Pay off huge student loan vs Investing

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
Coiled_Snake
Posts: 35
Joined: Wed May 28, 2014 1:44 pm

Pay off huge student loan vs Investing

Post by Coiled_Snake »

Brand-new to this board and to trying to get out of debt in general. Everything I have read online so far directs me here, so here is my initial go:

New job in new location has tripled income to a point where investing/taxes have to be a priority for my family (married/4 kids). Up to this point we have spent all excess money traveling the world/vacationing.

We have maxed 401k, 457, HSA contributions for the year and have several 529 plans. No consumer debt and we just sold our "dream home" with the move.

One debt remains: $200 000 student loan locked at 2%. Monthly payments at $350. Is it better to pay this down now with paychecks or to invest into index funds and then repay it back quarterly/yearly with assumed earnings?

I have searched and have not found this scenario...but it isn't too uncommon for new graduates, right?
Thanks in advance!
steve_14
Posts: 1507
Joined: Wed Jun 20, 2012 12:05 am

Re: Pay off huge student loan vs Investing

Post by steve_14 »

If you invest, you'd be effectively borrowing at 2% to invest in the stock market. Kind of like owning a mutual fund with a 2% expense ratio. If you'd take this deal, invest the money. Otherwise pay off the debt. I'd pay off the debt.
User avatar
danwhite77
Posts: 421
Joined: Thu Mar 08, 2012 9:21 am

Re: Pay off huge student loan vs Investing

Post by danwhite77 »

Coiled_Snake wrote:Brand-new to this board and to trying to get out of debt in general. Everything I have read online so far directs me here, so here is my initial go:

New job in new location has tripled income to a point where investing/taxes have to be a priority for my family (married/4 kids). Up to this point we have spent all excess money traveling the world/vacationing.

We have maxed 401k, 457, HSA contributions for the year and have several 529 plans. No consumer debt and we just sold our "dream home" with the move.

One debt remains: $200 000 student loan locked at 2%. Monthly payments at $350. Is it better to pay this down now with paychecks or to invest into index funds and then repay it back quarterly/yearly with assumed earnings?

I have searched and have not found this scenario...but it isn't too uncommon for new graduates, right?
Thanks in advance!
Check out the wiki: http://www.bogleheads.org/wiki/Paying_d ... _investing

I am in a life situation very comparable to your own and I had a student loan that, at its largest amount, was more than half of yours with a lower interest rate (yes, lower, as in 1.75%). I recently ran the amortization schedule for the loan and realized that I would still be paying off the loan when my youngest daughter (who is currently two and a half) is in college. That realization trumped any of the 'interest expense vs. expected returns' considerations. To heck with that, I am not going to be paying off my own education when I'm also trying to pay for my kids'. I am now aggressively paying down the loan and hopefully it will be gone no later than six weeks from now.
"While some mutual fund founders chose to make billions, he chose to make a difference." - Dedication to Jack Bogle in 'The Bogleheads' Guide to Investing'.
Caduceus
Posts: 2961
Joined: Mon Sep 17, 2012 1:47 am

Re: Pay off huge student loan vs Investing

Post by Caduceus »

It's hard to say. Personally I would not pay down that debt too quickly at 2% interest and direct money instead to long-term investments. Your expected returns over the long run are much higher than 2%, but obviously you take on a fair amount of risk too, so it's not an apples-to-apples comparison. I suspect many people would be comfortable if they could borrow at 0.25% to invest. (I would!) What about 0.5%? 1%? 2%?

One factor to consider is that people who free up / leverage their cash flow by effectively borrowing at 2% to invest may not end up being disciplined enough to invest the entirety of the cash flow that would have gone to debt repayments.
User avatar
pennstater2005
Posts: 2493
Joined: Wed Apr 11, 2012 8:50 pm

Re: Pay off huge student loan vs Investing

Post by pennstater2005 »

This thread may be of some interest to you.

http://www.bogleheads.org/forum/viewtop ... 2&t=136385
“If you think nobody cares if you're alive, try missing a couple of car payments.” – Earl Wilson
Topic Author
Coiled_Snake
Posts: 35
Joined: Wed May 28, 2014 1:44 pm

Re: Pay off huge student loan vs Investing

Post by Coiled_Snake »

Thank you for the wiki link, danwhite.

There does not seem to be consensus on this topic. I am glad that I wasn't missing something obvious to make it an easy decision.

Great name, Caduceus! :mrgreen:
placeholder
Posts: 4537
Joined: Tue Aug 06, 2013 12:43 pm

Re: Pay off huge student loan vs Investing

Post by placeholder »

steve_14 wrote:If you invest, you'd be effectively borrowing at 2% to invest in the stock market. Kind of like owning a mutual fund with a 2% expense ratio. If you'd take this deal, invest the money. Otherwise pay off the debt. I'd pay off the debt.
That's a ridiculous analogy because you're ignoring the leverage you get from investing with someone else's money.
The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Pay off huge student loan vs Investing

Post by The Wizard »

placeholder wrote:
steve_14 wrote:If you invest, you'd be effectively borrowing at 2% to invest in the stock market. Kind of like owning a mutual fund with a 2% expense ratio. If you'd take this deal, invest the money. Otherwise pay off the debt. I'd pay off the debt.
That's a ridiculous analogy because you're ignoring the leverage you get from investing with someone else's money.
Correct. Leverage, or investing using borrowed money, is not a concept we usually promote around here, but the decision on what to do on repaying this loan should really be based ENTIRELY on the interest rate for the loan. 2% is not the same as 6.8%, and certainly not the same as 14.9% on credit cards.
At 2% I would pay the absolute minimum monthly payments on that loan and put huge amounts of additional income into a balanced investment portfolio that will soon be double and then quadruple the size of the remaining balance on that loan.

To put it another way, a common saying is: Paying off a X.X% loan is the same as having a guaranteed X.X% investment. True, but if you told me a major portion of my existing portfolio is now earning 2.0% forever more, I'd find a quiet place to go cry to myself...
Attempted new signature...
Topic Author
Coiled_Snake
Posts: 35
Joined: Wed May 28, 2014 1:44 pm

Re: Pay off huge student loan vs Investing

Post by Coiled_Snake »

Wizard has exactly explained what my math brain is telling me... *sigh*
So it really just comes down to getting a higher return than 2%?
I could pay off the 200k in the next 4 quarters but also want to try my hand at letting investments work for me. I am absolutely novice at this.
ratesguy
Posts: 56
Joined: Fri Mar 21, 2014 4:03 pm

Re: Pay off huge student loan vs Investing

Post by ratesguy »

Would you loan some guy like you 200k at 2pct for that long? No offense intended, I wouldn't loan any individual I know money at 2oct for the long-term unless it was meant as a big favor to family.

If you agree then maybe keeping the loan isn't so bad. Unless you want to do the lender a favor.

I'm not sure you need to think of it as leverage is bad, no debt is good. You can think of this loan as one trade and the index fund or whatever as another.

There is value to liquidity. If you pay this off and are left with most of your assets in tax-protected form you have less of an after-tax liquidity fund (emergency fund if you like ... I tend not to think in those terms, I just want enough in taxable accounts invested in things that are liquid if the need arises)

Student loan debt tends to be "better" debt b/c if you lose a job it can be deferred, if you lose income it might be tax deductible again....

I still have student loans at varying rates from 1.125% to 2.25%. Some are floating rate. If rates ever go up (in my case fed funds/prime) I can always pay it down then when the economics seem better.

It wouldn't be the craziest thing for someone to borrow at those rates just for the liquidity. But realistically if you don't think you can achieve 2% plus on your investments why bother.

Obviously I'm talking my own book. To some people it seems debt is psychologically bothersome. I focus on net worth. Hut if you would get great satisfaction out of paying off the debt than go for it.
jms7
Posts: 16
Joined: Thu May 08, 2014 9:45 am

Re: Pay off huge student loan vs Investing

Post by jms7 »

At 2%, I vote for paying the loan off on term. If your rates were higher, my answer would be different.

It sounds like you're maxing your tax-advantaged space and still have a lot left over ($50,000/quarter). The key is ensuring that the left overs are put to good use rather than wasted on things that provide you with no value. Since your new to this, I strongly recommend spending some time reading the board, the wikis, and some of the suggested books before doing anything.
User avatar
White Coat Investor
Posts: 15229
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: Pay off huge student loan vs Investing

Post by White Coat Investor »

2% is awfully favorable. You must have graduated from med school about the same time as me. Here's my thoughts on student loans vs investing:

http://whitecoatinvestor.com/student-lo ... investing/

Here's another nice resource:

http://www.doctorseyesonly.com/podcasts/67

I have a similar loan (2.75% fully deductible mortgage.) Thus far I haven't paid any extra on it. But I feel guilty every time I listen to Dave Ramsey.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
Topic Author
Coiled_Snake
Posts: 35
Joined: Wed May 28, 2014 1:44 pm

Re: Pay off huge student loan vs Investing

Post by Coiled_Snake »

ER Doc,
Yep.
I just "joined" your White Coat site. Thanks for establishing the content there!
I have a lot to learn and the options a bit dizzying.
Thanks for understanding.
User avatar
jimb_fromATL
Posts: 2278
Joined: Sun Nov 10, 2013 12:00 pm
Location: Atlanta area & Piedmont Triad NC and Interstate 85 in between.

Re: Pay off huge student loan vs Investing

Post by jimb_fromATL »

Here are some points to ponder:

As the numbers --though not the emotions-- show in this thread, when you're paying any significant taxes, you'll come out better by maxing all your tax-deferred retirement investment opportunities first.

Since you're doing that, the next place to put more money is probably a mortgage if you have one. IF you have a paid-for home or a schedule to have a mortgage paid off within no more than perhaps 10 years, and no other debts, and a huge cash reserve to get you through any possible financial setbacks such as a job loss or cut in pay due to any reasons (including bad health, accident or injury) then even at 2% you can't beat the equivalent rate of return at absolutely no risk of paying down the student loan debt faster with after-tax money -- compared to investing in taxable accounts.

The rate of return is actually better than the rate of the debt because you pay taxes on dividends or interest earned in taxable accounts, but there is no tax on money that you choose to keep for yourself instead of paying it out as interest on your debt.

If you are concerned about asset allocation, it would be reasonable to consider paying down the student loan debt (or any other debt) to investing in an account or fund that would give you enough money after-tax to pay off the debt at the same point the extra payments would have it paid off -- as part of your stable value/no-loss allocation.

Or you could consider the extra payments to be investing in an annuity that is guaranteed to be worth enough at the time the prepayments owuld have paid off the loan to give you a stream of withdrawals big enough to make the payments that you eliminated by paying off the debt early.

To illustrate:
  • If you owe $200,000 at 2.% with 120 months (10. years) left, the payment for P&I is about $1840 per month. Paying $500 per month extra on a $200,000 10 year debt pays it off in 92.27 months.

    With top tax brackets of 28% federal and 7.% state, paying $500 it gives you exactly the same net result as investing the $500 in a series of CDs or a money market account that give you a guaranteed average annual yield of 3.054% for 92.27 months.

    Or it would be equivalent to an after-tax account earning a guaranteed average APY of 2.529% after paying tax on dividends yearly with 15% fed caps gain tax and 7.% state income tax on the yearly earnings and the long-term gain in value.

    The math:

    For $200,000 at 2.% with 120 months (10. years) remaining the payment for P&I is $1840.27 per month, and the total interest paid will be $20,832.

    If you pay an extra $500.00 per month, the payment of $2340.27 per month will pay off a balance of $200,000 at 2.% in 92.3 months (7.7 years). The total interest will be $15,939.

    So paying the extra $500 per month on the debt guarantees you a savings of 27.7 months (2.3 years) and $4,894 in interest on the debt.

    Since it's hard to compare interest rates when you're looking at non-linear progressions, let's look at the equivalent long-term return for investing the money somewhere else.

    We know thats the extra $500 per month will have the debt paid off in 92.3 months. On the 2.% debt you would still owe $49,827 at that time. The result of the extra payments is absolutely guaranteed by the laws of math…not speculation of what you might make in another investment.
    So the $500 in some other investment would need to be able to give you an absolutely guaranteed no-risk rate of return that would give you $49,827 after taxes in 92 months, which could then be used to pay off the debt balance at that time and give you the same result.

    To meet that goal, an after tax account would need to earn an average net APY of 2.529% after paying 15% fed cap gains and 7.% state income tax on dividends every year. You'd have $46,135 principal and $4,733 gain.

    If you paid a total of 22.% fed cap gains and state income tax on the gain, your $500 per month would need to earn an annual average of 2.529%.

    If the cap gains rate were to go up to 28% like it once was, plus the 7% state income tax on the earnings, your $500 would need to earn an annual average of 2.999%.

    In a series of CDs or a MM account, paying 28% federal and 7.% state income tax out of earnings yearly, your $500 per month investment would need to earn a guaranteed no-risk average APY of 3.054%.

Notice that all of these rates are still better than you can get nowadays in virtually any CDs or money market or savings accounts where the principal is guaranteed safe and the return is guaranteed too.

jimb
Lars_2013
Posts: 203
Joined: Sun Dec 15, 2013 2:00 pm

Re: Pay off huge student loan vs Investing

Post by Lars_2013 »

$350/month payments for $200k of debt sounds like income-based repayment to me. If so, you should definitely consider the expected value to you of loan forgiveness after either 10 years (for public service folks) or 25 years. Figuring out if you're likely to qualify for forgiveness is tricky since it requires predicting your future income as well as future public policy, but it can be worth a huge amount.
Topic Author
Coiled_Snake
Posts: 35
Joined: Wed May 28, 2014 1:44 pm

Re: Pay off huge student loan vs Investing

Post by Coiled_Snake »

You are correct, Lars.

The 120 payment loan forgiveness option is on the table, too. But...

Do I want to be want to be working full-time for the next 10 years? I highly doubt it. The goal is move on to a different location in about three years. We have wanderlust and travel the world.

We are not going to buy a home again. We pick up and move too much.

Those numbers , jimb, just made my head explode. I did your previous thread also. I have no state tax and am 35% income bracket.
User avatar
jimb_fromATL
Posts: 2278
Joined: Sun Nov 10, 2013 12:00 pm
Location: Atlanta area & Piedmont Triad NC and Interstate 85 in between.

Re: Pay off huge student loan vs Investing

Post by jimb_fromATL »

Lars_2013 wrote:$350/month payments for $200k of debt sounds like income-based repayment to me. If so, you should definitely consider the expected value to you of loan forgiveness after either 10 years (for public service folks) or 25 years. Figuring out if you're likely to qualify for forgiveness is tricky since it requires predicting your future income as well as future public policy, but it can be worth a huge amount.
From my guesses with the information given and if I understand the IBR plan correctly as described HERE I don't think there will be anything left for loan forgiveness in 10 years.

It would help to know more about the your actual income, since that $350 per month IBR plan payment has to be based on a whole lot less income than you appear to have now.

As I understand it the IBR per month is 15% of your discretionary income amount that is above 1.5% of the poverty level for --in this case-- a family of 6.

Since you're required to report changes to your income every year, tripling your income will apparently make the payment go up a lot.

Were you contributing the max to a 457 and 401(k) and any other plans before you go the raise in income?

Here's a example using some guesses:

Assuming the poverty level in your area for a family of 6 is $31,590 then 1.5 times that is $47,385.

if your IBR based payment of $350 per month is 15% of your discretionary income, then that amount must be about 350/15% x 12 = $28,000 per year. So your AGI must have been about $75,385.

Assuming maxing a 401(K) and 457 at $17,500 each for a total of $35,000 then your pre-deduction income might have been around $127,885 as of last year's report to your lender.

If that has tripled now, it will be about $278,655. After subtracting the 401(k) and 457 that leaves $261,155. (That's way higher than the limit for deducting IRAs ...by the way.)

The difference between the 1.5x poverty level amount of $47,385 and your new AGI of $243,655 is $196,270. So you new 15% IBR payment will be 15% of that divided by 12 = $2453 per month.

With no more income changes, that would pay off the $200,000 at 2% in about 87.7 months, 7.3 years.

If the original 10 year schedule was a lower payment than the new IBR calcualation, my understanding is that amount becomes the minimum payment. (I used 10 years in my example, since I don't know how long you've been in the program.)

Got more specific details?

jimb
Topic Author
Coiled_Snake
Posts: 35
Joined: Wed May 28, 2014 1:44 pm

Re: Pay off huge student loan vs Investing

Post by Coiled_Snake »

your figures are right on, jimb.
So what does it mean? :?:
User avatar
White Coat Investor
Posts: 15229
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: Pay off huge student loan vs Investing

Post by White Coat Investor »

Are you working for a 501(c)3? If not, forget about PSLF. IBR is essentially useless to an attending if there is no PSLF, although for a low paid attending with a high burden, I suppose there is still the possibility of forgiveness at 20 years. But I imagine that even paying the IBR payment minimum your loans will still be gone in less than 20 years.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
Topic Author
Coiled_Snake
Posts: 35
Joined: Wed May 28, 2014 1:44 pm

Re: Pay off huge student loan vs Investing

Post by Coiled_Snake »

Yes I am.
This payoff benefit weighs into the decision.
The loan forgiveness is at 10 years (120 payments)...not 20.
Compound
Posts: 844
Joined: Mon May 26, 2014 1:32 pm

Re: Pay off huge student loan vs Investing

Post by Compound »

I am in a very similar position. I have low interest rate student debt (2.25%) and had been working to pay it off largely because I have developed a disdain for debt. It sure would be nice to not owe anyone money!

However, I relatively recently discovered the importance of writing out an investing policy statement to help me prioritize where I should funnel disposable income:
http://www.bogleheads.org/wiki/Investme ... _statement

Between doing that exercise and reading through the WCI's priority list (he linked to it above), I realized that I was incorrectly (for me) prioritizing debt repayment over doing a backdoor Roth IRA. If you haven't yet done an IPS, consider it. I wrestled mentally with the "right" thing to do in terms of my disposable income for quite a while. Taking the time to thoughtfully write out a plan was very illuminating for me. Good luck.
User avatar
HardKnocker
Posts: 2063
Joined: Mon Oct 06, 2008 11:55 am
Location: New Jersey USA

Re: Pay off huge student loan vs Investing

Post by HardKnocker »

One thing about the debt payoff vs. investment decision is that returns on investments are not guaranteed. The money you invest can (and will) fluctuate in value.

The debt will not. It will not go away by itself. You payoff the debt and it is gone. Period.

You invest the money instead and you could lose it. The debt will still be there like a millstone around your neck.

Do you think the idea of investing vs. payoff debts is new? It is not. People were talking about this when interest rates were much higher. "Should I payoff my loan at 8% when I can get 12% on my mutual funds?", etc.

Generally it is a poor idea to invest rather than payoff debt, particularly in the stock market where you can have huge market drops.

Of course the use of borrowed money is a tool we must use at times to acquire things, hopefully things that make us money and increase our cash flows. It's a balancing act between cash flows and debt payments.

Some people are very enthusiastic about taking on debt for the purpose of increasing returns. This can be very successful and lucrative. What often happens is that there is some kind of unforeseen variable that appears that affects cash flow. Then the house of cards comes tumbling down. You have to be careful.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Pay off huge student loan vs Investing

Post by The Wizard »

HardKnocker wrote:One thing about the debt payoff vs. investment decision is that returns on investments are not guaranteed. The money you invest can (and will) fluctuate in value.

The debt will not. It will not go away by itself. You payoff the debt and it is gone. Period.

You invest the money instead and you could lose it. The debt will still be there like a millstone around your neck...
This is why it's important to keep adding money to your investment account every month, which is what normal working people generally do.
Fluctuations in diversified stock and bond funds are normal and we all understand that. It's not a reason to prepay a below market rate loan...
Attempted new signature...
huntertheory
Posts: 298
Joined: Sat Mar 27, 2010 8:05 am

Re: Pay off huge student loan vs Investing

Post by huntertheory »

This is the eternal debate, especially with a 2% interest rate. I'd add only a couple of points:

1) Under almost any calculation, creating an emergency fund and maxing out out your tax-deferred space is going to be more important to your long term health than paying off the 2% loans.

2) Do you have any near term liquidity/cash needs? Buying a car? Big tuition bills? You said you're not buying a house soon. An advantage of investing is you can always change your mind and sell your funds or stocks and turn it back into cash if you need it (at least in taxable accounts). Once you pay down debt the only way to get the cash back is to borrow again -- and this time the rates won't be so good.

3) If you're squared away on 1) and 2) and really can't make up your mind, why not both? That's the approach I took with law school loans and I am very happy with it. One issue you'll face is hindsight will affect your feelings about whatever choice you make: if you pay off the debt and the stock market returns 20% a year for 10 years, then you won't be able to help thinking about the money you gave away by not investing it. If you invest the money and the market tanks or even stays flat, you'll think about all the extra interest you paid when you could have just paid off the debt years earlier.

I looked at it like the rest of my portfolio: There's a role for a guaranteed 2% return (paying off the debt) and a role for taking on some additional risk for additional potential return (with increased risk). So I both paid off the debt at an accelerated rate while also investing.
Topic Author
Coiled_Snake
Posts: 35
Joined: Wed May 28, 2014 1:44 pm

Re: Pay off huge student loan vs Investing

Post by Coiled_Snake »

You made lots of sense, hunter.

I feel like I have a solid emergency fund and there will be no new tuition bills for the next ten years. We have everything we need.

The main thing I am trying to determine is: Do I lose any massive compounding benefits anywhere by just taking the next 12 months paying off the 200k, learning more about investing, and beginning next April full force? My wife and I continue to flip-flop on the numbers and "getting out of debt" vs increasing taxable income account.

The "get out of debt" carrot along with the high income was why we left our idyllic situation and "sacrificed" to come to BFE. But now we are second-guessing before we begin putting down the big bucks.
User avatar
Go Blue 99
Posts: 970
Joined: Thu Oct 09, 2008 3:42 pm

Re: Pay off huge student loan vs Investing

Post by Go Blue 99 »

huntertheory wrote: 3) If you're squared away on 1) and 2) and really can't make up your mind, why not both? That's the approach I took with law school loans and I am very happy with it. One issue you'll face is hindsight will affect your feelings about whatever choice you make: if you pay off the debt and the stock market returns 20% a year for 10 years, then you won't be able to help thinking about the money you gave away by not investing it. If you invest the money and the market tanks or even stays flat, you'll think about all the extra interest you paid when you could have just paid off the debt years earlier.

I looked at it like the rest of my portfolio: There's a role for a guaranteed 2% return (paying off the debt) and a role for taking on some additional risk for additional potential return (with increased risk). So I both paid off the debt at an accelerated rate while also investing.
I like this strategy and that is what I am following in regards to my b-school loans (which are at 2.6%). Nobody says you have to just pick one goal and ignore the other.
huntertheory
Posts: 298
Joined: Sat Mar 27, 2010 8:05 am

Re: Pay off huge student loan vs Investing

Post by huntertheory »

Coiled_Snake wrote:You made lots of sense, hunter.



The main thing I am trying to determine is: Do I lose any massive compounding benefits anywhere by just taking the next 12 months paying off the 200k, learning more about investing, and beginning next April full force? My wife and I continue to flip-flop on the numbers and "getting out of debt" vs increasing taxable income account.
How much of the debt would you pay off/invest over the next year? Let's say you had $200k in cash right now and could either pay off all the debt or invest it all right now, and you knew the market would have a great year and return 12%, but you instead paid off the debt at 2%. (I know this isn't actually your choice, but just for illustration.) In that case you'd be losing out on 12%-2% of $200,000, or $20,000 -- significant but manageable (and potentially subject to capital gains taxes).

You can do the same exercise for, say, paying off an extra $20,000 versus investing it is $2000, and so on. I'm guessing the "opportunity cost" isn't really that big -- and obviously the market could also *not* go up over the next year.
placeholder
Posts: 4537
Joined: Tue Aug 06, 2013 12:43 pm

Re: Pay off huge student loan vs Investing

Post by placeholder »

HardKnocker wrote:Generally it is a poor idea to invest rather than payoff debt, particularly in the stock market where you can have huge market drops.
I disagree with this as any kind of general policy as the specifics of each situation will be the driving factors.
Bob's not my name
Posts: 7416
Joined: Sun Nov 15, 2009 9:24 am

Re: Pay off huge student loan vs Investing

Post by Bob's not my name »

ratesguy wrote:if you lose income it might be tax deductible again
Obviously not. $200,000 * 2% = $4,000
chicagobear
Posts: 550
Joined: Sun Dec 16, 2007 10:12 pm

Re: Pay off huge student loan vs Investing

Post by chicagobear »

No way would I pay off a long term 2% loan. That will be worth a lot if (when) rates rise. In fact, I'd be willing to save any excess cash in a .80% savings account rather than pre-pay the loan, realizing that I have a negative arbitrage situation for a while.
inbox788
Posts: 8137
Joined: Thu Mar 15, 2012 5:24 pm

Re: Pay off huge student loan vs Investing

Post by inbox788 »

danwhite77 wrote:
Coiled_Snake wrote:One debt remains: $200 000 student loan locked at 2%. Monthly payments at $350. Is it better to pay this down now with paychecks or to invest into index funds and then repay it back quarterly/yearly with assumed earnings?
Check out the wiki: http://www.bogleheads.org/wiki/Paying_d ... _investing
Great link. Short answer for me at 2% would be to invest and pay back as slowly as possible. Above 4% I'd pay back the loan. Different folks have different thresholds.
I am in a life situation very comparable to your own and I had a student loan that, at its largest amount, was more than half of yours with a lower interest rate (yes, lower, as in 1.75%). I recently ran the amortization schedule for the loan and realized that I would still be paying off the loan when my youngest daughter (who is currently two and a half) is in college. That realization trumped any of the 'interest expense vs. expected returns' considerations. To heck with that, I am not going to be paying off my own education when I'm also trying to pay for my kids'. I am now aggressively paying down the loan and hopefully it will be gone no later than six weeks from now.
I'd be glad to have student loans when my kids go to college fixed at less than 2%. The more the merrier and cheaper than mortgage. College expenses and loans are water under the bridge, so the way to pay back with least cost is all that matters to me. I can do the mental accounting between remaining loan and tax-beneficial/taxable investment account, and for every $10k and 1% delta, it's an extra $100 in my pocket. For big loans and large deltas (though I understand it can sometimes be negative), it can mean thousands, and over decades, tens of thousands of dollars. Aside from the non-mathematical considerations, there are 2 additional things not specifically noted. I can continue to claim to be poor, still paying off student loans. And although remote, there is always a lottery that the government decides that X number of years is too long to be paying loans and decides to write off and forgive really old loans. If there's a student loan crash like some people predict, will there be a documentation crisis like with the real estate loans? What do you mean you can't produce a 30 year old promissory note from 3 lenders/servicers ago?
steve_14
Posts: 1507
Joined: Wed Jun 20, 2012 12:05 am

Re: Pay off huge student loan vs Investing

Post by steve_14 »

placeholder wrote:
steve_14 wrote:If you invest, you'd be effectively borrowing at 2% to invest in the stock market. Kind of like owning a mutual fund with a 2% expense ratio. If you'd take this deal, invest the money. Otherwise pay off the debt. I'd pay off the debt.
That's a ridiculous analogy because you're ignoring the leverage you get from investing with someone else's money.
I'm not ignoring anything at all. When deciding whether or not to invest in a risky asset which could drop in value by 50% or more in short order, I look at the cost of assuming that risk.

With our own money, the cost is the ER of the fund. I'd pay .1%, I might pay 1%, I'm unlikely to pay 2%, and I sure wouldn't pay 5%.

When deciding whether or not to pay down debt or invest, I make exactly the same calculation. I'd "pay" .1%, I might pay 1%, I'm unlikely to pay 2%, and I sure wouldn't pay 5%.

What, exactly, is "ridiculous" about that? Either way I have to clear a 2% hurdle to come out ahead. One uses leverage and one doesn't - so what?
noktem
Posts: 20
Joined: Mon Apr 28, 2014 6:09 pm

Re: Pay off huge student loan vs Investing

Post by noktem »

steve_14 wrote:What, exactly, is "ridiculous" about that? Either way I have to clear a 2% hurdle to come out ahead. One uses leverage and one doesn't - so what?
Well... to illustrate the use of leverage, suppose you have $10,000 and you have the option of:

a. 3.25% return for 10 years (in a CD for example)
b. Someone lends you $100,000 at 2% first, so you have 1.25% return.

Which would you choose? Here is a simplified version of how the math works out (note to simplify it further and to emphasize the use of leverage, I am not paying back any of the principle until the end of the 10 years):

a. 10,000*(1.0325)^10 = 13,768.94
b. 110,000*(1.0125)^10-100,000 = 114,549.79 24,549.79

Of course, you get a much bigger difference if you are putting it into something more risky and can obtain higher returns.

EDIT:Had put in the wrong number in calculator.
Last edited by noktem on Thu May 29, 2014 5:42 pm, edited 1 time in total.
steve_14
Posts: 1507
Joined: Wed Jun 20, 2012 12:05 am

Re: Pay off huge student loan vs Investing

Post by steve_14 »

noktem wrote:
steve_14 wrote:What, exactly, is "ridiculous" about that? Either way I have to clear a 2% hurdle to come out ahead. One uses leverage and one doesn't - so what?
Well... to illustrate the use of leverage, suppose you have $10,000 and you have the option of:

a. 3.25% return for 10 years (in a CD for example)
b. Someone lends you $100,000 at 2% first, so you have 1.25% return.

Which would you choose? Here is a simplified version of how the math works out (note to simplify it further and to emphasize the use of leverage, I am not paying back any of the principle until the end of the 10 years):

a. 10,000*(1.0325)^10 = 13,768.94
b. 110,000*(1.0125)^10-100,000 = 114,549.79

Of course, you get a much bigger difference if you are putting it into something more risky and can obtain higher returns.
Your b. Should be $14K, not $114K, but my point of my post wasn't to calculate equivalence, but to show a way of thinking about risky assets. Whether my money or borrowed funds, losing $50K in the market tomorrow costs me exactly the same amount of money. So when I have to make any decision to accept risk, my question is: At what cost?
noktem
Posts: 20
Joined: Mon Apr 28, 2014 6:09 pm

Re: Pay off huge student loan vs Investing

Post by noktem »

steve_14 wrote:
noktem wrote:
steve_14 wrote:What, exactly, is "ridiculous" about that? Either way I have to clear a 2% hurdle to come out ahead. One uses leverage and one doesn't - so what?
Well... to illustrate the use of leverage, suppose you have $10,000 and you have the option of:

a. 3.25% return for 10 years (in a CD for example)
b. Someone lends you $100,000 at 2% first, so you have 1.25% return.

Which would you choose? Here is a simplified version of how the math works out (note to simplify it further and to emphasize the use of leverage, I am not paying back any of the principle until the end of the 10 years):

a. 10,000*(1.0325)^10 = 13,768.94
b. 110,000*(1.0125)^10-100,000 = 114,549.79

Of course, you get a much bigger difference if you are putting it into something more risky and can obtain higher returns.
Your b. Should be $14K, not $114K, but my point of my post wasn't to calculate equivalence, but to show a way of thinking about risky assets. Whether my money or borrowed funds, losing $50K in the market tomorrow costs me exactly the same amount of money. So when I have to make any decision to accept risk, my question is: At what cost?
I had put in the wrong number in the calculator :) I have fixed it now, it should be $24.5k.

I was merely agreeing with placeholder that you cannot just tack it on to the expense ratio as they are clearly different. Risk is different factor, I don't see how deciding whether 2.0% is too much of an expense ratio has anything to do with factoring in risk. That is precisely why I chose to use a 10 year CD to emphasize that fact.
Topic Author
Coiled_Snake
Posts: 35
Joined: Wed May 28, 2014 1:44 pm

Re: Pay off huge student loan vs Investing

Post by Coiled_Snake »

So many numbers... So many differing views.

1. Pay it off
2. Don't touch it
3. Go middle ground
4. Let it pay itself off

My wife is laughing at me as I pull my hair out.
Are there some "core tenets" that Bogleheads agree upon financially? I need to start from the beginning because ya'll obviously view money differently than I had thought about it (which is enlightening and great). Thanks!
steve_14
Posts: 1507
Joined: Wed Jun 20, 2012 12:05 am

Re: Pay off huge student loan vs Investing

Post by steve_14 »

noktem wrote:
steve_14 wrote:
noktem wrote:
steve_14 wrote:What, exactly, is "ridiculous" about that? Either way I have to clear a 2% hurdle to come out ahead. One uses leverage and one doesn't - so what?
Well... to illustrate the use of leverage, suppose you have $10,000 and you have the option of:

a. 3.25% return for 10 years (in a CD for example)
b. Someone lends you $100,000 at 2% first, so you have 1.25% return.

Which would you choose? Here is a simplified version of how the math works out (note to simplify it further and to emphasize the use of leverage, I am not paying back any of the principle until the end of the 10 years):

a. 10,000*(1.0325)^10 = 13,768.94
b. 110,000*(1.0125)^10-100,000 = 114,549.79

Of course, you get a much bigger difference if you are putting it into something more risky and can obtain higher returns.
Your b. Should be $14K, not $114K, but my point of my post wasn't to calculate equivalence, but to show a way of thinking about risky assets. Whether my money or borrowed funds, losing $50K in the market tomorrow costs me exactly the same amount of money. So when I have to make any decision to accept risk, my question is: At what cost?
I had put in the wrong number in the calculator :) I have fixed it now, it should be $24.5k.

I was merely agreeing with placeholder that you cannot just tack it on to the expense ratio as they are clearly different. Risk is different factor, I don't see how deciding whether 2.0% is too much of an expense ratio has anything to do with factoring in risk. That is precisely why I chose to use a 10 year CD to emphasize that fact.
Ah, I was just eyeballing the result. My point again (which maybe I wasn't making very well) was to equate cost and risk - at what point does the cost drag make the risk of stocks not worth it?
User avatar
jimb_fromATL
Posts: 2278
Joined: Sun Nov 10, 2013 12:00 pm
Location: Atlanta area & Piedmont Triad NC and Interstate 85 in between.

Re: Pay off huge student loan vs Investing

Post by jimb_fromATL »

HardKnocker wrote:One thing about the debt payoff vs. investment decision is that returns on investments are not guaranteed. The money you invest can (and will) fluctuate in value. The debt will not.
True, but if the entire history of the stock market is any clue at all, the fluctuations even out within a few years ... and in a lot fewer than the 8 years or so maximum life span of the OP's loans based on either IBR or the original 10 year schedule.
steve_14 wrote:... My point again (which maybe I wasn't making very well) was to equate cost and risk - at what point does the cost drag make the risk of stocks not worth it?
In this case it's a question of being able to beat a 2% debt over about 8 to 10 years. Since 1939 there have been only 3 years that the 10 year rolling average APY of the S&P 500 was less than 2%, which was at the bottom of the crash of 2008. Those were -1.47% for 2008; -0.99% for 2008; and already back up to 1.36% by 2010. By the end of 2011 the rolling 10 year average was 2.87%, and by 2012 the average over the last 10 years including the crash was over 7%. For monthly contributions the 10 year rolling average was less than 2% for only 2 years before it was back up over that.
It will not go away by itself. You payoff the debt and it is gone. Period.
For someone who is a public service loan forgiveness program (but who is not making as much money as the OP) the remaining debt will actually go away for them after 10 years. IF the OP were to have a huge cut in pay because of a job change, chances are a lot of their debt would go away too.
You invest the money instead and you could lose it. The debt will still be there like a millstone around your neck.
We're not talking about short term savings that you might need to fix the air conditioner or transmission. We talkin' more retirement money that won't be needed for potentially decades.

As shown in the above statistics, in modern times, the most you would have lost in the S&P 500 at any point for money that had been invested for 10 years was 1.47%, and that's only if you have no other choice --or no more self discipline-- except to take it all out at the bottom of the market.

Incidentally, the yearly historical data totals don't really reflect the worst case. If you panicked and took it all out at exactly the worst month, the total loss could have been around 3.5%. But again, it recovered very quickly, compared to the rest of your life for earning compound interest.
Generally it is a poor idea to invest rather than payoff debt, particularly in the stock market where you can have huge market drops.
To reiterate all over again, not if the history of the stock market continues anywhere close to the way it has always performed, and if you can afford -- and have the patience-- to ride out a low in the market for a couple of years.

The OP is already maxing their 401(k) and 457 tax-deferred plans. That’s good because It's even more important to invest instead of paying off reasonable rate debts too fast when it will allow you to defer taxes in a high tax bracket and invest that money for yourself where it will earn compound interest for the rest of your life ... for the reasons --and as the numbers show-- in this thread.
Of course the use of borrowed money is a tool we must use at times to acquire things, hopefully things that make us money and increase our cash flows.

... like education that lets some folks make the kind of money the OP is making.
What often happens is that there is some kind of unforeseen variable that appears that affects cash flow. Then the house of cards comes tumbling down. You have to be careful.
Yep, you need an emergency fund, life insurance, and disability insurance.

The OP is already contributing the max to a 401(k) and 457 plan and other plans too. And they don't even have a mortgage or worry about with respect to losing a home. If times get really tough, they can fall back on their savings and with IBR the student loan debt payments will be reduced to next to nothing. No more than 15% of the diffeence between their AGI and 1.5 times the poverty level for a family their size.

Since the OP is already maxing all normal channels for deferring taxes, and does not plan to work forever, there are still some compelling reasons to consider going ahead and paying off even the 2% debt faster.

But in this case the worry about losing money in the stock market or falling on hard times and still having the debt hanging over their heads are not really valid reasons in my opinion.

jimb
User avatar
burgrat
Posts: 240
Joined: Sat Apr 24, 2010 11:38 am

Re: Pay off huge student loan vs Investing

Post by burgrat »

I am in a similar situation in that I have a large student loan at 2% fixed rate. The original amount was around $240,000 and I've paid it down to about $120,000 at this point (after 7 years). I could pay it off at this point, but I've decided to pay extra from time to time instead. I am also making sure I am maxing my IRA and investing whatever's leftover.
One reason I've decided not to pay it off completely is that the loan balance is completely forgiven in case of my death. I don't plan on dying, but you never know! :D So even if I put the $120k in an account that earns only 0.80%, the loan would basically cost me $1,200/yr for what is essentially a $120k cash reserve/life insurance policy. I've invested the money instead and done pretty well. I plan to pay it down to $99,000 by the end of this year, and then slowly chip away until it's done.
Do you know if the loan balance is forgiven if you pass away? I know it sounds morbid, but it is something to consider.
Topic Author
Coiled_Snake
Posts: 35
Joined: Wed May 28, 2014 1:44 pm

Re: Pay off huge student loan vs Investing

Post by Coiled_Snake »

Great point!

Yes, it definitely is forgiven if I die.
User avatar
jimb_fromATL
Posts: 2278
Joined: Sun Nov 10, 2013 12:00 pm
Location: Atlanta area & Piedmont Triad NC and Interstate 85 in between.

Re: Pay off huge student loan vs Investing

Post by jimb_fromATL »

Coiled_Snake wrote:
There does not seem to be consensus on this topic. I am glad that I wasn't missing something obvious to make it an easy decision.
When there’s any doubt, I think it helps to do the actual math with probable gains for investing versus guaranteed savings in interest on the debt, taking tax consequences into consideration. Then weigh that against your plans and feelings.

Here are a few more thoughts:

Unless you plan for a big cut in pay that would greatly reduce your IBR payments, it looks like even the minimum IBR will pay off your student loan debt before the taxpayers would pick up any remainder under the PSLF program.

Plus, with no debt, you’d have more freedom to decide what you wanted to do for the next few years without having to consider staying in a PSLF qualified position, or having to worry about having enough income to pay the original minimum payments if for some reason you were to drop out of the IBR program.

In your case we’re also talking all after-tax money since you’re already maxing all available opportunities to defer taxes in retirement accounts. It would be much more important NOT to pay down the debts too fast if you were going to lose any of the tax advantages and/or pay taxes several decades earlier than necessary instead of putting that money to use for your own benefit.

Here’s a way to consider for making a comparison of actual net results after taxes.

I just threw this spreadsheet together, so you do need to do the number for yourself. (My standard money back guarantee with proof of purchase, limited to the amount you paid, with no guarantee of accuracy, merchantability, or fitness for any particular purpose still applies. So be sure to keep your receipt.)
  • You can pay off a debt of $200,000 at 2% in 36 months with a payment of $5728.52 per month. The total interest will be $6,227.

    If you pay $11,119.26 extra every month it will be paid off in 12 months with $2,173 interest. This guarantees a savings of $4,053 interest.

    It also frees up 24 of the 36 payments. This means you can live on that much less income after tax, or spend it or better yet, invest it.

    To compare apples to apples, the same amount of money out of pocket, if you then reinvest the freed-up $5729 payments with no delay or skipping for the remaining 24 months earning an average of 2.%, then it will grow to $140,152 by the end of the original 36 months.

    If you invest the $11,119 earning 2.% for the 12 months instead of paying it on the loans, and if it can earn 2% average APY it will grow to $134,661. Then at the same 2.% it would grow to $140,152 in the remaining 24 months.

    The total payments out of pocket are the same $339,658. But taxes become important. Paying off the loan faster first then reinvesting the freed-up payments creates a taxable gain of $2668. But investing the extra money from the start creates a gain of $6,721 (which is offset by the savings of $4053 interest on the debt, but costs more tax.)

    For a simplified comparison, assuming federal cap gains tax of 15% and state income tax of 6% you'd pay $560 tax and have $139,592 net after tax for paying extra on the loan first.

    If you invest the extra money and keep the your gain will be $6,721 with tax of $1411 leaving $138,741 after tax. That's $851 less after tax for paying down the debt first.
The above is for a very, very conservative earnings rate in your investment.

Next let’s use the same ,method and math for some other options, such as higher earnings in the investment, and perhaps taking longer to pay off the loan in order to reduce the risk of losing money in an investment if there’s a bad market drop that takes a couple of years to recover.
  • We saw that paying the debt off in 12 months instead of 36, 3% earnings: minimum pmt= $5729, extra= $11119: in 36 months at 3% earnings you'd have $828 more after tax for investing instead of paying down the debt faster.

    Paying the debt off in 12 months instead of 24, 1% earnings: minimum pmt= $8508, extra= $8340: in 24 months at 1% earnings you'd have $1229 less after tax for paying down the debt first.

    Paying the debt off in 12 months instead of 24, 2% earnings: minimum pmt= $8508, extra= $8340: in 24 months at 2% earnings you'd have $424 less after tax for paying down the debt first.

    Paying the debt off in 12 months instead of 24, 3% earnings: minimum pmt= $8508, extra= $8340: in 24 months at 3% earnings you'd have $396 more after tax for investing instead of paying down the debt faster.

    Paying the debt off in 12 months instead of 36, 3% earnings: minimum pmt= $5729, extra= $11119: in 36 months at 3% earnings you'd have $828 more after tax for investing instead of paying down the debt faster.

    Paying the debt off in 12 months instead of 60, 3% earnings: minimum pmt= $3506, extra= $13342: in 60 months at just 3% earnings you'd have $1805 more after tax for investing instead of paying down the debt faster.

    Higher earnings:

    Paying the debt off in 12 months instead of 24, 5% earnings: minimum pmt= $8508, extra= $8340: in 24 months at 5% earnings you'd have $2082 more after tax for investing instead of paying down the debt faster.

    Paying the debt off in 12 months instead of 60, 5% earnings: minimum pmt= $3506, extra= $13342: in 60 months at 5% earnings you'd have $9480 more after tax for investing instead of paying down the debt faster.
Since you have indicated that you might want to change positions or have more options in your life, and since you’re already maxing your tax advantages; and since you can afford it, personally I think I would go ahead and pay off the debts before investing more in after-tax, taxable accounts.

If you religiously reinvest the freed up payments with no delay or skipping, chances are the difference won’t be all that much in the long run. (Unlike losing the tax advantages by reducing retirement contributions -- which could cost a bundle.)

But if you decide NOT to reinvest the freed up payments (like most people do when they've eliminated an onerous debt) you’re still better off because you can live on a lot less money if you choose to do so, or can spend a lot more money for pleasure and entertainment. Your extra payments are then the equivalent of buying an annuity that would make the remaining payments that you would have had if you had not paid off the loan faster.

Other factors not to forget in deciding how fast to pay off your loans include making sure you keep a lot of liquid assets available for an emergency such a job loss or cut in pay for any reason including accident or injury; and to make sure you have adequate disability insurance to protect you and your family if you become disabled; and have adequate life insurance to take care of them if you die.

(Just try to strike a balance. You don’t want to be worth way too much more to your wife dead instead of alive :twisted: )

jimb
User avatar
swimirvine
Posts: 371
Joined: Tue May 28, 2013 7:51 am

Re: Pay off huge student loan vs Investing

Post by swimirvine »

Caduceus wrote:One factor to consider is that people who free up / leverage their cash flow by effectively borrowing at 2% to invest may not end up being disciplined enough to invest the entirety of the cash flow that would have gone to debt repayments.
I think this is the most important factor to consider ... the behavioral one.

saying that you're going to pay off you student loans slowly and investing the difference is easier said than done. You need to be disciplined and write you plan down in an IPS (Investment Policy Statement). The simple exercise of putting it in writing makes you more likely to stick to your plan. I'm in a similar situation to you with low interest student loans. I'm in private practice so my paychecks + monthly bonus can vary. This is the strategy I follow: I chose a "cushion amount" that I wanted to maintain in my checking account. For me that amount is $20k. I pay off my credit card in full on the last day of the month. On the first of the month I invest every dollar in my checking account over $20k. Some months that ends up being over $10k but there has been 1 month when that amount was $0 because of large expenses that I incurred.

Plan your work and work your plan.

Stay the Course
The way I invest my money is not the right way to invest, it's the right way for ME to invest.
User avatar
Clearly_Irrational
Posts: 3087
Joined: Thu Oct 13, 2011 3:43 pm

Re: Pay off huge student loan vs Investing

Post by Clearly_Irrational »

At 2% the money is nearly free (after accounting for inflation). Although I'm big on paying down debt, in this case I think that would be a mistake. Now if your loans were at 6.8% that would be a very different conversation.
climbhigh
Posts: 18
Joined: Fri May 30, 2014 1:54 pm

Re: Pay off huge student loan vs Investing

Post by climbhigh »

Clearly_Irrational wrote:...Now if your loans were at 6.8% that would be a very different conversation.
This is the situation I find myself in - $200k of student loans at 6.8% interest. My wife and I have the discussion monthly about whether our savings each month are going to go into the Roth IRAs or put towards the loans. I'm currently in residency so I'm trying to take full advantage of tax-advantaged space while in a low tax bracket. It definitely hurts to read about people just a few years older than myself with loans at 2% interest...
inbox788
Posts: 8137
Joined: Thu Mar 15, 2012 5:24 pm

Re: Pay off huge student loan vs Investing

Post by inbox788 »

At 2%, I'd seriously and likely keep the loan and invest it. With the possibility of loan forgiveness under PSLF, I'd even consider higher interest rate depending on amount. There's a calculator at finaid.org that might help you figure out the potential benefit. What's your loan amount, current income and expected income in 5-10 years? The bigger the loan and lower the income the more this makes sense.
User avatar
Clearly_Irrational
Posts: 3087
Joined: Thu Oct 13, 2011 3:43 pm

Re: Pay off huge student loan vs Investing

Post by Clearly_Irrational »

climbhigh wrote:
Clearly_Irrational wrote:...Now if your loans were at 6.8% that would be a very different conversation.
This is the situation I find myself in - $200k of student loans at 6.8% interest. My wife and I have the discussion monthly about whether our savings each month are going to go into the Roth IRAs or put towards the loans. I'm currently in residency so I'm trying to take full advantage of tax-advantaged space while in a low tax bracket. It definitely hurts to read about people just a few years older than myself with loans at 2% interest...
At 6.8% it's a harder decision. The Roth money has a higher expected return but it also has a higher volatility. Paying down student loans would have a higher Sharpe ratio but it's not a slam dunk. A lot will depend on your particular situation.
Topic Author
Coiled_Snake
Posts: 35
Joined: Wed May 28, 2014 1:44 pm

Advice much appreciated!

Post by Coiled_Snake »

Thank you all so much for the information, data, and personal sway.

I wanted to let you know that I was led to this site after reading the Dummies series by Eric Tyson and I just received this email directly from him:
"Will answer this (without revealing your name of course) on my website and in my syndicated newspaper column."

Tyson's advice is respected here, right? Anyways, I look forward to seeing what he says and how closely it jives with what ya'll have said!
<I am not a troll trying to promote him^ by the way>
Estate_Esq
Posts: 56
Joined: Wed Apr 13, 2016 8:53 am

Re: Pay off huge student loan vs Investing

Post by Estate_Esq »

Coiled_Snake wrote:So many numbers... So many differing views.

1. Pay it off
2. Don't touch it
3. Go middle ground
4. Let it pay itself off

My wife is laughing at me as I pull my hair out.
Are there some "core tenets" that Bogleheads agree upon financially? I need to start from the beginning because ya'll obviously view money differently than I had thought about it (which is enlightening and great). Thanks!
It's now two years later. What did you do?
User avatar
pennstater2005
Posts: 2493
Joined: Wed Apr 11, 2012 8:50 pm

Re: Pay off huge student loan vs Investing

Post by pennstater2005 »

^
Coiled Snake hasn't been active on this site for over a year and a half.
“If you think nobody cares if you're alive, try missing a couple of car payments.” – Earl Wilson
Dottie57
Posts: 9857
Joined: Thu May 19, 2016 5:43 pm
Location: Earth Northern Hemisphere

Re: Pay off huge student loan vs Investing

Post by Dottie57 »

Coiled_Snake wrote:Wizard has exactly explained what my math brain is telling me... *sigh*
So it really just comes down to getting a higher return than 2%?
I could pay off the 200k in the next 4 quarters but also want to try my hand at letting investments work for me. I am absolutely novice at this.
You don't have to do one or the other. Not either /or decision. Do the tax deferred max to lower taxes and with rest if available $, pay on the loan. It sounds like you have the money to do both.
Post Reply