby lowering her AGI significantly). The balance is scheduled to be forgiven in eight years.

Obviously this might require an employment change on your end if you're not already at a non-profit, but might be worth consideration.

Good luck.
Topic Author
yo gabbapentin
Posts: 46
Joined: Wed Mar 28, 2012 6:25 pm

Re: Help with massive debt repayment

Post by yo gabbapentin »

Thank you all for the advice.

FWIW, aside from my large mortgage, I live pretty simple. I have a wife who stays home with my 6 yr old and upcoming son who is due in November.

Regarding the disability and life, I already have that covered. I have a 2 million term insurance through principal and an own occupation disability through guardian. These insurances alone run me 800 per month!! If it weren't for these I would put even more towards the debt.

Regarding the loan forgiveness there are three large problems.
1. I consolidated the loans a few years ago.

2. I work for a for profit multi specialty group with a non compete clause. Tail malpractice would be 25k.

3. I don't trust the government to honor this.
Topic Author
yo gabbapentin
Posts: 46
Joined: Wed Mar 28, 2012 6:25 pm

Re: Help with massive debt repayment

Post by yo gabbapentin »

Forgot to mention that the student loan is on a 30 year repayment plan which obviously greatly increases the interest paid. Payment right now us $1350 per month for another 28 yrs.
Coiled_Snake
Posts: 35
Joined: Wed May 28, 2014 1:44 pm

Re: Help with massive debt repayment

Post by Coiled_Snake »

I hear ya.
Paying off $200k myself.
Something not mentioned yet, it appears that you went with a house on the large side. You may want to evaluate all of your spending habits because your family looks to be putting on the pretense of more money than you have.
Topic Author
yo gabbapentin
Posts: 46
Joined: Wed Mar 28, 2012 6:25 pm

Re: Help with massive debt repayment

Post by yo gabbapentin »

Regarding the house... I bought it at a huge discount for less than I could buy some crap hole in California or New York. It is ocean front and our absolute dream home. I could sell it and probably make 200-300+ on it. That will not happen because it was bought as my home and not an investment. If i made 10 million per year, I would not upgrade.

I completely realize that finance wise, the best plan would have been to rent a 300 Sq ft apartment, eat Ramen and pay debt/invest. My financially foolish spending is done and I don't regret a penny of it. So here I am, asking the finance gurus questions about the best ways to pay for all of it. Because selling will not be an option until it is forced. I believe in frugality, however I also believe in living life to some degree.
User avatar
Toons
Posts: 13933
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: Help with massive debt repayment

Post by Toons »

Thought I would look for a real case scenario of "Doc-itits",,,,hey its Dave ,but it makes for interesting reading.
Point being you can pay off the debt,,,Stop spending money.No excuses,No Rationalization. :happy

http://www.daveramsey.com/article/india ... ney_other/
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
MathWizard
Posts: 4643
Joined: Tue Jul 26, 2011 1:35 pm

Re: Help with massive debt repayment

Post by MathWizard »

yo gabbapentin wrote:Regarding the house... I bought it at a huge discount for less than I could buy some crap hole in California or New York. It is ocean front and our absolute dream home. I could sell it and probably make 200-300+ on it. That will not happen because it was bought as my home and not an investment. If i made 10 million per year, I would not upgrade.

I completely realize that finance wise, the best plan would have been to rent a 300 Sq ft apartment, eat Ramen and pay debt/invest. My financially foolish spending is done and I don't regret a penny of it. So here I am, asking the finance gurus questions about the best ways to pay for all of it. Because selling will not be an option until it is forced. I believe in frugality, however I also believe in living life to some degree.
I don't think that you went overboard on the house. 2x annual income for a house is reasonable.
The student loans got you the high salary, now you just have to pay them off.
If the 3.75% is fixed, you'll be paying it back in inflated dollars, so it's not a really big deal.
If it is variable, then I'd definitely get rid of it sooner rather than later.
User avatar
Dale_G
Posts: 3387
Joined: Tue Feb 20, 2007 5:43 pm
Location: Central Florida - on the grown up side of 83

Re: Help with massive debt repayment

Post by Dale_G »

yo gabbapentin wrote:Also, I understand the importance of compounding interest and want to make sure that I would not be better off doing something like 3k to debt repayment and 2k to taxable investment account.
Don't worry about investing. The interest on your debt is effectively compounding. When you pay off the debt, it is sort of a "reverse compounding" because your next payments will increasingly be to principal.

We assume you have an adequate emergency fund.

Dale
Volatility is my friend
crg11
Posts: 473
Joined: Sat Jan 04, 2014 8:16 am

Re: Help with massive debt repayment

Post by crg11 »

I'm a big fan of simplifying with the debt snowball method. Fast wins and fewer # of payments to deal with each month is a big peace of mind win (even if they are but a fraction of your total debt to start) and allows you to focus on the rest of your finances (the big loans) even more carefully. Yes it may not be the best interest wise, at least to start, but it gets you in the groove.

In this case, I'd go in this order:
1. $10k car loan (~2 months)
2. $20k car loan ($5k/month plus payment from #1)
3. $15k student loan ($5k/month plus payments from #1 and #2)

That wipes out 3 bills from being scheduled and tracked, frees up some (presumably) decent cash flow (every little bit helps), and gives you 3 nice short term wins in a 7-9 month period.

After that, the $250k student debt is the obvious target, using the $5k a month plus the cash flow freed up from paying off those 3 loans above into a very nice debt snowball. That's obviously going to take a bit longer (several years), but you should end up saving significant interest the process.

And then after that, if you want to go all out, knock out that mortgage and be 100% debt free.
countofmc
Posts: 512
Joined: Tue Dec 11, 2012 12:03 pm

Re: Help with massive debt repayment

Post by countofmc »

I'll cut across the grain here a bit. At those interest rates, I personally wouldn't be in a hurry to pay off ANY of those loans. I'd invest the extra in a Roth IRA (or non-deductible if your income is too high), I-Bonds, etc., and just keep making minimums on those loans.
User avatar
Dale_G
Posts: 3387
Joined: Tue Feb 20, 2007 5:43 pm
Location: Central Florida - on the grown up side of 83

Re: Help with massive debt repayment

Post by Dale_G »

countofmc wrote:I'll cut across the grain here a bit. At those interest rates, I personally wouldn't be in a hurry to pay off ANY of those loans. I'd invest the extra in a Roth IRA (or non-deductible if your income is too high), I-Bonds, etc., and just keep making minimums on those loans.
There is plenty of time to invest in retirement funds given the high earning power. Paying off the loans is a guaranteed return.

Dale
Volatility is my friend
User avatar
villars
Posts: 206
Joined: Sat Jan 18, 2014 11:07 pm

Re: Help with massive debt repayment

Post by villars »

No PMI on the mortgage, right?
cherijoh
Posts: 6591
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Help with massive debt repayment

Post by cherijoh »

Dale_G wrote:
countofmc wrote:I'll cut across the grain here a bit. At those interest rates, I personally wouldn't be in a hurry to pay off ANY of those loans. I'd invest the extra in a Roth IRA (or non-deductible if your income is too high), I-Bonds, etc., and just keep making minimums on those loans.
There is plenty of time to invest in retirement funds given the high earning power. Paying off the loans is a guaranteed return.

Dale
Bad idea to postpone retirement savings in my opinion. Take full advantage of your 401k - you will never get back any unused contribution space. Plus 401ks offer protection against anyone suing you.
Topic Author
yo gabbapentin
Posts: 46
Joined: Wed Mar 28, 2012 6:25 pm

Re: Help with massive debt repayment

Post by yo gabbapentin »

No PMI.
Topic Author
yo gabbapentin
Posts: 46
Joined: Wed Mar 28, 2012 6:25 pm

Re: Help with massive debt repayment

Post by yo gabbapentin »

cherijoh wrote:
Dale_G wrote:
countofmc wrote:I'll cut across the grain here a bit. At those interest rates, I personally wouldn't be in a hurry to pay off ANY of those loans. I'd invest the extra in a Roth IRA (or non-deductible if your income is too high), I-Bonds, etc., and just keep making minimums on those loans.
There is plenty of time to invest in retirement funds given the high earning power. Paying off the loans is a guaranteed return.

Dale
Bad idea to postpone retirement savings in my opinion. Take full advantage of your 401k - you will never get back any unused contribution space. Plus 401ks offer protection against anyone suing you.
That's another point for my expensive mortgage. My house is protected from lawsuits.
User avatar
villars
Posts: 206
Joined: Sat Jan 18, 2014 11:07 pm

Re: Help with massive debt repayment

Post by villars »

Agree you should max all time-limited investment options ( 401k, backdoor roth x2 , HSA if any, maybe even i-bonds ) as you would not get those chances back.

Check to make sure you are not hit by the AMT unexpectedly next April and budget accordingly.

Do utmost possible to avoid lifestyle creep.
Compound
Posts: 844
Joined: Mon May 26, 2014 1:32 pm

Re: Help with massive debt repayment

Post by Compound »

Yo-

My financial picture closely mirrors yours. I don't think there is one best way to do this.
Some food for thought:
1. The Ramsey idea of paying off the lowest balance loan carries little weight with me. In my case, my highest interest loan, when I got serious about debt repayment, also happened to have nearly the lowest balance out of all my loans. My wife and I paid that one off first. The euphoria of having that loan paid off lasted for about a hour until I realized I was still laden with massive debt elsewhere. I say go with what makes the most financial sense for your situation; Usually this means paying off the highest interest debt first, but their are other considerations.
2. As others have suggested, consider your tax situation when evaluating your loans. The effective interest rate on your mortgage is likely lower than listed.
3. Right now you do not have a cash flow problem. Job loss in today's healthcare climate is worth considering. If you were to lose your job, then I suspect cash flow would be a problem. So, job 1 is to build a sizeable emergency fund so you can keep your beautiful house in the event job loss. Also to that end, paying off lower balance loans quickly will decrease monthly expenditures in the event of job loss.
4. Somewhat on the contrary to point 3, if you're feeling pretty secure in your job for the duration of the shorter term loans (such as your auto loans), then it makes sense to me to continue making the standard payments on these while aggressively paying off your highest interest debt (your student loans).

Again, no right answer as I see it. Just a lot of options, each with risk.

Best of luck.
Post Reply