This has to be an extreme student loan horror example: assistance needed

[MrUpwardlyMobile]

A big thank you, again, to all for your responses. Thank you to those who specifically outlined how dumb and unnecessary it is that I transfer one of the loans to my name. We can easily do her refinancing the full amount and both make payments through a joint checking account and that's the direction we're going now. Different lenders told me I don't even have an option to "transfer ownership" of a student loan anyway. I had looked into a HELOC loan and those rates are higher than refinancing with most of the well known companies. Had we looked into this 1-2 years ago, that might no be the case. Ugh. 

This is a process. We're in the middle underwriting with multiple lenders. Nothing will be signed until we exhaust every effort to get the absolute lowest rate. We are interested in a 7 year term and by my math, a reasonable goal is to pay it off in 6 or less years with aggressive payments. Thanks to those who put up the whitecoatinvestor website--I checked it out and it might be something my wife would be interested in given the medical field.

This whole mess has actually been bringing us together for the past 10 days. We have an open dialogue about this and so far, so good.  I really think once we look at the final numbers on a spreadsheet, before inking any paperwork, and seeing how massive a difference a few tenths of a percentage on the rate can impact things, she will jump for the 7 year term.

Just remember you can refinance multiple times and keep bringing the rate down.  Additionally, you’ll want to use a referral link for many of the fintech refinancers because they’ll give you promo bonuses (usually $200) that you can further use to pay down debt.

[eddieryan]

We got an informal rate of 3.96 from Earnest on 7 years. I might cry with joy if we can get that officially.

Our networth is about 130k, 235k portfolio, plus home equity. A poster on Bogleheads laid out the case well to continue maxing 401k during loan repayment. Its hard to argue with his math. This will be an ongoing analysis but Im leaning
towards 6% in our situation.

https://www.bogleheads.org/forum/viewtopic.php?t=136385

[abhe8]

What are your wife's goals? What motivated her? We have a similar situation... I am a high earning medical professional with a big student loan debt. Dh worked most of our marriage is a less well paying job. It's harder for me to save and not spend. I've found reading books, memoirs, blogs about people living well below their means or saving lots of money, are very motivating. I'm also motivated to be able to work part-time and be home with my kids more.  these big goals really help me to rain in my spending on the little things and that adds up.

[NaN]

Thank you all for the feedback. I'm actually feeling much better after going through the responses.

I do not have a current budget for this year, but in past years I have made them. I am currently working on one now: here is a snapshot of our financial situation:

Wife salary- $130k
Mine- $75k

My feedback on each of your items.

Shelter and food
mortgage: $1553 (3.625 rate) - have to live somewhere, this is not bad at ALL.
food/gas: $6,000 (this needs work--rough estimate) - feeding 4, with potential commutes for work and running errands. Well, some here would say this sucks, but I don't think it is that bad.
utilities: $4k- wait, WHAT!?, Over $300 a month in utilities! Why can't this be below $1500 for the year? Maybe I am missing something, but holy moly- maybe turn the heat down to 64-65 in winter and AC up to 78-80 (or not at all!). Can you explain why it is $320 a month? I'm going to assume there is at least $1k in savings per year here.

Luxuries
cell phones $1400 - Switch to Google Project Fi or Republic Wireless immediately. Even if you pay an early termination on the contract with phones, usually you come out ahead in first year and kill it the second year. Since you are talking six years of repayment this is easy. You want to be in ass-kicking mode? I'm going to assume $1k for years 2-6 taking you are under contract for your phone.
cable $2k (she claims she has to have it) - No she doesn't. This is $1000 in savings per year ($60 internet + one or two streaming services).
20 yr term life policies of $250k for each of us (plus practically free premium for work life plans covering 4 x yearly salary on each): $450 a year - why? $300k for you, $520k for her. This is fine. Cut out $450 a year.
Wife's vehicle (plead for her to buy used vehicle, lost that battle): around $4500 annual in payments.
auto insurance: $105
I am guessing $50-60/month is due to covering comprehensive on a car with a loan. That's $300 a year in just the auto insurance as a luxury. A used Hyundai Elantra bought from Hertz Car Sales is about $11k. These are great cars, get 39 miles/gal on highway. They are safe, no frills. Get this and you would save $5k starting year 3 (and beyond!). Again, since you have to front money for the car now, it is maybe a battle to lose now to get her on board at looking at other things.

Medical
misc child expenses: $10,000 (5 month old is on ELECARE, $40 a can due to allergy).
Medical Bills arising from multiple surgeries after copay (would rather not get into details) approx $10,000
my HSA: $2k
We don't have to talk about the details, but this area is not insignificant. Are you using this HSA to pay for medical bills? How much longer on the $10k/year in medical bills do you have left?
With regards to your 5 month old, how much longer do they require him to be fed using cans of ELECARE? Quick search seems this could be only through a year or so? Even at 5 cans a month, that's $250/month, and only $3k? Not to pry for details, but that's an extra $7k there. Don't have kids, so not familiar with this situation.
I'll leave this untouched at the end, again, there are potential big gains to make here as long as you do some research. It is not about sacrificing you or your kids health, but just start being as thorough here as you are about the loan rates. Maybe get your wife to figure out how to cut some of this stuff out safely and properly?

Child care
daycare for two children: annual expenses $30,000. I contribute max $5k to daycare spending account, pre-tax. Wife can only contribute about $2k to daycare pre-tax due to high income restriction (she can also only contribute 6% to 401k due to high income restrictions and they match 6%).
Maybe others have better ideas.


Savings in luxuries over six years
$1k/year in utilities
$1k/year with phones (starting year 2)
$1k/year with cable
$450/year with extra LI
$5k/year starting 3 with potential selling fancy car
(1*6+1*5+1*5+0.5*6+5*4)=$39k over six years.
This is just in cutting back the luxuries you mentioned. Are there others?

Other big gains that could be made are in the Medical (are those going away after one year?) and Child Care.

Based on others advice, just get the refinancing done ASAP. Don't stress too much about getting the BEST rate. There is a point of diminishing returns. Do it, save, and move on. From first glance, the amount you will save on the loan is small compared to the luxuries stated above, especially if you free up income to pay it off in 3 years.

You will have no problem knocking this out. And definitely plan to celebrate when you do (but not by going out and buying a luxury car financed at 5% for 72-months ;) )

[eddieryan]

We are currently in the most expensive stage with the kids. We were told by a new pediatrician that the formula should be covered by insurance and they are going to make a request on our behalf-we already wrote insurance and lost but we're hopeful this Dr. can get it done. That will be huge. This is only required for about 7 more months anyway. I have about $5,500 remaining in my HSA ($2k going in this year) and we're able to cover med expenses with that. By the end of the year, it will be address about all of our remaining medical bills. I intend to max the HSA next year and every year thereafter with the way things are going with kids med expenses.

I can't say my wife is fully on board with cutting expenses...yet. She is all about refinancing and increasing payments and is happy that I'm focused on helping her with payments right now. Once we get official refinance offers, I anticipate push back that we can't afford payments. At that point, I'll lay out the case of where we can cut things and why this isn't even a choice. I need to let her see that this is hindering my own financial goals, actually discuss our financial goals and the kids' futures, and that by me shifting my every penny into the loan requires her cooperation to cut spending. This is non-negotiable. Cable is the first to go. I'm going to recommend an HD antenna for $20 and we can use Netflix. If not, then the Sling option will have to be the way to go. The vehicle isn't high end, it's just new. She has deep-rooted beliefs that a car must not be more than a few years old due to safety and warranty concerns. We have debated this before and she won't change her mind so I'm looking elsewhere to trim. We have a loyal termite gold plan that costs $450 a year--time to cut that (long story but we bought a house with structural termite damage and the previous owners paid $20k to have the damage fixed, but termite damage was a huge concern we had when we moved in). I think I can manage inspecting the crawl space a few times a year. I'm checking out Google for our phones. We would need to eat about $300 in costs to change so that is looking like a good idea. The two of us still have not sat down and gone over a spending spreadsheet and I'm still tinkering with it. The more I think about it, the more little crap keeps coming up that was not even on my radar. $350 a year for organic lawn service. Our electric bills have routinely been over $250. We have a 2800 ft square home--two ac units. We're good with keeping things off when not in use so I don't know what is driving the electric. My wife does laundry compulsively, probably TOO much. The washer is probably running 5 days a week. It has to do with washing kids blankets/sheets for school and their clothes. I do my own like once every 2 weeks but she is at it constantly. We had an AC guy come out yesterday as I thought maybe the units weren't efficient, but he said everything looks good. I can't figure this out, but the electric is driving our utility costs. We have a sprinkler system that drives water costs during the hot months...that doesn't help.

NaN, I like the idea of multiplying these expenses over 6-7 years. It basically adds up to nearly a year of payments on the loan. After reviewing all the feedback, at a minimum this loan should be paid off in 6-7 years. In 2.5 years, my 3 year old will be ready for kindergarten freeing up another $10-11k. Bottom line is that a 7 year refinance is totally feasible, even a 5 year might be possible.

[ShoulderThingThatGoesUp]

I bet you could kill a lot of debt and expenses by moving from your 2800 square foot house to an 1800 square foot one, which is plenty for four people.

[MrUpwardlyMobile]

I bet you could kill a lot of debt and expenses by moving from your 2800 square foot house to an 1800 square foot one, which is plenty for four people.

The magnitude of the impact would depend on the market that they’re in.  But I was left with the impression that housing was off limits.

[ShoulderThingThatGoesUp]

Equity impact might be under $50k, but still substantial. But the cash flow impact should be huge.

[NaN]

I'm not so sure about the marriage counseling - the perception on that stuff is always difficult to overcome.

The way I see it, @eddieryan, you have been a lurker for a while. Yeah, I agree the past choices (not discussing finances with your wife earlier) are coming back to haunt you. Definitely a key part of this lifestyle is learning to communicate this effectively both within yourself, and to any partner.

The key is to communicate these in small conversations that add up. These changes won't happen over night, so don't expect it to. Believe me, I know from being on your wife's side. It took me several years when my partner introduced me to MMM's website to a) really get on board and b) pay off the debt that was hanging over my head. It doesn't happen quick. Additionally, she probably feels terrible about having this secret, previous bad choice, or whatever hanging over her head for quite a while. She sounds supportive of your efforts, so that's great. And she obviously has seen it upset you considerably. Just tackle one thing at a time.

My suggestion is once you guys get over of this initial shock of the loan discovery, and fix it by refinancing (and agreeing on repayment plans), take a break or so on talking about finances (1-2 months), but still come here and get support/ideas to bring up later with her.  She may need time to process internally herself. You have a lot stress of a newborn and now this - don't tackle too much at one moment here. This forum in a way is a funny form of group support, and even my participation has been lacking. We aren't professional group therapy, but I find it is a Mustachian substitute good enough for me ;).

[LWYRUP]

One word of caution on the 401(k) vs. loan payment debate.  Just remember that those advising the 401(k) option are basically suggesting you invest in a higher risk, higher return asset (mostly stocks) instead of a lower risk, lower return asset (loan paydown).  (The math doesn't work the same if you stick it all in 10 year bonds, for example).

I am not saying it's a bad idea.  I am just saying it is not "free money" or an obvious choice.  It is a conscious decision to take more investment risk in the hopes of greater future return.  Imagine a scenario where the market tanks, your wife loses her job, and you are left trying to spread $75k across your mortgage, student loans, living expenses plus assume further kids are in the mix.  Then you might need to pull money out of your 401(k), at the bottom, with a penalty, to stay afloat. 

You are a good spot but a risky one -- high earning with lots of obligations.  If it were me, I'd invest in the 401(k) up to the match and the HSA and then attack the loans with a fury.  INCLUDING selling the car and all sorts of purportedly "off the table" ideas. You will have plenty of time after that to stuff your accounts full of cash.  Yeah, it might delay some theoretical FIRE date by a year or two, but it will reduce the risk of a catastrophic failure, which is worth something.  It will also eliminate a point of contention in your marriage. 

You could also split the difference, say by funding half of the 401(k)s and pay off the loans slightly earlier.  I generally like doing that sort of thing in my finances as a risk mitigation technique (e.g., I invest partially in Roth, partially in traditional) so I get at least some gains or some loss mitigation no matter what happens. 

Finally, if you need to prioritize investment accounts, I'd probably pick backdoor Roth IRA over 401(k) because with a Roth IRA you can pull out contributions penalty-free in a liquidity emergency. 

[Ben Kurtz]

Bottom line is that a 7 year refinance is totally feasible, even a 5 year might be possible.

There will be a tradeoff between length of loan and interest rate, and despite my earlier enthusiasm for refinancing to cut your rate, I'm now going to give you some "on the other hand" advice: Don't contractually lock yourself into payoff terms that are too short, even if that gets you the lowest interest rate. You will have a much larger margin of safety if you take a 5% interest rate and a 10 year payoff term rather than a 4% interest rate and a 5 year term.

You can lock into a 10 year repayment term and then make payments beyond the minimums, in an effort to get the thing paid off in 5 years anyway. But if you lock into a 5 year term and then somebody loses a job, it might be harder at just that moment to cut your minimum required payments to stay within your family's temporarily diminished earnings. The difference between student loans and other debt (such as car loans and mortgages) is that student loans often have easier to obtain hardship forbearances, which can save you from default in such a circumstance, but relying on that is a bit of a risk and also a bit of a temptation. Interest continues to roll in during a forbearance and you don't want to fall into that trap again.

The key point here is once you roll your payoff time horizon from 25 years down to 5-7 years, the overall effect of a 4% interest rate vs a 5% interest rate vs a 6 3/8% interest rate is hugely reduced. It's the long time horizon which makes every additional point of interest appear to be so expensive on a cumulative basis -- go play with a mortgage amortization calculator to see just how dramatic that is. 

Basically, refinancing to bring down the rate is partly a hedge against your taking a longer time to pay off the loan (because the longer period is what makes a higher interest rate really bite, and when the lower rate will therefore really help) and partly a commitment device to get you to pay more each month -- because to get an attractive-looking rate you'll have to bring the term down from 20+ years to 10 years. But with $212,500 to pay off and a family to look after I'd advise against overdoing things. Opt for a 10 year term, but plan your budget around paying it off within 5-7 years. Don't lock yourself into a 5 year term just to cut the rate that last point.

[MrUpwardlyMobile]

Bottom line is that a 7 year refinance is totally feasible, even a 5 year might be possible.

There will be a tradeoff between length of loan and interest rate, and despite my earlier enthusiasm for refinancing to cut your rate, I'm now going to give you some "on the other hand" advice: Don't contractually lock yourself into payoff terms that are too short, even if that gets you the lowest interest rate. You will have a much larger margin of safety if you take a 5% interest rate and a 10 year payoff term rather than a 4% interest rate and a 5 year term.

You can lock into a 10 year repayment term and then make payments beyond the minimums, in an effort to get the thing paid off in 5 years anyway. But if you lock into a 5 year term and then somebody loses a job, it might be harder at just that moment to cut your minimum required payments to stay within your family's temporarily diminished earnings. The difference between student loans and other debt (such as car loans and mortgages) is that student loans often have easier to obtain hardship forbearances, which can save you from default in such a circumstance, but relying on that is a bit of a risk and also a bit of a temptation. Interest continues to roll in during a forbearance and you don't want to fall into that trap again.

The key point here is once you roll your payoff time horizon from 25 years down to 5-7 years, the overall effect of a 4% interest rate vs a 5% interest rate vs a 6 3/8% interest rate is hugely reduced. It's the long time horizon which makes every additional point of interest appear to be so expensive on a cumulative basis -- go play with a mortgage amortization calculator to see just how dramatic that is. 

Basically, refinancing to bring down the rate is partly a hedge against your taking a longer time to pay off the loan (because the longer period is what makes a higher interest rate really bite, and when the lower rate will therefore really help) and partly a commitment device to get you to pay more each month -- because to get an attractive-looking rate you'll have to bring the term down from 20+ years to 10 years. But with $212,500 to pay off and a family to look after I'd advise against overdoing things. Opt for a 10 year term, but plan your budget around paying it off within 5-7 years. Don't lock yourself into a 5 year term just to cut the rate that last point.

In this case, every point amounts to thousands of dollars.  There is nothing preventing them from refinancing again in 9-12 months.  In fact, they should refinance a few times over the life of the payment plan.  Student loan payments are not like mortgages.

[Ben Kurtz]

In this case, every point amounts to thousands of dollars.  There is nothing preventing them from refinancing again in 9-12 months.  In fact, they should refinance a few times over the life of the payment plan.  Student loan payments are not like mortgages.

Every interest rate percentage point is worth $2,125 per year; but less as time goes on and the balance goes down. Obviously I understand that.

But planning to refi this thing over and over into a rising rate environment isn't exactly a guaranteed winner, nor is it a low-stress plan. Leaving the last possible interest rate point on the table might cost these folks, realistically, $6,000 to $8,000 over the expected payoff horizon. It won't be a perfectly trivial amount, but as a one-time expense it is not particularly large.

I regularly go on the record as endorsing flexible, simple and lower-stress approaches which are not perfectly optimized to get the last possible five thousand dollars of lifetime saving or investment growth, because once you have more or less enough money, flexibility, simplicity and low-stress are far more important, in my view, than a few more dollars.

For example, I've had a long-running difference of opinion with a poster on this forum (under the handle Boarder42, I recall) as to whether it is better to enter early retirement with maximum investment balances but a mortgage on your primary residence, or slightly lower investment balances but a paid-off house. We both acknowledge that carrying the mortgage in order to moderately leverage up your investment portfolio leads to the higher average expected long-term net worth. But I maintain that having higher fixed monthly expenses makes it psychologically more difficult and stressful to ride through the ups and downs of the investment markets and stick to the long-term correct investment plan, so I generally don't recommend it. I am applying fundamentally the same point here: my plan is not strictly optimized down to the last dollar, but it is optimized down to the point where the next dollar isn't worth the headache.

And even a robotic net-worth maximizer might take issue with your approach: If getting, say, a 4% rate required the OP to opt for a 5 year term while a 5% rate could be had on a 10 year term, the required extra monthly principal repayments under the former plan would likely (given what he's written about his budget) inhibit the OP's ability to max out every tax-advantaged savings account. Under the usual investment return assumptions, you should invest in equities in advantaged accounts before paying off debt with an interest rate lower than Treasury + 5%. Therefore, to the extent chasing the last point of interest savings would prevent the OP from maxing out his 401ks, IRAs, HSAs, 529s and any other tax-advantaged accounts, it would result in a lower long-term net worth and not be the ideal plan.

I'm frankly fine with the idea of not maxing out every investment account first. There are psychological and spiritual benefits that getting this thing whipped will convey to the couple. But in a frenzy to beat this loan they shouldn't cut off all the headroom they have left for maneuver.

[Gronnie]

I've read the entire thread and there has been lots of good advice.

I have a couple points to stress to the OP:

1. You can't both contribute to Dependent Care FSAs if it puts you over the household max. The household max is $5,000 per year. https://dpath.com/2018-fsa-contribution-limits/

2. Your wife is a Pharmacist, she should have AMPLE opportunities to pick up some moonlighting and significantly increase her income. If she sacrifices and works some extra for a couple years, putting it all towards the debt, these loans will be gone in no time.

[MrUpwardlyMobile]

In this case, every point amounts to thousands of dollars.  There is nothing preventing them from refinancing again in 9-12 months.  In fact, they should refinance a few times over the life of the payment plan.  Student loan payments are not like mortgages.

Every interest rate percentage point is worth $2,125 per year; but less as time goes on and the balance goes down. Obviously I understand that.

But planning to refi this thing over and over into a rising rate environment isn't exactly a guaranteed winner, nor is it a low-stress plan. Leaving the last possible interest rate point on the table might cost these folks, realistically, $6,000 to $8,000 over the expected payoff horizon. It won't be a perfectly trivial amount, but as a one-time expense it is not particularly large.

I regularly go on the record as endorsing flexible, simple and lower-stress approaches which are not perfectly optimized to get the last possible five thousand dollars of lifetime saving or investment growth, because once you have more or less enough money, flexibility, simplicity and low-stress are far more important, in my view, than a few more dollars.

For example, I've had a long-running difference of opinion with a poster on this forum (under the handle Boarder42, I recall) as to whether it is better to enter early retirement with maximum investment balances but a mortgage on your primary residence, or slightly lower investment balances but a paid-off house. We both acknowledge that carrying the mortgage in order to moderately leverage up your investment portfolio leads to the higher average expected long-term net worth. But I maintain that having higher fixed monthly expenses makes it psychologically more difficult and stressful to ride through the ups and downs of the investment markets and stick to the long-term correct investment plan, so I generally don't recommend it. I am applying fundamentally the same point here: my plan is not strictly optimized down to the last dollar, but it is optimized down to the point where the next dollar isn't worth the headache.

And even a robotic net-worth maximizer might take issue with your approach: If getting, say, a 4% rate required the OP to opt for a 5 year term while a 5% rate could be had on a 10 year term, the required extra monthly principal repayments under the former plan would likely (given what he's written about his budget) inhibit the OP's ability to max out every tax-advantaged savings account. Under the usual investment return assumptions, you should invest in equities in advantaged accounts before paying off debt with an interest rate lower than Treasury + 5%. Therefore, to the extent chasing the last point of interest savings would prevent the OP from maxing out his 401ks, IRAs, HSAs, 529s and any other tax-advantaged accounts, it would result in a lower long-term net worth and not be the ideal plan.

I'm frankly fine with the idea of not maxing out every investment account first. There are psychological and spiritual benefits that getting this thing whipped will convey to the couple. But in a frenzy to beat this loan they shouldn't cut off all the headroom they have left for maneuver.

I don’t take issue with anything you’ve said here.  I agree that this is a matter of opinion, personal finance is personal. 

That said, I think you’ve underestimated how drastic a 5 v 7 v 10 year plan can vary on interest rate.  From experience, I found that a 10 year plan from most refinancers at high income, high credit score, with a big balance like that is often going to yield a 6% interest rate.  The difference between 7 year and 10 year was 1.5% when I did it.  The difference between 5 and 7 was almost another 1.3% (it was actually a 1.28 difference or something thereabouts).  That’s a huge jump between 5 and 10.  I’m not necessarily saying he has to go to 5 year as I agree that flexibility matters, but if they aim to pay in 5, they should refinance for 5.  If it’s too much to bear After 12 months, the amount they’ll have paid down may actually get them a lower rate on a refinance even with rising rates during that same time period.  They have a fair bit of space between their current offer and the bottom of 2.88% that Earnest offers.

[eddieryan]

I know I sound like a broken record, but thank you again for the posts. Very thought provoking material to consider.

I'm finalizing running our figures for yearly spending:

Annual spending: $113,748. This includes just about everything I can think of, from oil changes to estimated maintenance costs for the house, dog food, etc., and is inclusive of $3000 a month towards the student loan.

Annual expenses to trim: $5,802 (within reason, this is my projected compromise on eliminating cable, lawn care, life insurance, etc....and oh yeah, a $208/month maid who cleans the house twice a month).

Annual take-home pay: $120,000.   $113,748 (reflects doubling loan payments from $1500 to $3000) -5,802 (shit we don't need)= $107,946     $120,000-107,946= $12,054 of wiggle room for the year.

I also should be getting a 4-7% raise in July, plus I do get a yearly bonus somewhere in the neighborhood of 10% or up (fingers crossed), but that is not paid until early next year. My wife also gets about a 2% raise a year and is the pharm manager at a hospital so I don't think she has an option to increase her income by working more hours, but I really don't know and will ask her about that.

So the question is, is about $1,000 cushion a month reasonable in our situation? It would seem so. This leads me to believe locking in on a rate of around 4% (if we can get it) for 7 years is the way to go. When my son begins kindergarten, 30 months from now, I will shift about $920 a month towards the loan, so by my estimates, we can have it paid off in about 70 months.

The contribute to 401k v pay student loan debate will be on my mind. This is not an easy answer and I may end up periodically contributing more, but I'm okay with reducing it now to 6%. My feelings may change and I am very tempted to invest more if the markets continues to go south. I do have a side hustle option to pull in a few more thousand, so that may lead me to use those funds as a reason to up the contributions to 401k some.  I actually calculated $13,580 extra cost going with a 5% rate at 10 years versus a 4% rate at 7 years if we actually were to make the equivalent payment plan on each of them. The former would result in 72 months of payment with a min of $2250 payment and the latter 68 payments with a minimum of about $2900. So I see the point made of going with a 10 year plan with a higher interest rate but having the comfort of knowing we would only need to pay $2250 if something unforeseen happens, and also allowing me the option to decide to contribute more to the 401k. We can't really make a decision anyway until we have official refi offers next week.

We do have about $11k in a nest egg for an emergency, but I view this as an emergency, so I'm not sure if I should leave this alone, allocate a portion of it to the loan, or just throw it all at the loan right now. I welcome any discussion on that.

[Gronnie]

What about your overcontribution to Dependent Care FSA, are you going to fix that? Have you overcontributed in past years as well?

[eddieryan]

Yes, for 2016 and 2017, but only by about 1800 over a year as wife has a cap. So what does this mean? The IRS may audit us and send a bill?

[NoStacheOhio]

Yes, for 2016 and 2017, but only by about 1800 over a year as wife has a cap. So what does this mean? The IRS may audit us and send a bill?

It should've been disallowed when you filed your return. It's never happened to me, but I think you just get charged the taxes on it. Talk to an accountant.

[NaN]

There is no penalty in a year to over-contributing to the Dependent Care FSA with two accounts. In terms of past returns, depends on how you filed them. If you used an accountant they probably found it, filed the right forms, and charged you tax on the extra pre-tax contribution over $5k.

[Ben Kurtz]

We do have about $11k in a nest egg for an emergency, but I view this as an emergency, so I'm not sure if I should leave this alone, allocate a portion of it to the loan, or just throw it all at the loan right now. I welcome any discussion on that.

Debt at non-outrageous rates is not exactly a "hair-on-fire" emergency in the sense that phrase is normally used around here. So I wouldn't advise throwing your emergency fund into paying off the student loan, because once paid in you can't get it back out.

In point of fact, I'd say your emergency fund is too small. You have a monthly burn rate of around $9,000 (you'll have a hard time qualifying as "mustachian" to most folks around here), meaning your emergency fund is barely more than one month of expenses. Most advice is for 3-6 months of essential spending stashed away in a liquid emergency fund. There is no need to overdo it, but your emergency fund is well on the small side for what most folks find comfortable. You might want to consider a plan that slowly ramps it up to $20,000 or $25,000.

[I'm a red panda]

We are currently in the most expensive stage with the kids.

I'd be careful with that assumption.  I only have a 1-year old, but I've been told it most definitely doesn't get cheaper.  We don't have the formula expense, but the only thing she has cost us is diapers (target Up and Up- so minimal cost), medical bills (won't disappear with age) and daycare (about $1200 a month for us in a LCOL state), she eats solids now, but we haven't actually noticed an increase in our food bill. I've never bought her clothes or toys, as we have an active buy nothing group. I've been told the daycare expense quickly is replaced by other things when they get older, and the hand me downs rarer when they are school age.    For us, before/after-care costs nearly the same as daycare for way fewer hours; but possibly a pharmacist schedule is really flexible so you wouldn't need those?



You say you have a positive net worth.  To have that and have this giant debt- could you just pay it off and be done with it?

[alanB]

Your "student loan horror" is not even close to horrific.  $212,500 @ 6.735% on $205,000 gross salary is a cakewalk.  I could think of several people I know who are in far direr situations and sleep peacefully at night without a care in the world,* those are the people who are going to tank the student loan market.  If you have a problem that can only be solved with money, and a large influx of money, well... you have no real problem.  Your wife's suggestion of paying forever is not ideal, but would not be the end of the world either. 

Annual spending: $113,748.

Yep, there's your problem.  You are upset that the loan will cost you $540,000 over the next 25 years?  Do you have any idea how much that spending will cost you?  I would suggest you read this: http://www.mrmoneymustache.com/2011/08/01/a-millionaire-is-made-ten-bucks-at-a-time/ and never ever read Bogleheads again ;)


*jk they are riddled with anxiety, just not about student loans

[Nick_Miller]

Well folks are saying this debt is not a "hair on fire" emergency and that it's not "horrific."

I strongly disagree. I think it's a horrific emergency.

You basically have a mortgage...with no house behind it...that cannot be discharged in bankruptcy...that is costing you about $14,000 a year just by its mere presence and that will screw up the rest of your lives if you don't attack it.

For the next couple of years, I would really hammer that sucker (after refinancing) because you (and more importantly, your wife) need to get accustomed to writing that big painful check each month.

[Ben Kurtz]

Well folks are saying this debt is not a "hair on fire" emergency and that it's not "horrific."

I strongly disagree. I think it's a horrific emergency.

You basically have a mortgage...with no house behind it...that cannot be discharged in bankruptcy...that is costing you about $14,000 a year just by its mere presence and that will screw up the rest of your lives if you don't attack it.

To some extent, this is all in the eye of the beholder. The OP's wife doesn't have a house to match the loan, but she has a professional degree that allows her to earn much more than she likely could have without it. It may be costing $14,000 a year in interest, but her yearly earnings have increased by far more than that because of the professional qualification. Many medical professionals will take our huge loans to pay for their qualifications, and on numbers it will be painful to look at but worth it. (I'm not a medical professional, but that's what I've read.)

The horrific part isn't the loan itself, so much as it is the $113,748 per year spending habit that has prevented them from paying it down swiftly. The wife took out the loan, got the boost in salary, and then forgot that the educational qualification wasn't free: the loan should have been paid back first before she spent all of her bountiful earnings on cable TV and brand-new cars and other silly things.

And to the OP's narrower point, and to the habitual use of the expression "hair on fire" debt emergency: The 6 3/8% interest rate on the student loan (soon to come down in a refinancing) does not justify the depletion of the family's emergency cash account (while a 22% credit card balance might), and the family's financial profile -- though not exactly inspiring -- does not suggest they are overconsuming to the point of being unable to pay their bills or pay down their debts. By the received wisdom concerning investment order (especially once they refinance the rate down), they should probably by maxing out their investments first and not paying a dollar more than the minimum on the loan. The only catch is, given their spending habits, getting motivated to pay down the loan will probably lead to more fat being trimmed from the spending budget than making a plan to invest more in mutual funds. And trimming that consumption fat will be a huge win for them.

I don't fundamentally disagree with you that the OP and his family would be very well served by putting in a strong effort to pay down the loan quickly, notwithstanding the traditional investment order. But throughout this thread, my concern here is more with the couple's ability to communicate about money and reach a shared viewpoint, and not about usurious interest rates or spending habits that are pushing them further into debt (given that their existing spending habits are slowly raising them out of debt).

[elliha]

We are currently in the most expensive stage with the kids.

I'd be careful with that assumption.  I only have a 1-year old, but I've been told it most definitely doesn't get cheaper.  We don't have the formula expense, but the only thing she has cost us is diapers (target Up and Up- so minimal cost), medical bills (won't disappear with age) and daycare (about $1200 a month for us in a LCOL state), she eats solids now, but we haven't actually noticed an increase in our food bill. I've never bought her clothes or toys, as we have an active buy nothing group. I've been told the daycare expense quickly is replaced by other things when they get older, and the hand me downs rarer when they are school age.    For us, before/after-care costs nearly the same as daycare for way fewer hours; but possibly a pharmacist schedule is really flexible so you wouldn't need those?



You say you have a positive net worth.  To have that and have this giant debt- could you just pay it off and be done with it?

I agree, my kids are soon to be 2 and 6 years old and they cost much more now than as babies. They already roughly cost as much as one adult when it comes to food, the older one is much harder to find second hand clothes for since now she has her own preferences on what to wear and older kids wear their clothes out more than the little ones so the ones out there are usually not as nice as they were when she was 2-3 years old. She has broken two sets of rubber boots due to god knows what and is now on her third pair in less than a year. She is now at an age where she wants to do sports and other activities. While I am not the type of parent that thinks kids need to do tons of activities I do think that one or two a year is reasonable. She did jujitsu last year and wants to try soccer or floorball this autumn. All three are reasonably priced activities in my town but that is still more money than as a baby. Both cost money for childcare (in Sweden school starts at 6 and she will need care after school too until she is at least 10) and while my son is still OK with wearing leggings and floral print shirts I assume there will be a time when I he might not accept that and then I will need to budget getting more or less a whole new wardrobe for him. Still my son plays with our daughter's old toys but as he grows older he will probably start having his own preferences for toys too. We don't plan to overspend on this but it would be unfair to not allow any new toys.

I assume that in 5 years time when they are 11 and 7 they will both do 1-2 activities, probably eat at least as 1.5 adult, both need clothes that will be mostly sales and cheaper brands but still have to be bought mostly new. Toys for older kids are almost always expensive and they may want more access to technology. By then none of them will be able to go for free on the bus (ends the day the turn 6 but children's rates are still half of an adult's) and we use the bus a lot. They will need bikes and even second hand ones cost money. We may however be able to downsize our car somewhat by then though since we will no longer need to take rear-facing carseats into consideration but that is really one of few cost reductions. Child care will be cheaper as I assume my daughter will no longer need after school care and our son might need less hours if he goes home with his sister sometimes.

Then in a couple more years they are both teens and will eat the same amount as adults or more. Often this is the period when kids want the most expensive things. Sure, we will give them all they ask for but it is reasonable to give them some of it. I will get them cellphones for sure as I will want to get in touch with them when they starting being further away from home.