Author Topic: Paying $2040/mo to student loans. Can I profit by refinancing to a longer term?  (Read 1358 times)

Kashmoney21

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Hey all,

I'm a 24 year-old living in Chicago. I graduated about 2 years ago from an expensive engineering undergraduate program with about $138K in student loan debt. I received no help from my parents (not that I expected any) so I've been stuck paying off this amount. Thankfully I landed a relatively high paying salary ($77K after bonuses) so I was very aggressive in handling it and continually made payments of a little over $2K/month.

When I first graduated I had a number of individual smaller loans (including Parent Plus loans) that ranged in interest rates from 5% to 8%. I refinanced right away using one of my parents as a cosigner at a 7-year variable rate of 3.8%. Over about the course of a year this had risen to 4.7% and it was absolutely depressing me considering the fact my interest rate kept rising and I still had a balance of about $110K.

About 8 months ago I decided to RE-refinance my loans yet again and because of my great credit and my cosigner I thankfully got an incredible rate of 3.18% FIXED for a 5-year term from a lesser known company (they offered me the best rate they had possible). My monthly payments are now $2040/month for the next 4ish years.

I realized a few days ago though that I could easily make much more than 3.18% on the market if I invested these funds instead. I called up the same loan provider and asked what my options would be for a lower monthly rate. My current balance sits at $98K. These were the two options they gave me:

7-year Fixed: 4.09% with monthly payments of ~$1370

10-year Fixed: 4.45% with monthly payments of ~$1030


Now let's say I decided to convert my loan into one of those. Would it make sense to take the additional $800 or $1100 I would save each month and sock it into index funds, REITs with high dividends, or other investments? I would guess I'd actually be coming out ahead over that 7 or 10 year period (assuming favorable markets) and not to mention I would have that money liquid for the opportunity to use on more lucrative investments down the line (such as real estate or starting a business, both of which I'm very interested in but don't have the funds for now). Would the increase in interest be worth it?

If it is a good decision, which refinance plan would be best? 7 or 10 year?

Thanks for your time reading and looking forward to hearing some insight!

Kashmoney21

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MOD NOTE: Merged duplicate topics.
« Last Edit: April 12, 2018, 10:23:54 PM by arebelspy »

PoutineLover

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You are trading a guaranteed return for a more risky one, and the shorter the timeline the more likely that it won't pay off. Generally to get the higher return you have to commit to a long buy and hold period, and 7-10 years is really not that long in the context of stock market returns. You have a pretty good rate right now and you have a short payoff period, for my personal risk tolerance I'd stick with the current terms, but you may be comfortable with higher risk. Are you currently able to save anything else after paying the loans? Over the next 4 years you can probably still sock away funds, while you increase your income, then you have a lot more freedom to invest without this loan burden hanging over you.
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frugaliknowit

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Why would you want a higher interest rate?  Just to extend the term?  No way.  Don't go there.  Don't try to arbitrage a SL rate against potential market returns.  Bad idea.

therethere

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I set my limit for brokerage versus loan payoff at 5%. I don't think I would refinance for a higher rate to allow more for a brokerage. I set a hard boundary that I was not to touch any money in the brokerage account for anything until it surpassed the loan balance. 4 years later and I'm "ahead" 14-18k but most of that is due to the stock market run in 2017. It was disheartening the months where doing so had me "behind" 4k early on but it turned around.

On another note, get your cosigner off your student loans. I'd be furious as a cosigner if I thought you took a 5 year term and then extended it out to 10 years. That more than doubles the risk for the cosigner. Were your rates that different without them listed? I think it's selfish to have others signed up for a non-bankruptable debt if they don't need to be. Getting my parents off my loans was my #1 priority after I got a job.

If you do decide to extend the term, I would acknowledge in a will or whatever that the cosigner receives the brokerage account (or whatever you go with) in case of your death so they can payoff the loan.
« Last Edit: April 11, 2018, 10:25:26 AM by therethere »
I refinanced my student loans with Earnest and cut 1% off my rate. PM me for a referral with $200 credit.

Millennialworkerbee

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Technically the math agrees with your approach. However, as someone 4 years ahead of you, I WISH I was done with my student loans. Itís not having the debt that bothers me, it is the monthly cash flow that bothers me.

I did what you did while I was single and paid the minimum and invested the rest. Now at 28 I am married with a baby and expenses are totally different. I look at our monthly bills and WISH that the student loans were no longer an $800 line item. Student loans + daycare + mortgage/rent is a lot.

Of course who knows what life will be like for you in 7-10 years from now. If you think marriage + kids  or a new business that would require temporary reduced income/high debt repayment might be in your future, my vote would be to get those loans in your past as quickly as possible.

Dicey

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This theory is often applied when discussing prepayment of mortgages. However, Student Loans are unsecured debt with no underlying potential for appreciation. While I'm in favor of keeping cheap, fixed rate mortgages, the same does not apply to SLs. Work your ass off to kill this debt asap.

Make sure you also save enough to at least get your employer's full match. The sooner you invest, the fewer dollars it will take to achieve FI. And no, this is not conflicting advice. Live like a student now and laugh all the way to the bank later.
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Malkynn

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This is the question that everyone with substantial student debt has to contend with, and the answer won't necessarily stay the same along the way.

I've changed up my approach over the years (I've dealt with A LOT more debt than you) and depending on the year, the factors can change to raise or lower my risk tolerance.

This truly is a personal decision. After 4 solid years of this, I finally came to grips with the fact that finance is truly personal, that the factors that make one plan good for one person and terrible for another, are largely based on feelings. The numbers are necessary for making informed decisions, but what determines what's right for *you* is subjective, not mathematical.

index

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The average rolling 10-yr GR for the S&P 500 (meaning 1998-2008; 1999-2009; 2000-2010 and so on.) has been 4.4% for from 1998 to today and the max was 6.9%. So on average, taking the 10-yr loan is going to lose money. Best case, from recent history, you are going to make a spread of 2.5%. Best to just pay of the loan in my opinion.     

robartsd

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If you're able to make you SL payments and max out your tax advantaged accounts, I wouldn't think about extending the term to lower payments (at the cost of higher interest rates).

jax8

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Could you refinance at 7 years without your co-signer?  If so, I'd go for for the $670 per month breathing room 1.) for myself in case of job loss and/or needing a smaller emergency fund on hand, and 2.) to get my co-signer off the loans.

If Mom and Dad didn't have $75,000 to pay for college 5 years ago, they aren't going to have it if you die or become disabled, either.  Pay the loans, then invest.


SwitchActiveDWG

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I'd stay where you're at and pay it off. A 4 year time horizon in the market is not a solid ~7% value like a long time horizon. You'd have to do some more sophisticated analysis to compare the two. For the risk profile I would pay the student loans off. Not likely a decision you'll regret either.

Lady SA

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Do you currently have any leftover cash to invest each month? If so, how much? How much do you put into your 401k or IRA?

My DH and I graduated in 2014 with over $150k in loans between us, but we had a salary of $110k total. We refinanced our loans (to 4.9%, 5%, and 5.3%), and had a $2k min payment each month. However, because of our high income, we were able to max our IRAs and 401ks, and still have $1k leftover each month to pay extra on our loans (for a total payment of a tad over $3k). I am very, very glad we prioritized saving equally to paying off loans (this only worked because of the interest rates we got). We hardly put anything in a brokerage account, anything leftover went to loans, so our investments are almost entirely in our pretax 401ks and IRAs.

We went from $150k in debt and ~$1k in assets in 2014 to now, where we have $200k in investments ($230k in assets total) and just $40k in loans. Once your networth tips into positive territory, and is weighted more towards assets that grow in your favor instead of against, suddenly things start accelerating, and it is a great feeling.

any increase in interest rate on your loans will hugely impact the amount of interest you pay. And, like others have said, you don't have any asset behind the loan that you can fall back on if there is a crisis (not like a mortgage or car loan), so it really depends on how secure your job REALLY is (as in, how easy and fast would it be to find another similar job if you lost yours, in a downturn?), and how risk-adverse you are. A 4% fixed loan is actually pretty great, but I wonder if there is a way you could invest more by slashing some of your other living expenses instead of changing the terms of your loan.

edit: time in the market is what is important. If you are entirely holding off investing because you can't afford it until your loan is done, then I would consider an adjustment, because being able to invest a solid chunk of change in your early 20's will give you the maximum amounts of doubling (look into the Rule of 72). But if you are currently able to sock something away in your 401k, then making significant changes may not be as necessary. I hope that makes sense.
For us, we still have one more year for our loan repayment schedule, THEN we will begin dumping money into an after-tax brokerage account. This whole time, we have been investing heavily in other vehicles, but not a brokerage account. That comes after loans are done, not before. So if you are intending to open a brokerage account with freed up money, I would say that's not worth it, but if you want to free up some cash to invest pre-tax, that could potentially work. A case study may help.
« Last Edit: April 11, 2018, 11:42:47 AM by Lady SA »
https://www.earnest.com/invite/lillian2 --> Use this referral to refinance your student loans with Earnest and get a $200 bonus!

Lady SA

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Also, is there an option where you do not have a cosigner and have the loan entirely in your name? That way, if you get hit by a bus or fall off a cliff, the loans die with you. Otherwise, your parents/cosigner would still be responsible for the terms of the loan.

My DH had a huge loan that was cosigned by his dad, who has low income but great credit. We knew he would be crushed by this if DH happened to die, so we actually did end up refinancing for a higher rate after DH graduated, just to get it solely in DH's name and remove all our cosigners. That in itself, while not mathematically optimal, did feel like a huge emotional weight was lifted because we weren't worried about burdening our families after our untimely deaths.
https://www.earnest.com/invite/lillian2 --> Use this referral to refinance your student loans with Earnest and get a $200 bonus!

robartsd

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My DH had a huge loan that was cosigned by his dad, who has low income but great credit. We knew he would be crushed by this if DH happened to die, so we actually did end up refinancing for a higher rate after DH graduated, just to get it solely in DH's name and remove all our cosigners. That in itself, while not mathematically optimal, did feel like a huge emotional weight was lifted because we weren't worried about burdening our families after our untimely deaths.
Another option would be to make the cosigner a beneficiary of retirement accounts and/or life insurance that would cover the loan balance. Depending on the situation this could sometimes be more optimal than refinancing without the co-signer.

Kashmoney21

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You are trading a guaranteed return for a more risky one, and the shorter the timeline the more likely that it won't pay off. Generally to get the higher return you have to commit to a long buy and hold period, and 7-10 years is really not that long in the context of stock market returns. You have a pretty good rate right now and you have a short payoff period, for my personal risk tolerance I'd stick with the current terms, but you may be comfortable with higher risk. Are you currently able to save anything else after paying the loans? Over the next 4 years you can probably still sock away funds, while you increase your income, then you have a lot more freedom to invest without this loan burden hanging over you.

Yes thankfully I'm still able to save a bit on the side, but still $2000 a month is roughly half of all paychecks I receive. I've been living at home the past few years to be able to save more.


Could you refinance at 7 years without your co-signer?  If so, I'd go for for the $670 per month breathing room 1.) for myself in case of job loss and/or needing a smaller emergency fund on hand, and 2.) to get my co-signer off the loans.

If Mom and Dad didn't have $75,000 to pay for college 5 years ago, they aren't going to have it if you die or become disabled, either.  Pay the loans, then invest.

This is a really good point and to be honest one that I hadn't thought about. I'll have to ask to see what my rates look like without a cosigner, but my feeling is that they'll be substantially worse.

Kashmoney21

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Do you currently have any leftover cash to invest each month? If so, how much? How much do you put into your 401k or IRA?

My DH and I graduated in 2014 with over $150k in loans between us, but we had a salary of $110k total. We refinanced our loans (to 4.9%, 5%, and 5.3%), and had a $2k min payment each month. However, because of our high income, we were able to max our IRAs and 401ks, and still have $1k leftover each month to pay extra on our loans (for a total payment of a tad over $3k). I am very, very glad we prioritized saving equally to paying off loans (this only worked because of the interest rates we got). We hardly put anything in a brokerage account, anything leftover went to loans, so our investments are almost entirely in our pretax 401ks and IRAs.

We went from $150k in debt and ~$1k in assets in 2014 to now, where we have $200k in investments ($230k in assets total) and just $40k in loans. Once your networth tips into positive territory, and is weighted more towards assets that grow in your favor instead of against, suddenly things start accelerating, and it is a great feeling.

any increase in interest rate on your loans will hugely impact the amount of interest you pay. And, like others have said, you don't have any asset behind the loan that you can fall back on if there is a crisis (not like a mortgage or car loan), so it really depends on how secure your job REALLY is (as in, how easy and fast would it be to find another similar job if you lost yours, in a downturn?), and how risk-adverse you are. A 4% fixed loan is actually pretty great, but I wonder if there is a way you could invest more by slashing some of your other living expenses instead of changing the terms of your loan.

edit: time in the market is what is important. If you are entirely holding off investing because you can't afford it until your loan is done, then I would consider an adjustment, because being able to invest a solid chunk of change in your early 20's will give you the maximum amounts of doubling (look into the Rule of 72). But if you are currently able to sock something away in your 401k, then making significant changes may not be as necessary. I hope that makes sense.
For us, we still have one more year for our loan repayment schedule, THEN we will begin dumping money into an after-tax brokerage account. This whole time, we have been investing heavily in other vehicles, but not a brokerage account. That comes after loans are done, not before. So if you are intending to open a brokerage account with freed up money, I would say that's not worth it, but if you want to free up some cash to invest pre-tax, that could potentially work. A case study may help.

Thank you for this lengthy and detailed response! I'm currently still able to save a bit outside of my SL payments but I was hoping that I could increase that by lowering the payment. My job is very secure but unfortunately they don't offer a 401k for match. Currently what I've been doing is throwing everything into Betterment. Would a 401k or IRA be worth it if I'm planning on retiring before 65?


Dicey

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Do you currently have any leftover cash to invest each month? If so, how much? How much do you put into your 401k or IRA?

My DH and I graduated in 2014 with over $150k in loans between us, but we had a salary of $110k total. We refinanced our loans (to 4.9%, 5%, and 5.3%), and had a $2k min payment each month. However, because of our high income, we were able to max our IRAs and 401ks, and still have $1k leftover each month to pay extra on our loans (for a total payment of a tad over $3k). I am very, very glad we prioritized saving equally to paying off loans (this only worked because of the interest rates we got). We hardly put anything in a brokerage account, anything leftover went to loans, so our investments are almost entirely in our pretax 401ks and IRAs.

We went from $150k in debt and ~$1k in assets in 2014 to now, where we have $200k in investments ($230k in assets total) and just $40k in loans. Once your networth tips into positive territory, and is weighted more towards assets that grow in your favor instead of against, suddenly things start accelerating, and it is a great feeling.

any increase in interest rate on your loans will hugely impact the amount of interest you pay. And, like others have said, you don't have any asset behind the loan that you can fall back on if there is a crisis (not like a mortgage or car loan), so it really depends on how secure your job REALLY is (as in, how easy and fast would it be to find another similar job if you lost yours, in a downturn?), and how risk-adverse you are. A 4% fixed loan is actually pretty great, but I wonder if there is a way you could invest more by slashing some of your other living expenses instead of changing the terms of your loan.

edit: time in the market is what is important. If you are entirely holding off investing because you can't afford it until your loan is done, then I would consider an adjustment, because being able to invest a solid chunk of change in your early 20's will give you the maximum amounts of doubling (look into the Rule of 72). But if you are currently able to sock something away in your 401k, then making significant changes may not be as necessary. I hope that makes sense.
For us, we still have one more year for our loan repayment schedule, THEN we will begin dumping money into an after-tax brokerage account. This whole time, we have been investing heavily in other vehicles, but not a brokerage account. That comes after loans are done, not before. So if you are intending to open a brokerage account with freed up money, I would say that's not worth it, but if you want to free up some cash to invest pre-tax, that could potentially work. A case study may help.

Thank you for this lengthy and detailed response! I'm currently still able to save a bit outside of my SL payments but I was hoping that I could increase that by lowering the payment. My job is very secure but unfortunately they don't offer a 401k for match. Currently what I've been doing is throwing everything into Betterment. Would a 401k or IRA be worth it if I'm planning on retiring before 65?
Lady SA's post is a thing of beauty.

+ Acccccck! Not a taxable account w/B'ment!! MMM used it for a tiny amount of his portfolio to take advantage of tax loss harvesting, which does not apply to your situation at all!

Investing in your 401k, match or no match, produces immediate tax savings. Please go absorb jlcollinsnh's Stock Series. Your future self will thank you.

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robartsd

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Lady SA's post is a thing of beauty.

+ Acccccck! Not a taxable account w/B'ment!! MMM used it for a tiny amount of his portfolio to take advantage of tax loss harvesting, which does not apply to your situation at all!

Investing in your 401k, match or no match, produces immediate tax savings. Please go absorb jlcollinsnh's Stock Series. Your future self will thank you.
There are plenty of ways to get at retirement funds before age 59.5. Trust us that you want to save in tax advantaged accounts, then study the stock series, at that point if you're still in doubt study up on Roth conversion ladders.

Easye418

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Jesus christ.... just reading this gives me stress, I can only imagine for you.

Just pay off the loan as quickly as you can.  I would consider the 10 year fixed just so you can start breathing at a fairly tiny cost. 


I'm a 24 year-old living in Chicago. I graduated about 2 years ago from an expensive engineering undergraduate program with about $138K in student loan debt. I received no help from my parents (not that I expected any) so I've been stuck paying off this amount. Thankfully I landed a relatively high paying salary ($77K after bonuses) so I was very aggressive in handling it and continually made payments of a little over $2K/month.

I'm sorry, I love calling out bullshit when I see it.  You wouldn't write this sentence if you weren't whining that your parents paid nothing for your college and then you claim you are "stuck" with it. 

You made the choice to go to an expensive two year college, just own it.
« Last Edit: April 11, 2018, 04:04:20 PM by Easye418 »
You either cut expenses, raise income, or both.  Simple as that.

MrUpwardlyMobile

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Jesus christ.... just reading this gives me stress, I can only imagine for you.

Just pay off the loan as quickly as you can.  I would consider the 10 year fixed just so you can start breathing at a fairly tiny cost. 


I'm a 24 year-old living in Chicago. I graduated about 2 years ago from an expensive engineering undergraduate program with about $138K in student loan debt. I received no help from my parents (not that I expected any) so I've been stuck paying off this amount. Thankfully I landed a relatively high paying salary ($77K after bonuses) so I was very aggressive in handling it and continually made payments of a little over $2K/month.

I'm sorry, I love calling out bullshit when I see it.  You wouldn't write this sentence if you weren't whining that your parents paid nothing for your college and then you claim you are "stuck" with it. 

You made the choice to go to an expensive two year college, just own it.

Undergrad usually refers to the four year bachelors program rather than a 2 year associates program. 
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Refinance Student loans with Earnest.  Theyíll pay you $200 and their rates are cheaper than SoFi.

Easye418

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Jesus christ.... just reading this gives me stress, I can only imagine for you.

Just pay off the loan as quickly as you can.  I would consider the 10 year fixed just so you can start breathing at a fairly tiny cost. 


I'm a 24 year-old living in Chicago. I graduated about 2 years ago from an expensive engineering undergraduate program with about $138K in student loan debt. I received no help from my parents (not that I expected any) so I've been stuck paying off this amount. Thankfully I landed a relatively high paying salary ($77K after bonuses) so I was very aggressive in handling it and continually made payments of a little over $2K/month.

I'm sorry, I love calling out bullshit when I see it.  You wouldn't write this sentence if you weren't whining that your parents paid nothing for your college and then you claim you are "stuck" with it. 

You made the choice to go to an expensive two year college, just own it.

Undergrad usually refers to the four year bachelors program rather than a 2 year associates program.

Hehe maybe I need to quit my bullshitting.

Doesn't change the point
You either cut expenses, raise income, or both.  Simple as that.

MrUpwardlyMobile

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Jesus christ.... just reading this gives me stress, I can only imagine for you.

Just pay off the loan as quickly as you can.  I would consider the 10 year fixed just so you can start breathing at a fairly tiny cost. 


I'm a 24 year-old living in Chicago. I graduated about 2 years ago from an expensive engineering undergraduate program with about $138K in student loan debt. I received no help from my parents (not that I expected any) so I've been stuck paying off this amount. Thankfully I landed a relatively high paying salary ($77K after bonuses) so I was very aggressive in handling it and continually made payments of a little over $2K/month.

I'm sorry, I love calling out bullshit when I see it.  You wouldn't write this sentence if you weren't whining that your parents paid nothing for your college and then you claim you are "stuck" with it. 

You made the choice to go to an expensive two year college, just own it.

Undergrad usually refers to the four year bachelors program rather than a 2 year associates program.

Hehe maybe I need to quit my bullshitting.

Doesn't change the point

Your point seemed spot on.
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Refinance Student loans with Earnest.  Theyíll pay you $200 and their rates are cheaper than SoFi.

Gone Fishing

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All of the "pay it off now" crowd is essentially betting the market is not going to average better than 4.45% over the next ten years.  It has probably happened before, and will probably happen again, but I'd take my chances.  As it was, we let my wife's student loan amortize out at 6%.  I also have a mortgage at 4.5% that I am letting amortize out.

A lower payment will also give you more flexibility in the even your stable employment becomes unstable.  It gets a lot harder to renegotiate after the fact.

What's even more important, and has already been touched on, is that you are probably getting hammered on taxes.  Read the links in my signature below, starting with Madfientist, then the next two for examples.  Read them again.  Study your options, then read them again.  When it clicks, you will be kicking yourself for paying the taxes that you have paid up to this point. If you don't do your own taxes, start.  Play with the numbers and see what you get. 
« Last Edit: April 11, 2018, 05:09:46 PM by Gone Fishing »

Steeze

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Kashmoney21 - I can feel your pain. I just recently finished off my 100k in student loans for engineering school.

I graduated 6 years ago and didn't find an engineering job for the first year. I waited tables and made minimum payments on the loans, some loans increased over this time period. 2nd year I got a temp job at an engineering firm, then worked at an outdoor sports store to round out the year - more minimum payments. Year three i landed my first full time engineering gig at 45k a year - still making minimums, but at least I wasn't losing money every month. Year 4 I moved on to another firm and made 53k a year + a decent bonus. Started making extra payments, but not much, was saving for a down payment (so i thought). Year 5 I got another raise and another bonus. Still more saving for that house and not too many extra payments. Later that year I started reading MMM and the light bulb went on. I knew FI was for me. I started making 2k/mo payments and put my bonus 100% to the loans. Year 6 I took my down payment money and knocked out 35k of the loan. I then put my bonus toward the loan, and this March when taxes came back (thanks to getting married in 2017), I paid off the loan in full.

The only investing I did over that time period was to hit the 401k match from year 3 to year 6. Could I have taken that extra payment money, invested it, and came out ahead of schedule? Absolutely. BUT! there was no way for me to predict that - it could have easily gone the other way, and that is what I would caution against. Get that ball and chain off your ankle and you will be in a great position to invest - and the high payments will provide you with discipline and a lean lifestyle.

The only reason I would stretch out the loan payments over more years is for an insurance policy. If you lose your job how long can you make a 2k/mo payment? How long can you make a 1k/mo payment? I always wanted 6 months of bills to look for a new job. Even if you did stretch it out I would still suggest you continue making the extra payments, and as much as you can. If you have a good safety net otherwise, I would keep the lower interest rate over the shorter period.

After paying off the loans I had enough left over in March this year to max my ROTH for 2017. I am now on track to max my 2018 tIRA (wife started working) and also max my 401k. Still have extra. Will be maxing my wife's IRA, and paying additional bills so she can max her 401k too. We are on track to start saving a lot very quickly. I do not regret the decision I made to get out of debt instead of investing or buying a home. Paying that last loan off was a proud moment of my life - now I can focus on building my net worth. I can think about having children, buying a house, moving, or taking a new job without the looming $1000/mo payment. Worth it for me, and I am thankful for this new found freedom.

You will be surprised at how quickly you can pay them off - my bet is that you have them done in 3-3.5 years. I hit mine 6 months early. Your raises will be bigger than expected, bonuses bigger than expected, gifts, tax returns, etc. If you practice frugality you will find even more clever ways to pay that thing off. Congratulations on being so aggressive on your loan repayments.
-100k at 25, 0 at 30, +50k and counting! FI Target 2030

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The average rolling 10-yr GR for the S&P 500 (meaning 1998-2008; 1999-2009; 2000-2010 and so on.) has been 4.4% for from 1998 to today and the max was 6.9%. So on average, taking the 10-yr loan is going to lose money. Best case, from recent history, you are going to make a spread of 2.5%. Best to just pay of the loan in my opinion.     
Yes, but if you had invested $1000 per month in the S&P500 from January 1998 until now, your rate of return wash 8.52%, which is higher than any of those. A total market fund was even better. Dollar cost averaging: better than magic.

(attribution given due to blatant ripoff from top is in thread)

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1998&firstMonth=1&endYear=2018&lastMonth=12&endDate=04%2F11%2F2018&initialAmount=1000&annualOperation=1&annualAdjustment=1000&inflationAdjusted=true&annualPercentage=0.0&frequency=2&rebalanceType=1&showYield=false&reinvestDividends=true&benchmark=VFINX&symbol1=VTSMX&allocation1_1=100

Which doesn't necessarily constitute advice. Optimal is one thing, but that is a lot of cash flow and soul crushing. I'd probably keep them though the current low rate, but not refinance, personally.

sokoloff

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One thing I didnít see covered above is that you need to be considering the after-tax rate of return vs the after-tax cost of the loans. The loans have no tax advantage (in all likelihood), so their cost before and after tax is the same. Not so for investments, so be sure to penalize the investments with your full marginal rate (federal plus state plus local if you have it) on the projected income.

Iím a big proponent of taking the highest expected value course and itís served me pretty well over the years. In your case, be sure to consider taxes, the value to your co-signer of getting them off the loan (if relevant), the cash flow headroom for possible job loss, the cash flow impact down the road of being able to but property, and the psychological freedom from having no student loans sooner vs later.

Even being a chase-the-EV guy, Iíd probably keep the existing loan and just retire it over the shorter time, but itís not solely a math problem.

robartsd

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All of the "pay it off now" crowd is essentially betting the market is not going to average better than 4.45% over the next ten years.  It has probably happened before, and will probably happen again, but I'd take my chances.  As it was, we let my wife's student loan amortize out at 6%.  I also have a mortgage at 4.5% that I am letting amortize out.

A lower payment will also give you more flexibility in the even your stable employment becomes unstable.  It gets a lot harder to renegotiate after the fact.

What's even more important, and has already been touched on, is that you are probably getting hammered on taxes.  Read the links in my signature below, starting with Madfientist, then the next two for examples.  Read them again.  Study your options, then read them again.  When it clicks, you will be kicking yourself for paying the taxes that you have paid up to this point. If you don't do your own taxes, start.  Play with the numbers and see what you get.
I agree that if the payments are too high to maximize tax advantaged accounts I recommend refinancing to reduce payments. I'm not sure I'd do it to increase funds available for taxable investing.

dogboyslim

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This theory is often applied when discussing prepayment of mortgages. However, Student Loans are unsecured debt with no underlying potential for appreciation. While I'm in favor of keeping cheap, fixed rate mortgages, the same does not apply to SLs. Work your ass off to kill this debt asap.

Make sure you also save enough to at least get your employer's full match. The sooner you invest, the fewer dollars it will take to achieve FI. And no, this is not conflicting advice. Live like a student now and laugh all the way to the bank later.

Money is fungible.  The fact that one debt has an underlying asset and the other has an intangible asset (being used to leverage a higher paying job in this case) is irrelevant.  I see this question from two perspectives: 

1.  You(OP) stated that you are in an adjustable rate at 4.7, but you can re-fi to a fixed rate at less than 4.7.  Do that.  I don't think many people are looking at the financial world right now predicting decreasing interest rates.  If you can drop your rate, do so.

2.  Cash flow.  I confess I didn't read the OP that carefully, but how is your cash flow with your current payment?  If fine, then consider how to deal that out.  Figure out the amount you have available to invest after paying your minimum payment, and then consider the debt payoff as a fixed asset paying a return at the % of the loan rate.  If you are struggling with your cash flow, refinance longer to relieve your liquidity stress.  Consider at least a portion of your investment as a sinking fund to apply against your loan balance in any case.  I do not advise paying off debt to the exclusion of investment unless you have an established credit line that is sizeable and already available to you.

Just my $.02

Kashmoney21

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All of the "pay it off now" crowd is essentially betting the market is not going to average better than 4.45% over the next ten years.  It has probably happened before, and will probably happen again, but I'd take my chances.  As it was, we let my wife's student loan amortize out at 6%.  I also have a mortgage at 4.5% that I am letting amortize out.

A lower payment will also give you more flexibility in the even your stable employment becomes unstable.  It gets a lot harder to renegotiate after the fact.

What's even more important, and has already been touched on, is that you are probably getting hammered on taxes.  Read the links in my signature below, starting with Madfientist, then the next two for examples.  Read them again.  Study your options, then read them again.  When it clicks, you will be kicking yourself for paying the taxes that you have paid up to this point. If you don't do your own taxes, start.  Play with the numbers and see what you get.

Thank you so much for this advice, I've always shrugged off IRAs because I didn't want to lock up the money I have now until 60, but I can see the benefits now.

I read the resources you mentioned but I'm still undecided on whether a traditional or Roth is best to start. I really have no idea what my income will look like say 10 or 20 years from now, but I know I want to retire early.

Would it be a mistake to contribute to a traditional IRA if my income from passive investments (Real estate, business, etc) puts me into a higher tax bracket? I'm completely unsure of what my future income will look like.

What would the forum advise? From what I've read about the roth conversion ladder strategy it seems like Traditional is most probably the best way to go.

Kashmoney21

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Jesus christ.... just reading this gives me stress, I can only imagine for you.

Just pay off the loan as quickly as you can.  I would consider the 10 year fixed just so you can start breathing at a fairly tiny cost. 


I'm a 24 year-old living in Chicago. I graduated about 2 years ago from an expensive engineering undergraduate program with about $138K in student loan debt. I received no help from my parents (not that I expected any) so I've been stuck paying off this amount. Thankfully I landed a relatively high paying salary ($77K after bonuses) so I was very aggressive in handling it and continually made payments of a little over $2K/month.

I'm sorry, I love calling out bullshit when I see it.  You wouldn't write this sentence if you weren't whining that your parents paid nothing for your college and then you claim you are "stuck" with it. 

You made the choice to go to an expensive two year college, just own it.

Undergrad usually refers to the four year bachelors program rather than a 2 year associates program.

Hehe maybe I need to quit my bullshitting.

Doesn't change the point

Your point seemed spot on.

I agree that it does sound like I'm whining. I really don't expect them to pay any of it, I know it's my choice and I do own up to it.

Sometimes it's difficult for me to put my thoughts down into words so really thanks for pointing that out, genuinely.

robartsd

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I read the resources you mentioned but I'm still undecided on whether a traditional or Roth is best to start. I really have no idea what my income will look like say 10 or 20 years from now, but I know I want to retire early.
If you're just not sure about your tax rate in withdraw - that's just going to be a function of your spending in retirement (unless like MMM you earn a ton of money you don't need anyway after you retire) - almost certainly lower than your income.

In some cases, it might be optimal to not contribute to a tIRA so that you can easily make backdoor Roth contributions later. Backdoor Roth only applies in years when your income is too high to deduct tIRA contributions or make direct Roth IRA contributions. Having any tIRA funds interferes with the backdoor Roth (though it would not interfere with mega backdoor Roth if available in your 401k). If you're a high enough earner that this option applies and following frugal practices to retire early you'll probably reach FI quickly enough that foregoing backdoor Roth contributions later is better than foregoing tIRA contributions now.

Kashmoney21

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I read the resources you mentioned but I'm still undecided on whether a traditional or Roth is best to start. I really have no idea what my income will look like say 10 or 20 years from now, but I know I want to retire early.
If you're just not sure about your tax rate in withdraw - that's just going to be a function of your spending in retirement (unless like MMM you earn a ton of money you don't need anyway after you retire) - almost certainly lower than your income.

In some cases, it might be optimal to not contribute to a tIRA so that you can easily make backdoor Roth contributions later. Backdoor Roth only applies in years when your income is too high to deduct tIRA contributions or make direct Roth IRA contributions. Having any tIRA funds interferes with the backdoor Roth (though it would not interfere with mega backdoor Roth if available in your 401k). If you're a high enough earner that this option applies and following frugal practices to retire early you'll probably reach FI quickly enough that foregoing backdoor Roth contributions later is better than foregoing tIRA contributions now.

So it sounds to me like a tIRA contribution is the move? I still have 2 days to contribute for this past year. I have the funds, should I just throw the full amount of $6500 at it?

robartsd

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I read the resources you mentioned but I'm still undecided on whether a traditional or Roth is best to start. I really have no idea what my income will look like say 10 or 20 years from now, but I know I want to retire early.
If you're just not sure about your tax rate in withdraw - that's just going to be a function of your spending in retirement (unless like MMM you earn a ton of money you don't need anyway after you retire) - almost certainly lower than your income.

In some cases, it might be optimal to not contribute to a tIRA so that you can easily make backdoor Roth contributions later. Backdoor Roth only applies in years when your income is too high to deduct tIRA contributions or make direct Roth IRA contributions. Having any tIRA funds interferes with the backdoor Roth (though it would not interfere with mega backdoor Roth if available in your 401k). If you're a high enough earner that this option applies and following frugal practices to retire early you'll probably reach FI quickly enough that foregoing backdoor Roth contributions later is better than foregoing tIRA contributions now.

So it sounds to me like a tIRA contribution is the move? I still have 2 days to contribute for this past year. I have the funds, should I just throw the full amount of $6500 at it?
Full amount is normally $5500. Today is the last day for 2017. You can also make your 2018 contribution if you want.

If you already filed your taxes (due today), you'll need to file an amended return to benefit from tIRA contribution. (Even a Roth IRA contribution could trigger a reason for an amended return if it qualified the taxpayer for the Saver's Tax Credit.)

Gone Fishing

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I read the resources you mentioned but I'm still undecided on whether a traditional or Roth is best to start. I really have no idea what my income will look like say 10 or 20 years from now, but I know I want to retire early.
If you're just not sure about your tax rate in withdraw - that's just going to be a function of your spending in retirement (unless like MMM you earn a ton of money you don't need anyway after you retire) - almost certainly lower than your income.

In some cases, it might be optimal to not contribute to a tIRA so that you can easily make backdoor Roth contributions later. Backdoor Roth only applies in years when your income is too high to deduct tIRA contributions or make direct Roth IRA contributions. Having any tIRA funds interferes with the backdoor Roth (though it would not interfere with mega backdoor Roth if available in your 401k). If you're a high enough earner that this option applies and following frugal practices to retire early you'll probably reach FI quickly enough that foregoing backdoor Roth contributions later is better than foregoing tIRA contributions now.

So it sounds to me like a tIRA contribution is the move? I still have 2 days to contribute for this past year. I have the funds, should I just throw the full amount of $6500 at it?
Full amount is normally $5500. Today is the last day for 2017. You can also make your 2018 contribution if you want.

If you already filed your taxes (due today), you'll need to file an amended return to benefit from tIRA contribution. (Even a Roth IRA contribution could trigger a reason for an amended return if it qualified the taxpayer for the Saver's Tax Credit.)

Isn't tomorrow the deadline?

Easye418

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Jesus christ.... just reading this gives me stress, I can only imagine for you.

Just pay off the loan as quickly as you can.  I would consider the 10 year fixed just so you can start breathing at a fairly tiny cost. 


I'm a 24 year-old living in Chicago. I graduated about 2 years ago from an expensive engineering undergraduate program with about $138K in student loan debt. I received no help from my parents (not that I expected any) so I've been stuck paying off this amount. Thankfully I landed a relatively high paying salary ($77K after bonuses) so I was very aggressive in handling it and continually made payments of a little over $2K/month.

I'm sorry, I love calling out bullshit when I see it.  You wouldn't write this sentence if you weren't whining that your parents paid nothing for your college and then you claim you are "stuck" with it. 

You made the choice to go to an expensive two year college, just own it.

Undergrad usually refers to the four year bachelors program rather than a 2 year associates program.

Hehe maybe I need to quit my bullshitting.

Doesn't change the point

Your point seemed spot on.

I agree that it does sound like I'm whining. I really don't expect them to pay any of it, I know it's my choice and I do own up to it.

Sometimes it's difficult for me to put my thoughts down into words so really thanks for pointing that out, genuinely.

Ha... I was probably having a bad day, best of luck on your journey.
You either cut expenses, raise income, or both.  Simple as that.

robartsd

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I read the resources you mentioned but I'm still undecided on whether a traditional or Roth is best to start. I really have no idea what my income will look like say 10 or 20 years from now, but I know I want to retire early.
If you're just not sure about your tax rate in withdraw - that's just going to be a function of your spending in retirement (unless like MMM you earn a ton of money you don't need anyway after you retire) - almost certainly lower than your income.

In some cases, it might be optimal to not contribute to a tIRA so that you can easily make backdoor Roth contributions later. Backdoor Roth only applies in years when your income is too high to deduct tIRA contributions or make direct Roth IRA contributions. Having any tIRA funds interferes with the backdoor Roth (though it would not interfere with mega backdoor Roth if available in your 401k). If you're a high enough earner that this option applies and following frugal practices to retire early you'll probably reach FI quickly enough that foregoing backdoor Roth contributions later is better than foregoing tIRA contributions now.

So it sounds to me like a tIRA contribution is the move? I still have 2 days to contribute for this past year. I have the funds, should I just throw the full amount of $6500 at it?
Full amount is normally $5500. Today is the last day for 2017. You can also make your 2018 contribution if you want.

If you already filed your taxes (due today), you'll need to file an amended return to benefit from tIRA contribution. (Even a Roth IRA contribution could trigger a reason for an amended return if it qualified the taxpayer for the Saver's Tax Credit.)

Isn't tomorrow the deadline?
You're right. I didn't realize today was a holiday in DC.

simonsez

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Good luck, OP!  You've gotten great advice and it sounds like you're headed in the right direction.

Be sure to check out the Investment Order post that is stickied in the Investor Alley.

I also liked this post from the Mad FIentist - https://www.madfientist.com/hierarchy-of-financial-needs/
It makes sense that specific advice can't exist in a vacuum, each situation has nuance.  Learn the basics and gather general maxims (like this post is doing) from others with experience, assess your situation, formulate a plan, and engage en route to a life of fulfillment.