Author Topic: Updated: Advice on paying student loans vs investing? [$200k loans]  (Read 2251 times)

STEMorbust

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Hi folks,

The fiancee and I had a good year of saving and increased our net worth by $90k(!). It was a mix of my own 401k market gains and our combined frugality discipline. The breakdown is around $40k in retirement fund growth, $30k in student loan payments, and $20k in high yield savings. Being worth a combined $0 is on the horizon for 2020 ;)

The big question that we're facing is how much to put towards the student loans monthly. We're looking at $110k private at 4.25% (7 year, $1,550/mo) and $95k federal at 6.5% (small monthly payment on REPAYE that picks up to $1k in October). We also want to save ~$40k for a down payment on land/a house. The current $20k savings is from slowing down student loan payments while we see what shakes out politically -- instead of putting $5k/mo towards loans, it's going in the account while we're in a holding pattern (so it's different than the house/land savings).

We typically have $5k leftover monthly after retirement contributions and all bills/spending (I max 401k and Roth with no match on either, fiancee does 3.5% to 401k to maximize emp match). Our goal is to increase NW by at least $100k per year with a FIRE target of $1.6M by 45, ideally 40 (we are 30 y/o).

What strategy should be using to pay off the student loans? My thought is that slowing down private payments in order to invest in retirement could be worthwhile as it would reduce AGI and, therefore, federal payments on income-based plans.

Any other advice?

Thank you!

therethere

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Re: Updated: Advice on paying student loans vs investing? [$200k loans]
« Reply #1 on: February 14, 2020, 02:59:40 PM »
Refinance!!!! Then keep the loans around and pay the minimums. I followed the investment order and paid off all my loans above 5% or refinanced them below that rate. Any money I would have funneled to payoff my student loans I bought VTSAX with. My calculations show I'm ahead about 30k (on a target repayment balance of 50k) over 5 years this way. I just refinanced them again to get a 3.1% rate. With being able to deduct student loan interest, it's effectively ~2.4% loan. The great part about this strategy is that eventually you'll have enough in your brokerage account to pay off the loans in full if you want. And if you don't, you'll always have that money available to you to use as an opportunity fund. If you paid it towards student loans it's "gone."

As a bonus, maybe I'll have some small amount forgiven if student loans get forgiven. Although this played no part in my decision.

I only wish rates were this low when I had my mega private student loans. But back 10 years ago they were nearing 8-9% and refinancing was not available.
« Last Edit: February 14, 2020, 03:04:22 PM by therethere »

STEMorbust

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Re: Updated: Advice on paying student loans vs investing? [$200k loans]
« Reply #2 on: February 14, 2020, 03:03:49 PM »
Refinance!!!! Then keep the loans around and pay the minimums. I followed the investment order and paid off all my loans above 5% or refinanced them below that rate. Any money I would have funneled to payoff my student loans I bought VTSAX with. My calculations show I'm ahead about 30k over 5 years this way. I just refinanced them again to get a 3.1% rate.

As a bonus, maybe I'll have some small amount forgiven if student loans get forgiven.

So you refinanced Federal? That still frightens me but is tempting with the rate at 6.5%. The spread of them, a year ago, is below. Two on top have been paid.

- $4,577.02 @ 6.8%
- $4,457.84 @ 6.8%

- $14,122.92 @ 6.75%
- $1,066.60 @ 6.75%
- $21,974.33 @ 6%
- $24,233.58 @ 5.84%
- $22,807.01 @ 5.31%
- $3,278.23 @ 4.5%
- $3,118.96 @ 3.4%

therethere

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Re: Updated: Advice on paying student loans vs investing? [$200k loans]
« Reply #3 on: February 14, 2020, 03:10:28 PM »
Yes, I even combined private and federal at some point. Once I got to the point where monthly cash flow didn't matter too much I just started chasing lower rates. With what you stated, cashflow isn't an issue. I rate check refinancing every 6-12 months and have refinanced 3 or 4 times.

The only reasons not to pay down loans or refinance in my mind are:
You would come out ahead via REPAYE/forgiveness
You cannot afford to pay the loan and need access to all the forgiveness and IBR type programs
Cashflow is an issue and you want the payments gone ASAP.
You cannot qualify for a refinance rate <5%. If this is the case, pay them down or gather assets and continue to check for new rates every few months.

I would say, with that balance I would rate check with varying refinance amounts. Mainly you're trying to get rid of the highest rates while keeping the refinance balance lower to give you a better rate. Like I might leave off the 3.4%-4.5% loans and the private loan and see if that gives you a more favorable rate. There is no reason why you have to consolidate/refinance all your loans together. You can cherry pick the specific ones you want included. Play around with it.
« Last Edit: February 14, 2020, 03:14:34 PM by therethere »

STEMorbust

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Re: Updated: Advice on paying student loans vs investing? [$200k loans]
« Reply #4 on: February 14, 2020, 03:17:02 PM »
That's a great point! Refinance the loans over 6% at least to start.

How low would you go with refinancing when it comes to term rate? By the logic of market investing instead of paying loans, you'd want to do the longest possible term at the lowest possible rate, right?

therethere

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Re: Updated: Advice on paying student loans vs investing? [$200k loans]
« Reply #5 on: February 14, 2020, 03:21:43 PM »
Eh, I didn't think too much about that. I just tried to keep it approximately the same as the length term I was refinancing to keep it even. I feel like after 20 years of paying them I'll want to finally be done at some point. I also didn't want to continue to do that math.

Laura33

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Re: Updated: Advice on paying student loans vs investing? [$200k loans]
« Reply #6 on: February 14, 2020, 03:41:13 PM »
Wait:  why are you diverting the extra loan payment into savings to see how the political situation shakes out?  I'm not following.  Unless you're worried your jobs might go away? 

mistymoney

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Re: Updated: Advice on paying student loans vs investing? [$200k loans]
« Reply #7 on: February 15, 2020, 08:12:16 AM »
Refinance!!!! Then keep the loans around and pay the minimums. I followed the investment order and paid off all my loans above 5% or refinanced them below that rate. Any money I would have funneled to payoff my student loans I bought VTSAX with. My calculations show I'm ahead about 30k (on a target repayment balance of 50k) over 5 years this way. I just refinanced them again to get a 3.1% rate. With being able to deduct student loan interest, it's effectively ~2.4% loan. The great part about this strategy is that eventually you'll have enough in your brokerage account to pay off the loans in full if you want. And if you don't, you'll always have that money available to you to use as an opportunity fund. If you paid it towards student loans it's "gone."

As a bonus, maybe I'll have some small amount forgiven if student loans get forgiven. Although this played no part in my decision.

I only wish rates were this low when I had my mega private student loans. But back 10 years ago they were nearing 8-9% and refinancing was not available.

but that isn't really the guideline. It's 5% above current treasury note.

2. Pay off any debts with interest rates ~5% or more above the current 10-year Treasury note yield.

https://www.cnbc.com/quotes/?symbol=US10Y

10 year note is at 1.588, so the guideline would target interest at 6.588 or more.

mistymoney

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Re: Updated: Advice on paying student loans vs investing? [$200k loans]
« Reply #8 on: February 15, 2020, 08:13:16 AM »
Wait:  why are you diverting the extra loan payment into savings to see how the political situation shakes out?  I'm not following.  Unless you're worried your jobs might go away?

If sanders is elected - student loans supposedly go poof?

mistymoney

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Re: Updated: Advice on paying student loans vs investing? [$200k loans]
« Reply #9 on: February 15, 2020, 08:14:51 AM »
Refinance!!!! Then keep the loans around and pay the minimums. I followed the investment order and paid off all my loans above 5% or refinanced them below that rate. Any money I would have funneled to payoff my student loans I bought VTSAX with. My calculations show I'm ahead about 30k over 5 years this way. I just refinanced them again to get a 3.1% rate.

As a bonus, maybe I'll have some small amount forgiven if student loans get forgiven.

So you refinanced Federal? That still frightens me but is tempting with the rate at 6.5%. The spread of them, a year ago, is below. Two on top have been paid.

- $4,577.02 @ 6.8%
- $4,457.84 @ 6.8%

- $14,122.92 @ 6.75%
- $1,066.60 @ 6.75%
- $21,974.33 @ 6%
- $24,233.58 @ 5.84%
- $22,807.01 @ 5.31%
- $3,278.23 @ 4.5%
- $3,118.96 @ 3.4%

I'm not seeing 200k here?

kenner

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Re: Updated: Advice on paying student loans vs investing? [$200k loans]
« Reply #10 on: February 15, 2020, 02:08:14 PM »
Wait:  why are you diverting the extra loan payment into savings to see how the political situation shakes out?  I'm not following.  Unless you're worried your jobs might go away?

If sanders is elected - student loans supposedly go poof?

Hoping this is sarcasm.  With the fear that it's not...well, to start with, federal and private loans are two different beasts.  On the private side, non-government entities are legally entitled to the money they're owed, however you might feel about student loan terms/protections.  From a could-it-be-done perspective I suppose the government could buy it all and forgive it that way, or maybe they could directly refund money paid through some kind of tax break, but either way someone pays.  From a reality standpoint, that's money that needs to come from somewhere, and I don't see how a president trying to do something like that wouldn't face serious hurdles with the other branches of government since the president doesn't get to act in a vacuum.  Nor does the president get to act in a vacuum for federal student loans which I think involve even more money and while the US gov budget isn't like a personal budget, remember how many shutdowns we've already seen over budgets?  Personally I think student loan reform going forward is very likely since that money isn't on the table yet, but what candidates promise on the election trail and what they actually deliver when in office (what they even can do, legally and otherwise) don't always have a lot in common.

STEMorbust

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Re: Updated: Advice on paying student loans vs investing? [$200k loans]
« Reply #11 on: February 18, 2020, 11:10:55 AM »
Wait:  why are you diverting the extra loan payment into savings to see how the political situation shakes out?  I'm not following.  Unless you're worried your jobs might go away?

As mentioned, we're taking a calculated risk given the forgiveness plans of Warren and Sanders. Warren has proposed $50k total forgiven while Sanders is all federal and private. While I agree that it's improbable that either plan will actually benefit us (be it for political or temporal reasons), it's a small risk to take as long as our 'extra' funds see comparable interest gains while we wait another few months to see who the nominee is.

STEMorbust

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Re: Updated: Advice on paying student loans vs investing? [$200k loans]
« Reply #12 on: February 18, 2020, 11:13:10 AM »
I'm not seeing 200k here?

That's just federal! I listed them in reference to the suggestion of refinancing some of the fed but not all.

wellactually

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Re: Updated: Advice on paying student loans vs investing? [$200k loans]
« Reply #13 on: February 18, 2020, 01:14:11 PM »
I doubt your high yield savings account is bearing 4.5% interest or any "comparable interest gains."

So you're not currently choosing between paying off debt more aggressively and putting money toward investments more aggressively. You're sitting on money.

And if you really think about it, I think you can understand why the idea of the federal government using tax dollars to pay off private loans which they did not agree to back is never, ever going to happen. So you are risking something by sitting on the money. You're sitting on either the difference between your high yield savings interest and 4.5% guaranteed return. OR you're sitting on the difference between the savings and what you'd get if that extra money was in the market.

Personally, all our student loans were federal and at 6.8%. We prioritized debt-payoff because we wanted to simplify our finances, lower risk, and increase our monthly cashflow. That was absolutely the right choice for us. A lot of people here have made the opposite decision (especially when their rates were lower!) and instead maxed out all tax-advantaged accounts and then invested the rest.

I think you should do one or the other. If you want to save up the downpayment first, that's fine. But I wouldn't divert $5k/month for the next 11 months based on politics.


Peachtea

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Re: Updated: Advice on paying student loans vs investing? [$200k loans]
« Reply #14 on: February 18, 2020, 09:40:10 PM »
Okay, Iím on an IBR plan and doing the PSLF program. So I believe the current loan forgiveness plans in place will be honored and I am obviously a fan. But youíre trying to time potential future programs and that in my mind is crazy. Even if Sanders or Warren are elected, youíre looking at a long wait for relief, if it ever comes. Thatís too many hopes and maybes. You have the power to do something about them now!

Now never say never and all, but IMO you should be chipping away at those loans in the meanwhile. For example, Iíve been reading about bills for paid maternity leave for federal employees for the last five years, and Iím pretty sure theyíve been introduced much earlier than that, like the last 10 years. Yet itís just been enacted. Can you imagine someone 10 years ago waiting that long to have kids on the hope a bill would eventually pass?

If you want to prioritize a down payment, thatís a different matter. Otherwise at least knock out the loans 6% and above. Because right now your trading 6-7% guaranteed ROI for maybe 2% savings interest and hopes and prayers. Yikes!

STEMorbust

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Re: Updated: Advice on paying student loans vs investing? [$200k loans]
« Reply #15 on: February 19, 2020, 11:59:40 AM »
I don't disagree, thank you for the feedback. To clarify -- we're still paying $1,550/mo on the private loan which is 4.25%, 7 years. The federal payments are small because of REPAYE. The break from putting all extra towards loans has made sense because we want to have liquid available for a house payment, with an added bonus of the possibility of some type of partial forgiveness if politics go a certain way (which we'd know in part by June when Dem nominee is announced).

Holding back on putting the extra towards loans has also been because we aren't sure which to pay toward. Does it make sense to:

1) Aggressively pay off both private and federal over the next 4-5 years (push back having children?)
2) Aggressively pay private but stick to 25 year REPAYE/PAYE/IBR for 25 years while saving for a potential tax bomb (hoping for some level of forgiveness along the way)
3) Take slow approach to private given sub-5% interest rates and put money in index funds instead while aggressively paying high-interest federal
4) Slow approach to private and 25 year plan for federal, with a lot of money going in index funds

Thoughts? Am I missing anything?

therethere

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Re: Updated: Advice on paying student loans vs investing? [$200k loans]
« Reply #16 on: February 19, 2020, 12:17:43 PM »
Have you done the REPAYE calcs onto whether that would actually pay off? That's critical. Be honest about your income, raises, and career goals. It could be limiting if you're planning to stick out the full 25 years. But if you're using it to divert money to tax advantaged accounts then it could pay off, even on short term if you decide to not stick out the full 25 years. ReadySetMillionaire had a pretty good analysis on a thread a few years back. He used REPAYE to boost his retirement savings and downpayment fund early, and I believe recently has gotten off the REPAYE track but it helped boost his NW early on.

You won't know about forgiveness by June. It would take years for the govt to debate and decide on an actual plan. I would ignore this as a factor in your repayment plans.



STEMorbust

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Re: Updated: Advice on paying student loans vs investing? [$200k loans]
« Reply #17 on: February 19, 2020, 05:20:55 PM »
Have you done the REPAYE calcs onto whether that would actually pay off? That's critical. Be honest about your income, raises, and career goals. It could be limiting if you're planning to stick out the full 25 years. But if you're using it to divert money to tax advantaged accounts then it could pay off, even on short term if you decide to not stick out the full 25 years. ReadySetMillionaire had a pretty good analysis on a thread a few years back. He used REPAYE to boost his retirement savings and downpayment fund early, and I believe recently has gotten off the REPAYE track but it helped boost his NW early on.

You won't know about forgiveness by June. It would take years for the govt to debate and decide on an actual plan. I would ignore this as a factor in your repayment plans.

That's a good thread from RSM. He went from REPAYE to paying off rapidly to refinancing (~4.3% 10 YR) and putting his money elsewhere. A key difference is that all of his loans were/are federal whereas my fiancee's are split. That complicates the math. I spend my entire day working with numbers but am feeling like I need to pay a consultant a few hundred $$$ to find answers for us. I look forward to any other feedback or advice.

Peachtea

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Re: Updated: Advice on paying student loans vs investing? [$200k loans]
« Reply #18 on: February 20, 2020, 08:00:11 AM »
Holding back on putting the extra towards loans has also been because we aren't sure which to pay toward. Does it make sense to:

1) Aggressively pay off both private and federal over the next 4-5 years (push back having children?)
2) Aggressively pay private but stick to 25 year REPAYE/PAYE/IBR for 25 years while saving for a potential tax bomb (hoping for some level of forgiveness along the way)
3) Take slow approach to private given sub-5% interest rates and put money in index funds instead while aggressively paying high-interest federal
4) Slow approach to private and 25 year plan for federal, with a lot of money going in index funds

Thoughts? Am I missing anything?

Iíd first look at your goals and then try working back from there. If you want kids and are 30 I would personally prioritize that. You might want to hammer down the private loans in next year or so and stay on an IBR Federal to increase cash flow for when you have kids.

For a down payment, you donít need a house to have kids. Iíd look at the house goal independently. If you want to FIRE at 40, in 10 years, do you plan still living where you are or moving somewhere else? Use the nytimes rent vs buy calculator to make sure it makes sense to buy in the timeframe you plan on living wherever you are. Determining not only whether, but also to what extent, buying might be advantageous (or not) will help you figure out how much of a priority a down payment should be. And donít compare renting a 3 bedroom house to buying one, if renting a 2 bed (and then if needed 3 bed) apartment is a legitimate possibility and cheaper than renting a house. Then compare renting an apartment to buying a home.

You should look at 25 year payment + forgiveness vs switching to a standard 10 year plan. What saves you more over the long run? And how does it affect cash flow one? Donít worry about the private loans in this calculation, your only comparing one federal plan to another. You said your PAYE rate is going up soon to $1000. How close does that bring you to a standard 10 year payment? If itís close, switch to the standard 10 year plan. No need to calculate. Eyeballing it based on running lots of numbers in the past, I think 95k in fed loans means 25 year repayment will cost you a lot and should only be done if you cannot afford standard payments OR if youíre on IBR temporarily to work on other goals (not for 25 years).

If a 10 year standard plan makes sense for your federal loans (which I think it might based on the soon to be $1000 rate), then you are just comparing interest rates and the flexibility advantage of fed vs private loans. In that scenario, Iíd personally wipe out federal above 6 percent today, then work on private loans, then come back to remaining federal. Thereís discussions on letting low interest loans ride, but I killed all my private loans, even the one 3% unicorn. My grandparents were co-signers, so I didnít want them to worry about the loans. This was pre-mmm, but I donít regret it; it was a huge relief to be done with Sallie Mae/Navient.

Now if you also decided a buying house is much more advantages to renting, then Iíd work on your DP and before buying increase your efund to account for repairs. Then work on student loans in order described above as much as possible while trying to have kids. Unless you feel you need more cash flow for when a child comes and an IBR rate is much lower than 10 year rate, then Iíd go at private first. Reassess post child on what is manageable.

therethere

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Re: Updated: Advice on paying student loans vs investing? [$200k loans]
« Reply #19 on: February 20, 2020, 08:37:36 AM »
No one can do the calculations for you without knowing income, expectation of career growth and raises, monthly spend, etc as I said earlier. I highly recommend you do the math yourself to stay informed. Then you'll also be able to run different scenarios and really understand what is better at what stage and why. Build up a spreadsheet it will be worth it. Having separate loans doesn't really complicate it too much. I mean, you need them all gone anyway right?

There is a calculator on Studentloanhero.com for REPAYE for the loan payment amounts. You can pull this into Excel and set up some simple loan payoff schedules and have your retirement/other savings next to it. Figure out what meets your needs (cashflow, optimize savings, etc.). You want to take action but seem to be stuck in stall mode. If you're informed and fully understand your "why" then you'll feel good about whatever payoff decision you make.

For a long while my "why" was increasing cash flow and reducing interest paid (we had >2,500 in payments a month during the recession). So I spent 5+ years aggressively paying down my 8% private loans. Eventually once those got kicked, DH and I had steady jobs, and our overall monthly payments were lower. Then I reevaluated, realized that I had the amount of cashflow security I needed. I changed my "why" to saving as much on taxes as possible and jump started my neglected retirement accounts, diverting my extra money to max out my 401k. Not too long after my "why" turned into having my loans make me money versus cost me money. This had me move to continually seeking lower rates on my loans while diverting extra to brokerage account, giving me an opportunity fund.

There's a lot of math in loan payoffs but also a lot of emotions. When you have student loans as high as yours you need to listen to both emotions and math to find an agreeable solution.
« Last Edit: February 20, 2020, 08:47:04 AM by therethere »

STEMorbust

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Re: Updated: Advice on paying student loans vs investing? [$200k loans]
« Reply #20 on: February 20, 2020, 12:50:48 PM »
^ @Peachtea and @therethere

I super appreciate your advice. Thank you for helping an internet stranger.

Our rough plan is to have a wedding in 1 year, buy land in New England in 2-3 years (family there to live/work on it), possibly have kids in 5-7 years, and move back to said land in 10 years. At that point, we'd be wrapping up corporate careers and working limited hours as we see fit (semi or complete FIRE). I'm sure I'll look back on this plan and laugh at the inaccuracy of it all, but that's what we're working with.

The federal loans have about $16k at 6.5% interest, which is the highest. Most are around 5%, some lower. The plan that we'll operate with is paying that $16k as nearly a lump sum, then shifting focus to paying private off as rapidly as possible. That should take 1.5 years (20 payments) if we can swing a little over $5k. I think it makes sense to start with private even though it's ~1% interest lower than federal, because fed has increased protections plus a (small) possibility of forgiveness in the next couple of years (depending on the election). We'll keep fed on PAYE or IBR while private is paid off. That will have the added benefit of flexibility if we want to fund my SO's retirement account and reduce her AGI.

In the meantime, we'll fund a wedding savings account each month ($12k total). This will coincide with the next 15-ish months of private payments. After the wedding, we'll divert that effort to saving $50k for the home down payment.

I feel good about that plan. We always feel better when hitting the loan balance with $5k payments.