Author Topic: Just graduated, weighing out student debt vs investing  (Read 1745 times)

iva

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Just graduated, weighing out student debt vs investing
« on: July 23, 2017, 01:00:30 PM »
EDIT: posted in the wrong place, didn't realize I couldn't delete my own thread, please reply here!

Sup Mustachios. I've been reading MMM for a few years now and it's really been inspiring to me. The 2008 recession was quite a jarring experience for my whole family so I've been worried about money and over-spending from a young age. Luckily, I've made some strides to be able shed that anxiety and now I'd like to talk about my future!

I just finished four years of college with two degrees to show for it and an $88K starting salary or about $64K after taxes. (Crazy high for my first real gig, I know. I'm making more than both my parents combined right out of the gate and it makes me kind of uncomfortable. I work in analytics.) Now, despite working part time throughout college, plus working as an RA for room and board for 2 years, two summers of full-time work, and not actually being old enough to go out to bars for most of that time, I've still got about $75K in student debt (about half of which was for that second degree; the tuition and fees were high for a state school and I didn't get many scholarships). About $20K of that debt is in the form of a private loan that I plan to pay off within the next year or less. The rest is federal debt that enters repayment in March.

So my main question now is: do I rush to pay off the rest, or is my money better off invested elsewhere? I have various interest rates on each semester's loans, ranging from about 3.8% up to 6.3%. I think I could pay all of the debt off in two years, but I'm not sure if that's the best use of my money since an index fund would likely have a higher return than those rates. I do fear future financial instability, but I also don't want to make sub-optimal financial decisions out of an irrational fear. Although I have no payments due until March, but have been paying all of the interest down already and I'll probably request the Revised Pay As You Earn plan, at least to start.

As an aside, I'm definitely already putting as much as my employer will match into my 401K before paying down debt. Hopefully, no matter what, I'm well on my way to FIRE. I'm also hoping I can somehow help my parents retire soon, so if anyone has experience with that kind of process, please share....

Thanks MMM!
« Last Edit: July 23, 2017, 01:03:37 PM by mariah »

wordnerd

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Re: Just graduated, weighing out student debt vs investing
« Reply #1 on: July 23, 2017, 01:15:03 PM »
Hi and welcome! I'd definitely focus on paying off the 6.8% loans. At 3.8%, those loans are on the margin for paying off vs. investing. I would probably focus on paying them too because 1) I'm debt-averse and 2) I'm not optimistic that we'll be seeing 4% returns in the market of the next few years (but this is conjecture, and you shouldn't time the market, etc).

vawt

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Re: Just graduated, weighing out student debt vs investing
« Reply #2 on: July 28, 2017, 04:42:38 PM »
Don't buy a new car and make sure you have roommates!  Those are the two biggest mistakes college grads make in the first couple years after school.

My preference would be to pay down any student loans over 4% before doing any investments other than the 401k.  Once you knock out the 6.3% and any others over 4-5%, you could either push up your 401k percentage a bit (or a lot), open a Roth, or start saving for down payment on a house, etc.  The options really start to open up.

Lady SA

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Re: Just graduated, weighing out student debt vs investing
« Reply #3 on: July 31, 2017, 12:15:07 PM »
Do some research and see if refinancing one or all of your loans make sense. If you can get the rates down it definitely tips the scales toward investing.

My DH and I graduated in 2014 with $150k+ in student loans and about a $95k combined salary. We refinanced 3 out of 5 of our loans with Earnest (link in my sig for a referral) and got rates between 4.6-5.3%. We kept some of the lower interest loans as-is--I wasn't going to get any better than 3.5%! At that point, it made more sense to invest (avg market rate is 7-8%, compared to our highest loan at 5.3%) especially when the market was slightly depressed, so we took a half-and-half approach. We prioritized saving but also made sure to have extra in our budget allocated toward paying off loans aggressively. Now, 3 years on, our combined salary has increased to $180k, we are maxing all tax advantaged accounts, and we have an extra $1k per month going toward our highest interest loan, and our loan burden decreased to $67k.

We wanted to take advantage of as much time in the market as possible, which meant prioritizing getting our loan rates as low as possible (below expected market return) and investing before sending off loan payments. I'd check out Earnest and Sofi--we tried both and Earnest offered lower rates.
« Last Edit: July 31, 2017, 12:17:05 PM by Lady SA »
https://www.earnest.com/invite/lillian2 --> Use this referral to refinance your student loans with Earnest and get a $200 bonus!

SavinMaven

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Re: Just graduated, weighing out student debt vs investing
« Reply #4 on: August 05, 2017, 07:04:38 AM »
Recipe for happiness later:

1) pay the minimums on all debt.

2) Get a Roth, max it every single year.

3) Keep spending low - there is plenty of time to enjoy the fruits of your labors later.

4) Put all surplus toward the student loans.

Note the order, it is crucial. Once the minimums are paid, do not forego your 20s as the most important time to plant seeds. Favor maxing a Roth over the speed at which you pay down your loans. The magic of compound interest wants to smile on you.

sokoloff

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Re: Just graduated, weighing out student debt vs investing
« Reply #5 on: August 13, 2017, 01:57:28 PM »
My standard link when people want the basics on "how should I prioritize my saving/investing/debt repayment":

https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

GizmoTX

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Re: Just graduated, weighing out student debt vs investing
« Reply #6 on: August 13, 2017, 02:24:46 PM »
My standard link when people want the basics on "how should I prioritize my saving/investing/debt repayment":

https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

+1

eddie

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Re: Just graduated, weighing out student debt vs investing
« Reply #7 on: August 13, 2017, 07:11:39 PM »
I'm 35 and have gotten more and more anti debt with age.  We are finally going to get my wife's grad school paid off in the next year.  I would keep your expenses low.  Have some fun, but keep your lifestyle under control.  Do the 401k match and maybe fund a ROTH IRA, then get very serious about paying off your student loans.  Get them paid off in 3 years.  Then you won't have any payments and you can start saving up for a house and putting a bunch of $ into retirement.

Michael in ABQ

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Re: Just graduated, weighing out student debt vs investing
« Reply #8 on: August 13, 2017, 09:06:55 PM »
I'd pay them all off first. I finally became debt free about six months ago and it feels great. Waiting two years to start seriously investing for retirement won't make much of a difference in the long run. Plus, we're about due for another recession so odds are quite good that the stock market will be taking a dip in the next few years. With your income and if you continue to maintain the lifestyle of a poor college student you can probably pay all of those off in about two years.

Paying off those student loans is a guaranteed return of around 5%, while any 401k match is a guaranteed 50% or 100% match (depending on your plan). My 401k is up 20% over the last year. Will it go up another 20% next year? Probably not, could it drop 10%? Of course. I would knock out that debt immediately and then start saving. Your payments (assuming 5% weighted average interest and 10 year term) are around $800 per month. Wouldn't it be nice to have all of that cash flow freed up? If that amount were invested and earned 10%/year for 30 years it would be about $1.8 million. 
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