Author Topic: DONT Pay off your Student Loan Club!  (Read 1277 times)

Goldielocks

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DONT Pay off your Student Loan Club!
« on: October 16, 2018, 10:27:54 AM »
In honor of Boarder42's original thread, I wanted to start a discussion on Student Loans.

Why?
@Dicey made a good list of reasons why paying off the mortgage is less impactful in other countries where:
1) Fixed rates for 30 years are less common
2) No tax additional deductions for having a mortgage versus a paid off home 
3) Rates may be more

All of these apply to Student Loans in the USA, too -- variable rates are quite common, rates tend to be higher (to make up for the interest free period), tax deductions may or may not exist depending on how you have consolidated the loan amount.   


Over the years, I have often thought of a student loan payment like a mortgage payment -- especially when people are focused on "paying off the debt".  The size of the payments plus rent are typically mortgage sized.   The impact, if the rates are low enough, are similar to mortgage payoff advantages.

So,  for those of us that are fully on the "Don't pay off your mortgage" club roster, what do you think about Student Loans, and why?

Where would the break even point in this decision be for you?



* for the purpose of this discussion, let's assume that the student does not qualify for the public student loan forgiveness, because that is another complex can of discussion topics affecting a small percentage... but the repayment plans benefits that are available to most are open to this debate.

lexde

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Re: DONT Pay off your Student Loan Club!
« Reply #1 on: October 16, 2018, 10:29:49 AM »
Maybe if I was at 1-2%. At nearly 6%, it's gotta go. Non-negotiable for me.

Greyweld

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Re: DONT Pay off your Student Loan Club!
« Reply #2 on: October 16, 2018, 10:35:38 AM »
I've also heard the argument that because student loans can't be dissolved with bankruptcy, it's better to dissolve them earlier. Though with our crowd, focused on wealth building and keeping consumerism low, the threat of bankruptcy may be negligible enough for this to be a non-factor.

Goldielocks

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Re: DONT Pay off your Student Loan Club!
« Reply #3 on: October 16, 2018, 02:52:09 PM »
I've also heard the argument that because student loans can't be dissolved with bankruptcy, it's better to dissolve them earlier. Though with our crowd, focused on wealth building and keeping consumerism low, the threat of bankruptcy may be negligible enough for this to be a non-factor.

Can you explore that a bit more for me?  Why is paying off a SL in 5 years better than in 30 years (if you could extend / roll it over) due to bankruptcy not being applicable?  Connect the dots for me, I am blind.

Also, don't most people who no longer qualify for other income-adjusted SL payments but carry it long term, roll it into a new lower rate loan, eventually, that CAN be discharged by bankruptcy  -- or does the new lender keep treating it as a SL that can not be discharged?

Goldielocks

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Re: DONT Pay off your Student Loan Club!
« Reply #4 on: October 16, 2018, 02:53:48 PM »
Maybe if I was at 1-2%. At nearly 6%, it's gotta go. Non-negotiable for me.

Why is your cut off 1-2% and not 4%, for example?  Why the low hurdle rate?
I get that 6% is awfully close to average stock market returns, and the SL pay off is more guaranteed than the markets, but why so low of a cut off for you?

Here SL interest paid is tax deductible, so that makes it virtually identical to getting a margin loan / HELOC loan used to invest in non-reg. funds.  Except you can keep the tax deductible SL and use the money to invest in tax sheltered retirement plans... e.g, max out our equivalent of 401k, IRA, Roth plans, education savings plans...   (or pay down the mortgage!)



« Last Edit: October 16, 2018, 02:56:16 PM by Goldielocks »

Still Being

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Re: DONT Pay off your Student Loan Club!
« Reply #5 on: October 16, 2018, 02:56:46 PM »
I paid off all of my 6.55% loans. Remaining are all 3.15, 3.61, or 5.35. I can still deduct the interest too making the 3.15 negligible.

Greyweld

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Re: DONT Pay off your Student Loan Club!
« Reply #6 on: October 16, 2018, 03:03:25 PM »
I've also heard the argument that because student loans can't be dissolved with bankruptcy, it's better to dissolve them earlier. Though with our crowd, focused on wealth building and keeping consumerism low, the threat of bankruptcy may be negligible enough for this to be a non-factor.

Can you explore that a bit more for me?  Why is paying off a SL in 5 years better than in 30 years (if you could extend / roll it over) due to bankruptcy not being applicable?  Connect the dots for me, I am blind.

Also, don't most people who no longer qualify for other income-adjusted SL payments but carry it long term, roll it into a new lower rate loan, eventually, that CAN be discharged by bankruptcy  -- or does the new lender keep treating it as a SL that can not be discharged?

I think that maybe it only makes sense if you aren't investing? So perhaps you are trying to become debt-free, and have a 50k student loan and 50k of credit card debt, at similar interest rates below 6/7 ish percent. Assuming you have no student loan forgiveness potential, you might pay off the student loan first, so that if you lost your job between paying of that debt and completing paying off the other loans, went further into cc debt, and had to file for bankruptcy, you would eventually come out the other end with no debt.

Presumably, as with not paying off a mortgage, if you put all that money into taxable investment accounts, then in the event of a temporary job loss you could liquidate investments to avoid making payments late, avoid bankruptcy altogether, and eventually get back on your feet, all while continuing to pay the minimums on the loans.

I don't know if it makes sense... Because if you paid off your credit cards first and then lost your job after with only student loans left, bankruptcy wouldn't be available to fix anything? I probably should have thought this through more but I was hoping someone else would come along and either validate or refute the logic.

lexde

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Re: DONT Pay off your Student Loan Club!
« Reply #7 on: October 16, 2018, 03:03:43 PM »
Maybe if I was at 1-2%. At nearly 6%, it's gotta go. Non-negotiable for me.

Why is your cut off 1-2% and not 4%, for example?  Why the low hurdle rate?
I get that 6% is awfully close to average stock market returns, and the SL pay off is more guaranteed than the markets, but why so low of a cut off for you?

Here SL interest paid is tax deductible, so that makes it virtually identical to getting a margin loan / HELOC loan used to invest in non-reg. funds.  Except you can keep the tax deductible SL and use the money to invest in tax sheltered retirement plans... e.g, max out our equivalent of 401k, IRA, Roth plans, education savings plans...   (or pay down the mortgage!)
I don't have a specific cutoff. I've seen people with 1-2% and would not pay off at that rate. I don't know what my bright-line APR would be, but that's because mine is so high it's not worth spending the time to do an analysis. I think though that even at 4% I'd want to pay it off. Average market returns at 7% with 3% inflation means effective 4% average gains. Then added risk, rather than a guaranteed net worth increase. So I guess that's what I'm basing my arbitrary cutoff on, although again it doesn't really apply to me since I'm hovering around 6%.

PizzaSteve

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Re: DONT Pay off your Student Loan Club!
« Reply #8 on: October 16, 2018, 03:16:58 PM »
Great parody. 

therethere

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Re: DONT Pay off your Student Loan Club!
« Reply #9 on: October 16, 2018, 03:37:42 PM »
DH and I had 200k in loans. Needless to say I hated them with a passion. We followed the investment order spreadsheet and paid off all loans above 5%. We then refinanced the remaining loans to lower rates over time (I check every few months but I don't think they're going lower now). So once we paid off the >5% loans, we started to max our retirement accounts. We sent what excess was left to VTSAX in a new brokerage account. After ten years of paying every last penny to the loans on a weekly basis I was excited to have money "on-hand" but still available to pay off the loans if need be. I considered it an opportunity fund, especially with the rising housing market. Although now I don't ever want to touch it! Thanks to my handy spreadsheet I have detailed monthly numbers to show it worked, at least on my short timeline 2014-current.

For some numbers.... *Brokerage contributions are the amount I would have sent as an extra payment to loans. Not the total brokerage amount.

Weigted avg of loans is
YE2014 - $10,000 in brokerage contributions. Net Benefit $447
YE2015 - $36,250 brokerage. Net Benefit (-$343)
YE2016 - $48,500 brokerage (near exact student loan balance). Net Benefit $5,194
YE2017 - $43,250 Contributions. Net Benefit - $12,573    (Contributions effect down because of loan paydown)
YE2018 - $38,270 contributions. Net benefit - $7,000 (with last weeks losses, calculation underestimates benefit currently)

The first year (2014) we bounced back and forth with a net benefit/loss which was scary. It slowly rose in 15-17, but mainly hovered around 12k for the last year. The weighted average of my loans is around 3.75%. I would recommend this approach to anyone who has the cash flow to do so. It gave me extreme peace of mind to have money available to me in dire emergency, especially after years of keeping only $1k e-fund while paying down loans. Now, I still have the option to pay off the loans completely or pull a few payments from the brokerage if I need to.

The only thing that sucks is there is no big payoff celebration. I found it very disheartening when the brokerage was > loans and then kept flip-flopping. Since this was a long journey for DH and I, I just wanted to scream from the rooftops about being done! Instead it just slowly passed over and it took a few month to feel "safe" that we were really done.

Goldielocks

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Re: DONT Pay off your Student Loan Club!
« Reply #10 on: October 16, 2018, 04:23:50 PM »
therethere -- when you refinanced with Earnest, did your new loan look like a personal loan, or was it still a true "no bankruptcy applies" student loan?   How does that work?

Peachtea

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Re: DONT Pay off your Student Loan Club!
« Reply #11 on: October 16, 2018, 07:22:48 PM »
Some miscellaneous thoughts:
1) Unlike a mortgage the SL deduction is capped at $2500. Itís above the line so if say it would be taxed at a 20% bracket, thatís only a $500/year savings to carry the SL. For many, it probably doesnít make up for the interest paid or significantly lower the effective interest rate.
2) SL refi are usually still classified as educational loans and not dischargeable in bankrupt
3) private SL typically have a family member as a co-signer and so hanging onto the debt affects more than just the borrower.
4) Gov loans are fixed but private ones can be variable
5) A coworker has SL that heís been paying for over 15 years. He checked today and his interest rate is 2.25% fixed. What a unicorn! CW2 and I told him to hang on to it if he would otherwise invest the difference. If not, use his cash to just knock it out.
6) 6.8% interest rate on my fed loans, so if I wasnít doing PLSF I would pay it off. I paid all my private loans off as quick as possible. 6.8-10.5% it was a no-brainer. But I had one 3% loan I also paid off ASAP because it was variable and my grandparents were co-signers.

Paul der Krake

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Re: DONT Pay off your Student Loan Club!
« Reply #12 on: October 16, 2018, 07:39:40 PM »
Yeah the days of cheap student loans are over. The federal subsidized rate for 2018-2019 is a whopping 5.05%, plus 1.06% origination fee.

BeautifulDay

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Re: DONT Pay off your Student Loan Club!
« Reply #13 on: October 16, 2018, 08:05:27 PM »
Paid off my grad school loans (about $30k at 6.8%) as quickly as I could after graduating in 2013, finished them in 2016 right after finding MMM. No regrets since the rate was so high.
 
Then moved on to my DHís undergrad loans for a degree he never receive (ugh). His was about $10k at about 3%. With such a low rate that payoff wasnít optimal. But I had my hair on fire and wanted them gone (particularly since they hadnít resulted in an actual degree). I still had a lot to learn about optimal allocation of finite resources.

I now have $7600 left of my $16k undergraduate grad loans. 2.88% rate gives me no desire to prepay. Iíve been paying on them since graduation in 2005 (except when in deferrment for grad school).

I do struggle sometimes to balance the emotional benefit of prepaying my mortgage against the numbers that make prepayment a bad idea. So far Iím prioritizing investments over mortgage prepayment. Have to keep doing the math every so often.

But at least with my student loan, the choice to pay the minimum on my remaining loan is easy.

« Last Edit: October 17, 2018, 05:22:46 AM by BeautifulDay »

RWD

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Re: DONT Pay off your Student Loan Club!
« Reply #14 on: October 16, 2018, 08:38:45 PM »
My student loans were in the 4-5% range. I paid them off in under four years, but I would have come out way ahead if I had invested instead. There are (were?) tax benefits to keeping the student loans. But at the time investing was a nebulous concept for me so paying off the student loans was better than stuffing the money in a savings account. Another reason I paid off my loans early was because more than half were in my dad's name and I didn't feel comfortable with keeping them any longer than necessary (hurts his credit, they'll come after him if I default, etc.).

I don't regret paying off my student loans early, but I do regret not learning about investing in index funds sooner. I could have put so much more in my 401k by now...


Average market returns at 7% with 3% inflation means effective 4% average gains.
The 7% number thrown around usually includes inflation already. So it's 9-10% nominal, 7% real returns. Whether you believe we can expect those numbers going forward is a different question, but you can't claim average real returns have been 7%.

lexde

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Re: DONT Pay off your Student Loan Club!
« Reply #15 on: October 16, 2018, 08:41:42 PM »
My student loans were in the 4-5% range. I paid them off in under four years, but I would have come out way ahead if I had invested instead. There are (were?) tax benefits to keeping the student loans. But at the time investing was a nebulous concept for me so paying off the student loans was better than stuffing the money in a savings account. Another reason I paid off my loans early was because more than half were in my dad's name and I didn't feel comfortable with keeping them any longer than necessary (hurts his credit, they'll come after him if I default, etc.).

I don't regret paying off my student loans early, but I do regret not learning about investing in index funds sooner. I could have put so much more in my 401k by now...


Average market returns at 7% with 3% inflation means effective 4% average gains.
The 7% number thrown around usually includes inflation already. So it's 9-10% nominal, 7% real returns. Whether you believe we can expect those numbers going forward is a different question, but you can't claim average real returns have been 7%.
Fair enough.

Dicey

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Re: DONT Pay off your Student Loan Club!
« Reply #16 on: October 16, 2018, 11:03:01 PM »
In honor of Boarder42's original thread, I wanted to start a discussion on Student Loans.

Why?
@Dicey made a good list of reasons why paying off the mortgage is less impactful in other countries where:
1) Fixed rates for 30 years are less common
2) No tax additional deductions for having a mortgage versus a paid off home 
3) Rates may be more

All of these apply to Student Loans in the USA, too -- variable rates are quite common, rates tend to be higher (to make up for the interest free period), tax deductions may or may not exist depending on how you have consolidated the loan amount.   


Over the years, I have often thought of a student loan payment like a mortgage payment -- especially when people are focused on "paying off the debt".  The size of the payments plus rent are typically mortgage sized.   The impact, if the rates are low enough, are similar to mortgage payoff advantages.

So,  for those of us that are fully on the "Don't pay off your mortgage" club roster, what do you think about Student Loans, and why?

Where would the break even point in this decision be for you?



* for the purpose of this discussion, let's assume that the student does not qualify for the public student loan forgiveness, because that is another complex can of discussion topics affecting a small percentage... but the repayment plans benefits that are available to most are open to this debate.
Dicey here. As you stated, my comments were about mortgages, NOT student loans. I paid my own way through school, working as many as three jobs. I graduated without debt. I have given very little thought to student loans except to be grateful to my former student self for being such a hard worker.

At the moment, I have no further thoughts  on the matter.

eav

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Re: DONT Pay off your Student Loan Club!
« Reply #17 on: October 16, 2018, 11:52:34 PM »
My situation is $18,300 left at 3.09% fixed for 5 years (about 4.5 remaining). I go back and forth about wanting to do extra payments, but have just been paying the minimum $390. Savings rate is at about 50% otherwise. Part of me wants them gone, but I know investing as much as possible when young is crucial.

SansSkill

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Re: DONT Pay off your Student Loan Club!
« Reply #18 on: October 17, 2018, 01:55:12 AM »
I'm not going to pay off my student loans any quicker then required, but I live in the Netherlands.
It's basically the only correct method for those of us who invest from what I can see.

Historically interest on student loans has been below interest on saving accounts.
Our monthly payment is capped at (gross monthly income - gross minimum monthly wage) / 25.
In addition we have a wealth tax, called the box 3 tax. But you can subtract outstanding student debt from box 3.
So I have 10k debt for instance I don't need to pay tax over 10k of savings/investments, on top of the baseline 30k tax free.
Finally we pay back for at most 35 years, after that any remaining debt is automatically forgiven.*

* We have 60 joker months, you need to take at least 3 at a time but you can take more, during these joker months you don't need to pay back your loan but your payback time is increased by a month for every joker month, so if you take all 60 months you'll be paying back for 40 years instead.

therethere

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Re: DONT Pay off your Student Loan Club!
« Reply #19 on: October 17, 2018, 08:53:40 AM »
therethere -- when you refinanced with Earnest, did your new loan look like a personal loan, or was it still a true "no bankruptcy applies" student loan?   How does that work?

It's a student loan refinance not a personal loan. I would assume the no bankruptcy still applies. Otherwise, you can skip a payment once a year and have ability for a 6-month hardship deferment I believe. No real difference. I've actually refinanced my refinanced loan with Earnest about 1 year in to get a lower rate.

Slow&Steady

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Re: DONT Pay off your Student Loan Club!
« Reply #20 on: October 17, 2018, 09:25:36 AM »
Some miscellaneous thoughts:
1) Unlike a mortgage the SL deduction is capped at $2500. Itís above the line so if say it would be taxed at a 20% bracket, thatís only a $500/year savings to carry the SL. For many, it probably doesnít make up for the interest paid or significantly lower the effective interest rate.
...

The tax deduction is totally not worth it to a LOT of people, especially if you have 7.25% interest rate and were in the 10-15% tax bracket.  Side note, graduating 1-2 years before a bubble burst and consolidating right away leaves you with a really high interest rate and chances of being "downsized".  Refinancing them to a lower rate would have made sense when my balance was higher but I was not savvy enough to think about that back then.  Since then the "no fee" options are not available for me due to lower balance and the fees don't generally make sense vs just paying them off (hopefully before 2019 hits).

therethere

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Re: DONT Pay off your Student Loan Club!
« Reply #21 on: October 17, 2018, 09:32:28 AM »
Some miscellaneous thoughts:
1) Unlike a mortgage the SL deduction is capped at $2500. Itís above the line so if say it would be taxed at a 20% bracket, thatís only a $500/year savings to carry the SL. For many, it probably doesnít make up for the interest paid or significantly lower the effective interest rate.
...

The tax deduction is totally not worth it to a LOT of people, especially if you have 7.25% interest rate and were in the 10-15% tax bracket.  Side note, graduating 1-2 years before a bubble burst and consolidating right away leaves you with a really high interest rate and chances of being "downsized".  Refinancing them to a lower rate would have made sense when my balance was higher but I was not savvy enough to think about that back then.  Since then the "no fee" options are not available for me due to lower balance and the fees don't generally make sense vs just paying them off (hopefully before 2019 hits).

If it makes you feel better I had a two student loan refinances set up in 2007/2008 at around 60k each getting the rates down to around 3.5%.  It was maybe a year after graduating and I had just recently realized how screwed we were with our student loans. I sent in the paperwork 31 days versus 30 and it got denied. Before I could reapply, the economy went crazy and all student loan refinance companies fell off the face of the earth until around 2013/2014. Refinancing was impossible, and DH and I had 120k in private student loans at 8.6%!!!! We were then stuck with that rate until we paid them off, although rates did decline a few years in. That one mistake cost us probably $25,000 in extra interest....

Slow&Steady

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Re: DONT Pay off your Student Loan Club!
« Reply #22 on: October 17, 2018, 11:35:12 AM »
Some miscellaneous thoughts:
1) Unlike a mortgage the SL deduction is capped at $2500. Itís above the line so if say it would be taxed at a 20% bracket, thatís only a $500/year savings to carry the SL. For many, it probably doesnít make up for the interest paid or significantly lower the effective interest rate.
...

The tax deduction is totally not worth it to a LOT of people, especially if you have 7.25% interest rate and were in the 10-15% tax bracket.  Side note, graduating 1-2 years before a bubble burst and consolidating right away leaves you with a really high interest rate and chances of being "downsized".  Refinancing them to a lower rate would have made sense when my balance was higher but I was not savvy enough to think about that back then.  Since then the "no fee" options are not available for me due to lower balance and the fees don't generally make sense vs just paying them off (hopefully before 2019 hits).

If it makes you feel better I had a two student loan refinances set up in 2007/2008 at around 60k each getting the rates down to around 3.5%.  It was maybe a year after graduating and I had just recently realized how screwed we were with our student loans. I sent in the paperwork 31 days versus 30 and it got denied. Before I could reapply, the economy went crazy and all student loan refinance companies fell off the face of the earth until around 2013/2014. Refinancing was impossible, and DH and I had 120k in private student loans at 8.6%!!!! We were then stuck with that rate until we paid them off, although rates did decline a few years in. That one mistake cost us probably $25,000 in extra interest....

It does make me feel a little better.  I lost the ability for my interest rate to decrease by like 0.5% because I was like 5 days late on my 1st payment and I never set up autopay :(

diapasoun

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Re: DONT Pay off your Student Loan Club!
« Reply #23 on: October 17, 2018, 01:20:39 PM »
I don't have a mortgage, but if I had a low fixed interest rate, I'd certainly be interested in keeping it around and shovelling money into investments instead... but then, the likelihood I have a mortgage any time soon is small.

I do have student loans. Their rates vary, and I don't pay extra on most of them. I do pay extra on the ones that are 6.8%, as that's very close to the expected investment return and it's a guaranteed return. Not going to lie that there's an emotional component there, too; it does feel good to see that balance go down. However, I don't plan to start paying extra on the others. Who knows what future me may do in some ~wave of emotion~, but it's not part of the plan.

*****

Re: potential bankruptcy -- that's not something I've worried about in particular, and I don't factor it into my decision-making, since the only things that I could imagine would lead me to bankruptcy are personal black swan events involving horrific amounts of unexpected medical care. However, if you're pretty certain that bankruptcy is in your future, then yes, throwing money at the student loans over other debts or investing makes sense to me. You're going to have to pay them off no matter what, since you can't discharge them; it makes sense to pay less (or none) on the dischargeable debts and do your best to lighten the burden of the non-dischargeable with what's available to you.

MDfive21

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Re: DONT Pay off your Student Loan Club!
« Reply #24 on: October 17, 2018, 01:24:26 PM »
I've also heard the argument that because student loans can't be dissolved with bankruptcy, it's better to dissolve them earlier. Though with our crowd, focused on wealth building and keeping consumerism low, the threat of bankruptcy may be negligible enough for this to be a non-factor.

Can you explore that a bit more for me?  1.  Why is paying off a SL in 5 years better than in 30 years (if you could extend / roll it over) due to bankruptcy not being applicable?  Connect the dots for me, I am blind.

Also, don't most people who no longer qualify for other income-adjusted SL payments but carry it long term, roll it into a new lower rate loan, eventually, that CAN be discharged by bankruptcy  -- or 2.  does the new lender keep treating it as a SL that can not be discharged?

1.  the idea is to protect yourself from the interest bomb that would go off if for some reason you couldn't pay the loans for an extended period of time, such as that caused by unemployment, illness or injury.  pay them off as soon as you can while you have a decent paying job and you can rest easier knowing that if you lose your job and have to work for peanuts for a year or have an unthinkable personal crisis that leads to BK, your loans will have been paid off.  this is less of a thing if you have a very secure job or career path, but for those of us in volatile situations, having them gone decreases the stress of having debt.

consider it sort of an insurance payment to take the less optimal path in order to buy some sanity.

for me it was mainly the ~6% rate that made them intolerable, plus i'm not exactly in a secure job environment.  even if i'd had a 2% rate i would have shit-canned slma asap.

2.  all student loans are categorized as such and are not dis-chargeable in BK.  "The SoFi loan contract also specifically states that the loan is an ďeducational loanĒ for bankruptcy purposes, which means that if the borrower ever tries to declare bankruptcy, it's going to be difficult to discharge." 

it is possible to ILLEGALLY shift your loans to unsecured lines by living on credit cards and using your cash to pay down SLs, then declare BK to relieve yourself of the unsecured lines, but like i said that is ILLEGAL and FRAUD so don't do that.  :)
« Last Edit: October 17, 2018, 01:26:13 PM by MDfive21 »

Peachtea

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Re: DONT Pay off your Student Loan Club!
« Reply #25 on: October 17, 2018, 06:25:26 PM »
Some miscellaneous thoughts:
1) Unlike a mortgage the SL deduction is capped at $2500. Itís above the line so if say it would be taxed at a 20% bracket, thatís only a $500/year savings to carry the SL. For many, it probably doesnít make up for the interest paid or significantly lower the effective interest rate.
...

The tax deduction is totally not worth it to a LOT of people, especially if you have 7.25% interest rate and were in the 10-15% tax bracket.  Side note, graduating 1-2 years before a bubble burst and consolidating right away leaves you with a really high interest rate and chances of being "downsized".  Refinancing them to a lower rate would have made sense when my balance was higher but I was not savvy enough to think about that back then.  Since then the "no fee" options are not available for me due to lower balance and the fees don't generally make sense vs just paying them off (hopefully before 2019 hits).

Agreed. I originally has ďmostĒ but didnít want overstate since I donít have statistics (only too many anecdotes). The one coworker with a 15 year old 2.25% fixed loan (and sub 20k balance) is the only one I know where the tax deduction might be worth the loan. But even then, the low rate is really what makes it worth keeping, not the deduction.

therethere

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Re: DONT Pay off your Student Loan Club!
« Reply #26 on: October 18, 2018, 09:04:36 AM »
Some miscellaneous thoughts:
1) Unlike a mortgage the SL deduction is capped at $2500. Itís above the line so if say it would be taxed at a 20% bracket, thatís only a $500/year savings to carry the SL. For many, it probably doesnít make up for the interest paid or significantly lower the effective interest rate.
...

The tax deduction is totally not worth it to a LOT of people, especially if you have 7.25% interest rate and were in the 10-15% tax bracket.  Side note, graduating 1-2 years before a bubble burst and consolidating right away leaves you with a really high interest rate and chances of being "downsized".  Refinancing them to a lower rate would have made sense when my balance was higher but I was not savvy enough to think about that back then.  Since then the "no fee" options are not available for me due to lower balance and the fees don't generally make sense vs just paying them off (hopefully before 2019 hits).

Agreed. I originally has ďmostĒ but didnít want overstate since I donít have statistics (only too many anecdotes). The one coworker with a 15 year old 2.25% fixed loan (and sub 20k balance) is the only one I know where the tax deduction might be worth the loan. But even then, the low rate is really what makes it worth keeping, not the deduction.

But the tax deduction effectively lowers the interest rate of the loan. I would never keep the loan specifically for the tax break, but rather include the tax break to calculate the lower effective rate and then compare whether that is above my 5% threshold or not. That's the real driver for the decision to payoff or not. For instance, my loans 3.75%, but with the tax break they are effectively 3.0%. This will change as time passes depending on your income and how what loans you have left. So it's best to check-in on it once a year or so.

Goldielocks

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Re: DONT Pay off your Student Loan Club!
« Reply #27 on: October 20, 2018, 06:27:23 PM »
Yeah the days of cheap student loans are over. The federal subsidized rate for 2018-2019 is a whopping 5.05%, plus 1.06% origination fee.

I just found out that the provincial (AKA state) portion of the student loans here will have 0% interest rates....
The federal portion remains at prime plus 2.5%.

Paul der Krake

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Re: DONT Pay off your Student Loan Club!
« Reply #28 on: October 20, 2018, 06:32:30 PM »
Yeah the days of cheap student loans are over. The federal subsidized rate for 2018-2019 is a whopping 5.05%, plus 1.06% origination fee.

I just found out that the provincial (AKA state) portion of the student loans here will have 0% interest rates....
The federal portion remains at prime plus 2.5%.
So... 6.2%? That's crazy. Most EU countries are in the 1-3% range, but their economies are still stuck in first gear for graduates, so pick ya poison, lads.

Goldielocks

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Re: DONT Pay off your Student Loan Club!
« Reply #29 on: October 21, 2018, 12:30:05 PM »
Yeah, the federal portion is between 5.5% and 6.5%.   It is to encourage people to pay off their loans more quickly, and to recover the interest free period originally given while they were studying.   The net interest rate between federal and provincial has fallen to around 3%.

Note, Loans are relatively modest, with grants (free money) given to people with higher than average loans... and grants given to people that graduate, grants given to medical professionals, public service, etc..  e.g., handing out the money as loan forgiveness instead of as reduced interest..

Peachtea

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Re: DONT Pay off your Student Loan Club!
« Reply #30 on: November 28, 2018, 05:58:42 PM »
Some miscellaneous thoughts:
1) Unlike a mortgage the SL deduction is capped at $2500. Itís above the line so if say it would be taxed at a 20% bracket, thatís only a $500/year savings to carry the SL. For many, it probably doesnít make up for the interest paid or significantly lower the effective interest rate.
...

The tax deduction is totally not worth it to a LOT of people, especially if you have 7.25% interest rate and were in the 10-15% tax bracket.  Side note, graduating 1-2 years before a bubble burst and consolidating right away leaves you with a really high interest rate and chances of being "downsized".  Refinancing them to a lower rate would have made sense when my balance was higher but I was not savvy enough to think about that back then.  Since then the "no fee" options are not available for me due to lower balance and the fees don't generally make sense vs just paying them off (hopefully before 2019 hits).

Agreed. I originally has ďmostĒ but didnít want overstate since I donít have statistics (only too many anecdotes). The one coworker with a 15 year old 2.25% fixed loan (and sub 20k balance) is the only one I know where the tax deduction might be worth the loan. But even then, the low rate is really what makes it worth keeping, not the deduction.

But the tax deduction effectively lowers the interest rate of the loan. I would never keep the loan specifically for the tax break, but rather include the tax break to calculate the lower effective rate and then compare whether that is above my 5% threshold or not. That's the real driver for the decision to payoff or not. For instance, my loans 3.75%, but with the tax break they are effectively 3.0%. This will change as time passes depending on your income and how what loans you have left. So it's best to check-in on it once a year or so.

The tax deduction lowers mine from 6.8% to 6.55%, so even if I wasnít doing PSLF the tax deduction wouldnít make any difference in my decisions. I get what youíre saying that for some people it could make or break the difference in whether they should pay off early vs invest more. I just think thatís a very small portion. Now if they let us deduct a lot more than $2500, that would change things.