Author Topic: Help with student loan math  (Read 4384 times)

mozar

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Help with student loan math
« on: December 18, 2014, 06:03:26 PM »
Hello and thanks for your help.
I have 4 student loans left:
1. $7,808 %2.88% pay $110 once a month
2. $1,093 %4.55% deferred until 12/4/16
3. $1,093 %4.55% deferred until 12/4/16
4. $3,515 %4.55% deferred until 1/4/16

I have a mutual fund worth 8k. It is in an under-performing mutual fund. Let's say it's under-performing by 2%. I was planning on paying the $3515 next year with funds from my paycheck. In 2014 I made 65k the first half, then 75k the second half. Next year in 2015 (hopefully) I will make 75k the whole year. Should I pay off student loan 1, a combination, none? I'm open to suggestions.

mozar

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Re: Help with student loan math
« Reply #1 on: December 18, 2014, 06:22:00 PM »
The comment that dividend reinvested returns are 9.3% and mine is 7.6%
http://forum.mrmoneymustache.com/ask-a-mustachian/stock-market-returns/

MDM

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Re: Help with student loan math
« Reply #2 on: December 18, 2014, 07:02:10 PM »
I wouldn't prepay any of those loans. 2.88% nominal interest is already very low, and may be even lower after the tax benefit.

Even after loans 2 through 4 start accumulating interest, I see no reason to prepay them. 4.55% is still quite low, and again even lower after the tax benefit.

Your underperforming mutual fund is a separate issue. You don't say what it is underperforming. If it's a bad product, you should sell it and buy some well-known low-cost Vanguard equities index fund. Any money you would have used to prepay the loans can then buy more shares of this fund.
+1

Cathy's comments look good to me.

You should know the tax implications before you sell the fund.  You'll likely pay 15% federal tax on your capital gain - don't know about state.  7.6% is better than 2.88% and 4.55%, so even "underperforming" is better than the SL payoff.

MrsStubble

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Re: Help with student loan math
« Reply #3 on: December 18, 2014, 07:13:20 PM »
why are these loans in deferrment?  If you can, get them out of that because you are being charged interest on them while you are not paying on them and they will grow.   And they seem small. Take them out of deferrment and pay them all off - if you are concerned about the amounts, pay the little ones off and then work you way up to the 8k one.   Don't hold on to them just b/c of the tax break.  But don't use your mutual fund to pay them off, pay them off with your paychecks. You can do it and it will feel good to have them gone!

RWD

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Re: Help with student loan math
« Reply #4 on: December 18, 2014, 07:27:57 PM »
If it were me I would pay off the 4.55% loans and keep the 2.88% on minimum payments. It depends on your risk tolerance though.

mozar

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Re: Help with student loan math
« Reply #5 on: December 18, 2014, 07:30:46 PM »
Risk tolerance is pretty high. But paying of the 4.5% ones seems like a good idea. I put them in deferment when I quit my job a couple years ago. I have a job now.

RangerOne

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Re: Help with student loan math
« Reply #6 on: December 18, 2014, 08:07:53 PM »
To be fair debt is debt. Even the low interest loan at 2.88%, that is $110 bucks per month that you could be using for something else.

 In an emergency you can stop contributing as much to your investments. Its harder to stop making payments on a student loan though. You would have to request deferment which may or may not be granted.

I myself like to see my monthly income freed up from as many mandatory payments as possible. You are making enough money to wipe these loans out in probably half a year, a year at most. Why not just be free?

NV Teacher

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Re: Help with student loan math
« Reply #7 on: December 18, 2014, 08:17:58 PM »
I decided about a year ago that I was tired of the debt and paid off my loan.  One of the best decisions of my life.  Every time I see the words "student loan" I smile and enjoy the deep sense of satisfaction knowing that I'm not making that payment every month.

mozar

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Re: Help with student loan math
« Reply #8 on: December 18, 2014, 08:40:24 PM »
This is the last bit of 135k that I paid off w/o thinking about it too much. Trying to make the most rational decision now.

Calvawt

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Re: Help with student loan math
« Reply #9 on: December 18, 2014, 08:45:36 PM »
I am also of the opinion of just get rid of it and move forward with more free cash flow.

George Marshall

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Re: Help with student loan math
« Reply #10 on: December 18, 2014, 09:56:08 PM »
If your goal is to maximize your wealth, and your mutual fund will continue to return 7.6%, making minimum payments on your loans is not rational. Consider one of the loans for ~$1000 at 4.55%. You could take $1000 and pay it off, and be clear of that debt. Or, over the course of the year, you could invest that $1000 in your mutual fund, earn $76 (=$1000*7.6%), use that to pay the interest on your student loan of $45.50 (=$1000*4.55%), and come out ahead by $30.50, on average. In other words, paying off that student loan costs you $32.50 this year. Paying off the lower interest loan will cost you even more, implicitly.

The only valid reasons I see to pay off the loan are

1) your mutual fund won't really return more than the interest on your loans (certainly possible--do you expect this?);
2) you attach some extra value to being debt-free. This is an individual judgement, but I'm strongly of the opinion that debt doesn't matter if as long as your assets are covering your payments.

At this point, I strongly regret having paid back my student loans as quickly as I did. Making minimum payments would've helped build my credit, give me tax savings and allow me to take advantage of further investment gains. I wasn't thinking clearly before.