Investments and Debt at 5-8%

[Nicholas Carter]

When people on this site talk about letting debt ride and paying it off at the agreement rate to invest the difference, they typically talk about interest rates below 4%. When people talk about rerouting your whole life to get out of a debt, they typically talk about interest rates above 10%.
But what about the middle? I have 3,000 USD of student loan debt at 6%, 5,000 at 5.5% and another 5,000 at 4.1%. The loans I've already paid off were at 7%+. What do the numbers say about this 'middle debt'? If returns average 7%, and interest is 6.5%, what are the odds of more interest than returns?

[DS]

Some good advice here: https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

Also depends on if you are able to deduct your student loan interest?

[mathlete]

This would be an exercise in downloading historical market data (with dividends included) and then pulling out every X year period where "X" is the term of your loans and seeing, in how many such periods, the market returns greater than Y where "Y" is the interest rate on your loans.

Really though, with such small balances, it's unlikely to make too big of a difference in terms of your long term financial plans. Do whatever you're most comfortable with. Personally, I'd be more likely to make this decision based on credit ramifications rather than potential returns.

[Retire-Canada]

When people on this site talk about letting debt ride and paying it off at the agreement rate to invest the difference, they typically talk about interest rates below 4%. When people talk about rerouting your whole life to get out of a debt, they typically talk about interest rates above 10%.
But what about the middle? I have 3,000 USD of student loan debt at 6%, 5,000 at 5.5% and another 5,000 at 4.1%. The loans I've already paid off were at 7%+. What do the numbers say about this 'middle debt'? If returns average 7%, and interest is 6.5%, what are the odds of more interest than returns?

For $13K of debt I would just wipe that out and get on with investing. Typically when we are talking about holding debt so we can invest it's a mortgage of $X00,000.00 for 30 years.

[robartsd]

When people on this site talk about letting debt ride and paying it off at the agreement rate to invest the difference, they typically talk about interest rates below 4%. When people talk about rerouting your whole life to get out of a debt, they typically talk about interest rates above 10%.
But what about the middle? I have 3,000 USD of student loan debt at 6%, 5,000 at 5.5% and another 5,000 at 4.1%. The loans I've already paid off were at 7%+. What do the numbers say about this 'middle debt'? If returns average 7%, and interest is 6.5%, what are the odds of more interest than returns?

It's not just about returns, it's about risk-adjusted returns. Because it is about risk adjusted returns, the precise answer for the crossover between pay it off vs. pay as agreed varies from situation to situation.

[Dances With Fire]

Just a couple things to consider.

1) Risk. You have to stay invested over the long haul to get those "average" returns of say 7%-10%

2) Taxes. After taxes on investments, those 7% look more like 5%. So it is very close to being a wash.

I like the idea of being debt-free and invest from there. If you were big into real estate (and experienced at it) and/or were starting a business that might be where "good debt" comes into play.

[Scortius]

Holding your mortgage is a pretty simple choice because usually it's at or below 4%, it's fixed and uncallable for a full 30 year term, and generally people still have tax advantaged options to max out first. Short term medium rates are a bit different, even though they fit some of the above categories, the slightly higher rate and shorter term shift the equation. It does come down to personal preference for risk, but I think most would agree that 6% would be a bit high to ride out, especially when the amount is so small and the term is so short (compared to a 30 year full mortgage). 5% may be a bit closer, but for a smaller loan I'd probably still lean towards knocking it out. FWIW, I have a small student loan I could pay off today, but it's somewhere in the 2% range so I don't touch it. I think I would start to consider it around 5%, but again that's my personal preference.

[boarder42]

Id take those loans to term and take advantage of the tax breaks you get on the interest. They are so small it won't make a huge difference either way but I always house to pay the govt as little as possible

[One]

Pay off debt= sure thing. Investing = gambling, take sure thing.

[boarder42]

Pay off debt= sure thing. Investing = gambling, take sure thing.

Poor way to look at this. If you truly believe it's gambling what do you plan to retire on?

[nkt0]

I'm in the same boat with $13k in student loans at 4.5%. I've been dumping everything i have into paying them off, but i think i'm going to stop to build up a bigger stash instead, given that the interest is tax deductible, which effectively lowers the rate below 4%.

[wageslave23]

Pay off debt= sure thing. Investing = gambling, take sure thing.

Poor way to look at this. If you truly believe it's gambling what do you plan to retire on?

When looking at retirement savings it's more like... invest in stocks vs savings account @<2% interest.

In this situation the automatic 5% savings, would be a no brainer in a retirement savings scenario.  If you give me an investment that is a guaranteed 5 or 6% return tax free for my retirement funds, I am taking that 7 days a week- every last cent of my stash!

[Prairie Stash]

For $13K of debt I would just wipe that out and get on with investing. Typically when we are talking about holding debt so we can invest it's a mortgage of $X00,000.00 for 30 years.

+1

If you can't pay off $13k in debt, where are you getting the cash to invest? Start with $3000 at 6%, if the budget is so tight you can't rid yourself of this debt then you certainly don't have any extra cash. Do not invest if paying off debt is problematic or a hardship.

Now lets say you do have cash. There are two comparisons to make; stocks and to bonds. Stocks generally get over 7%, bonds under 4%. Bonds are meant to provide cash flow in tight markets, you sell them and buy stocks when the market crashes. In laymans terms "Buy low Sell High" is achieved be moving money in and out of bonds. The alternative way, which I prefer starting out, is to have cash flow.

I can always buy stocks because I'm not paying off debt on a fixed schedule. I would recommend 80% of your money goes towards stocks, 20% to bonds/debt IF the debt can be paid off in the short term. That typically improves cash flow and in the event of a downturn allows more buying opportunity (which is what would happen if you buy bonds).

The main benefit is it also improves immediate financial security. In the rush to FIRE never forget that you also need to have immediate financial securuty. Debt payment improves that aspect of your life, investing may not improve your fortunes over the next two years (but it will over 30 years). People need to consider short vs. long term when discussing debts.

[Nicholas Carter]

To those mentioning tax deductions: The amount of taxes I stand to pay this year is probably less than the standard deduction or close to it. I make about 40,000 USD per year. Paying off the 13,000 remaining will probably take about a year, and I expect that the next 12 month's real returns will be closer to 5 than 8 percent, which is why I'm planning to pay off the 6% and 5% interest loans as I shift over to a more growth-oriented financial plan.

If you can't pay off $13k in debt, where are you getting the cash to invest? Start with $3000 at 6%, if the budget is so tight you can't rid yourself of this debt then you certainly don't have any extra cash. Do not invest if paying off debt is problematic or a hardship.

Minimum payments on this debt, 'letting it ride', is going to come to about 3,000 USD. So I can take another 10,000 and have no debt but only about 2000 in my 401k, or I can have 10,000 USD of debt and 12,000 in my 401k.

[boarder42]

Student loan interest is above the line meaning it adds to the standard deduction.

If you're not making your 401k yet definitely pay the minimums

[Nicholas Carter]

Student loan interest is above the line meaning it adds to the standard deduction.

If you're not making your 401k yet definitely pay the minimums

When I run the numbers, the standard deduction already brings my tax return amount to maximum (I.E. it brings my tax payments for the year to zero).

I'm not at max for ytd on my 401k, in part because I just finished paying off some much more aggressive debt. In the last 12 months I made 2000 in 401k deposits and 18,000 in debt payments to get rid of the high interest debt. My inclination is to pay off half the remaining debt (the part that's over 5%) and then shifting gears to a minimum-debt, maximum-401k strategy going into the end of the year.

[wageslave23]

Student loan interest is above the line meaning it adds to the standard deduction.

If you're not making your 401k yet definitely pay the minimums

Yes.  If you are not already maxing out your 401k (and you would get a tax deduction for contributions), then that is the priority.

[boarder42]

You can't go back in time and max a 401k you didn't in a previous year. You should be making that before you pay down this debt.

[wageslave23]

Student loan interest is above the line meaning it adds to the standard deduction.

If you're not making your 401k yet definitely pay the minimums

When I run the numbers, the standard deduction already brings my tax return amount to maximum (I.E. it brings my tax payments for the year to zero).

I'm not at max for ytd on my 401k, in part because I just finished paying off some much more aggressive debt. In the last 12 months I made 2000 in 401k deposits and 18,000 in debt payments to get rid of the high interest debt. My inclination is to pay off half the remaining debt (the part that's over 5%) and then shifting gears to a minimum-debt, maximum-401k strategy going into the end of the year.

So in other words, you are married and/or have dependents and that is bringing your tax liability for the year down to $0?  If that is the case then I wouldn't contribute any more to a 401k because you are not getting any benefit from it.  You should then look at your liquid assets, if you have plenty of liquid assets like taxable stocks, savings, etc then I would recommend paying down the debt.  If you don't have much in liquid assets, then I would recommend contributing to a Roth IRA or a taxable stock account.  This is a little safer because if something were to happen to you, you can't get the money back once you pay off debts, but you can sell stock if you need the cash.

[Prairie Stash]

To those mentioning tax deductions: The amount of taxes I stand to pay this year is probably less than the standard deduction or close to it. I make about 40,000 USD per year. Paying off the 13,000 remaining will probably take about a year, and I expect that the next 12 month's real returns will be closer to 5 than 8 percent, which is why I'm planning to pay off the 6% and 5% interest loans as I shift over to a more growth-oriented financial plan.

If you can't pay off $13k in debt, where are you getting the cash to invest? Start with $3000 at 6%, if the budget is so tight you can't rid yourself of this debt then you certainly don't have any extra cash. Do not invest if paying off debt is problematic or a hardship.

Minimum payments on this debt, 'letting it ride', is going to come to about 3,000 USD. So I can take another 10,000 and have no debt but only about 2000 in my 401k, or I can have 10,000 USD of debt and 12,000 in my 401k.

Thank you for clarifying, it helps to have numbers to keep it in perspective. Its not $13,000 of debt as you point out, its three seperate problems that may all have the same solution or they might have different answers. So, start with only considering the $3000 (the highest interest), does it make sense for 401k or pay it off? Paying it off would free up $60/month ($700/year), does that change your cash flow enough to be worth it? Probably not, and the 401k is probably better. In this case we can skip looking at the other debts.

However, question this again next year and the year after. When the loan is going to be paid off within the calendar year, its worth paying off early. At that point it doesn't effect anything else, showing theres always a point where the answer changes). However you'll wonder what about within a couple years, that also depends on intangibles such as job security; I have no idea if you have long term or short term employment; feeding back into the cash flow scenarios (cash flow matters if you don't have long term prospects).

Answering the question solely based on returns is different then answering based on job security (intangibles), deductible interest and 401k. Rarely will you get an answer that works universally, the middle ground has a lot of exceptions which is why people avoid being definitive. Does it make sense why its confusing?

[Nicholas Carter]

So, start with only considering the $3000 (the highest interest), does it make sense for 401k or pay it off? Paying it off would free up $60/month ($700/year), does that change your cash flow enough to be worth it?

Thank you, and I can see this is a very complex topic. After taxes, insurance, and 401k contributions at the current rate, $60/month is about 3% of my annual take home.

However, question this again next year and the year after. When the loan is going to be paid off within the calendar year, its worth paying off early. At that point it doesn't effect anything else, showing there's always a point where the answer changes). However you'll wonder what about within a couple years, that also depends on intangibles such as job security; I have no idea if you have long term or short term employment; feeding back into the cash flow scenarios (cash flow matters if you don't have long term prospects).

I am unlikely to be removed from my job, but I find it very emotionally difficult. My primary motivation to pursue FI is to quit this job in the next five years and go back to the low paying but satisfying job that I was doing before.

[Prairie Stash]

So, start with only considering the $3000 (the highest interest), does it make sense for 401k or pay it off? Paying it off would free up $60/month ($700/year), does that change your cash flow enough to be worth it?

Thank you, and I can see this is a very complex topic. After taxes, insurance, and 401k contributions at the current rate, $60/month is about 3% of my annual take home.

However, question this again next year and the year after. When the loan is going to be paid off within the calendar year, its worth paying off early. At that point it doesn't effect anything else, showing there's always a point where the answer changes). However you'll wonder what about within a couple years, that also depends on intangibles such as job security; I have no idea if you have long term or short term employment; feeding back into the cash flow scenarios (cash flow matters if you don't have long term prospects).

I am unlikely to be removed from my job, but I find it very emotionally difficult. My primary motivation to pursue FI is to quit this job in the next five years and go back to the low paying but satisfying job that I was doing before.

I'd still probably do 401k, but if you find your job starts becoming overwhelming, switch to pay off debt mode. If you can, keep up the 401k for as long as possible, if you need to get minor boosts along the way, pay off the small loan unless the math says differently.

When riding an emotional roller coaster its possible to stay on longer if you have small wins along the way. It can provide enough of a relief that the following months are bearable again. Its an exercise in stoicism, try to spread the loans out over the years and use an early payoff as a chance for a brief emotional high. Other milestones should include hitting $10k in the 401k, hiting 50k and $100k; hitting milestones often has unexpected calming measures. Relieving financial stress allows you to handle stress in other parts of your life, I think stress is a cumulative problem. It's never one thing that puts you over the edge, it's the combination of everything that causes people to feel overwhelmed at some future point, by then its too late.

Does that make sense? Sometimes debt payoff can be a tool to relieve stress which ultimately might allow you to stay longer in your higher paying job. Its an intangible thats impossible to determine today, sometimes it pays to ignore math if it allows you to achieve a better outcome.

A large part of this forum is devoted to dealing with the emotional aspects, if it was just about numbers it would all be easy.

[Catbert]

Student loan interest is above the line meaning it adds to the standard deduction.

If you're not making your 401k yet definitely pay the minimums

When I run the numbers, the standard deduction already brings my tax return amount to maximum (I.E. it brings my tax payments for the year to zero).

I'm not at max for ytd on my 401k, in part because I just finished paying off some much more aggressive debt. In the last 12 months I made 2000 in 401k deposits and 18,000 in debt payments to get rid of the high interest debt. My inclination is to pay off half the remaining debt (the part that's over 5%) and then shifting gears to a minimum-debt, maximum-401k strategy going into the end of the year.

Is think this is a good strategy for you.  Even better if your 401k has a Roth option or substitute Roth IRA for 401k if there isn't a company match.

[thd7t]

If you have tax-free headroom, it ends up being close to a wash investing and paying off even low interest loans.  At medium to high interest, paying them off quickly and then raising your 401k is probably a winner.

[Lan Mandragoran]

If you have tax-free headroom, it ends up being close to a wash investing and paying off even low interest loans.  At medium to high interest, paying them off quickly and then raising your 401k is probably a winner.

Im confused, are you saying tax sheltered and low interest accounts are a wash? or are you saying low interest(for example 4%) vs taxable ends up being a wash? Either way I don't agree, but I'd be curious to hear why you say that.

[thd7t]

If you have tax-free headroom, it ends up being close to a wash investing and paying off even low interest loans.  At medium to high interest, paying them off quickly and then raising your 401k is probably a winner.

Im confused, are you saying tax sheltered and low interest accounts are a wash? or are you saying low interest(for example 4%) vs taxable ends up being a wash? Either way I don't agree, but I'd be curious to hear why you say that.

Sorry,
I think I was really unclear here.  What I was trying to say is that if you have 401k or TIRA room (or 457 or whatever) space, you may be able to get similar returns paying off low interest debt in one swoop and then investing regularly.

I'm going to use some simple assumptions for the example.  You're in the (now defunct) 25% tax bracket.  If you have a student loan at 3.5% for 10 years, your payment is $98.89.  If you have $13,333 and invest it in a 401k at 7% for that time, you'll end up with a paid off loan and $26,795.  If you pay off the loan on day one and contribute $131.52/month (98.89*1.33) to a 401k at 7% for ten years, you end up with a paid off student loan and $22,764.

In this case, paying off the loan right away allows a higher return (because of tax advantage).  You are potentially losing up to $500/year in tax advantage by losing the student loan interest deduction, but that's still not a strong argument.

Of course, real life requires a real condition to analyze.

ETA: I updated corrected numbers in bold.  Sorry for the (big) errors.  I was rushing and not checking!

[nkt0]

I'm going to use some simple assumptions for the example.  You're in the (now defunct) 25% tax bracket.  If you have a student loan at 3.5% for 10 years, your payment is $197.77.  If you have $10,000 and invest it in a 401k at 7% for that time, you'll end up with a paid off loan and $20,096.  If you pay off the loan on day one and contribute $247/month (197.77*1.25) to a 401k at 7% for ten years, you end up with a paid off student loan and $42,752.

Did you factor in taxes on that $10k if you use it to pay the student loan immediately?

[thd7t]

I'm going to use some simple assumptions for the example.  You're in the (now defunct) 25% tax bracket.  If you have a student loan at 3.5% for 10 years, your payment is $197.77.  If you have $10,000 and invest it in a 401k at 7% for that time, you'll end up with a paid off loan and $20,096.  If you pay off the loan on day one and contribute $247/month (197.77*1.25) to a 401k at 7% for ten years, you end up with a paid off student loan and $42,752.

Did you factor in taxes on that $10k if you use it to pay the student loan immediately?

I mentioned it briefly in my last paragraph.  Only $2000 of Student loan interest is deductable, so the benefit is $500/year (until the balance gets small enough to reduce interest below $2000).  All loans are paid post tax, so the $10,000 has already been taxed in either scenario.

[nkt0]

I mentioned it briefly in my last paragraph.  Only $2000 of Student loan interest is deductable, so the benefit is $500/year (until the balance gets small enough to reduce interest below $2000).  All loans are paid post tax, so the $10,000 has already been taxed in either scenario.

But the 401k should be pretax…

[thd7t]

I mentioned it briefly in my last paragraph.  Only $2000 of Student loan interest is deductable, so the benefit is $500/year (until the balance gets small enough to reduce interest below $2000).  All loans are paid post tax, so the $10,000 has already been taxed in either scenario.

But the 401k should be pretax…

Yup, you are correct!  You would contribute $13,300 to the 401k giving you $27k at the end with the initial lump sum investment.  I also under-calculated the contribution on the other scenario (just added 25% instead of 33%), but paying off the loan in this hypothetical is still coming out on top.

Thank you for double checking!

[robartsd]

Sorry,
I think I was really unclear here.  What I was trying to say is that if you have 401k or TIRA room (or 457 or whatever) space, you may be able to get similar returns paying off low interest debt in one swoop and then investing regularly.

I'm going to use some simple assumptions for the example.  You're in the (now defunct) 25% tax bracket.  If you have a student loan at 3.5% for 10 years, your payment is $197.77.  If you have $10,000 and invest it in a 401k at 7% for that time, you'll end up with a paid off loan and $20,096.  If you pay off the loan on day one and contribute $247/month (197.77*1.25) to a 401k at 7% for ten years, you end up with a paid off student loan and $42,752.

In this case, paying off the loan right away allows a higher return (because of tax advantage).  You are potentially losing up to $500/year in tax advantage by losing the student loan interest deduction, but that's still not a strong argument.

Of course, real life requires a real condition to analyze.

The reason for the big difference in your scenarios is that you calculated the student loan payment incorrectly. It would only take 55 months to pay off $10,000 at 3.5% with $197.77 monthly payment. Monthly payment on a 10 year loan of $10,000 at 3.5% is $98.89. You also neglected the tax advantage of investing in the 401k on day one.

Starting with $12,500 and adding tax liability deduction from student loan interest every 12 months (plus tax liability deduction from contributing to 401k) assuming a uniform 7% ROI compounded monthly I get $25,876.25 paying off the loan as scheduled. If there is no tax liability reduction from the loan interest, compounding the $12,500 at 7% results in $24,975.06. Paying off the loan immediately and investing the $98.89 loan payments (plus tax liability deduction from contributing to 401k) with the same monthly compounding assumption I get $21,394.31.

[thd7t]

Sorry,
I think I was really unclear here.  What I was trying to say is that if you have 401k or TIRA room (or 457 or whatever) space, you may be able to get similar returns paying off low interest debt in one swoop and then investing regularly.

I'm going to use some simple assumptions for the example.  You're in the (now defunct) 25% tax bracket.  If you have a student loan at 3.5% for 10 years, your payment is $197.77.  If you have $10,000 and invest it in a 401k at 7% for that time, you'll end up with a paid off loan and $20,096.  If you pay off the loan on day one and contribute $247/month (197.77*1.25) to a 401k at 7% for ten years, you end up with a paid off student loan and $42,752.

In this case, paying off the loan right away allows a higher return (because of tax advantage).  You are potentially losing up to $500/year in tax advantage by losing the student loan interest deduction, but that's still not a strong argument.

Of course, real life requires a real condition to analyze.

The reason for the big difference in your scenarios is that you calculated the student loan payment incorrectly. It would only take 55 months to pay off $10,000 at 3.5% with $197.77 monthly payment. Monthly payment on a 10 year loan of $10,000 at 3.5% is $98.89. You also neglected the tax advantage of investing in the 401k on day one.

Starting with $12,500 and adding tax liability deduction from student loan interest every 12 months (plus tax liability deduction from contributing to 401k) assuming a uniform 7% ROI compounded monthly I get $25,876.25 paying off the loan as scheduled. If there is no tax liability reduction from the loan interest, compounding the $12,500 at 7% results in $24,975.06. Paying off the loan immediately and investing the $98.89 loan payments (plus tax liability deduction from contributing to 401k) with the same monthly compounding assumption I get $21,394.31.

Thanks for catching that.  I notice that you're compounding $12,500 and only investing $98.89,  Shouldn't the $10,000 be $13,333 and the $98.89 be $131.85?  Adding back the taxes should happen on both.

For the lump sum investment I'm getting a final number of $26,794 and for the monthly investment I'm getting $22,821.  This is more in line with what I expected, but it does demonstrate that even with really uneven returns, the numbers come out close.  However, I should definitely have taken my time more with the math and appreciate the help!

[robartsd]

Thanks for catching that.  I notice that you're compounding $12,500 and only investing $98.89,  Shouldn't the $10,000 be $13,333 and the $98.89 be $131.85?  Adding back the taxes should happen on both.

For the lump sum investment I'm getting a final number of $26,794 and for the monthly investment I'm getting $22,821.  This is more in line with what I expected, but it does demonstrate that even with really uneven returns, the numbers come out close.  However, I should definitely have taken my time more with the math and appreciate the help!

I used 25% (based on your original example) marginal tax rate in both calculations, so the total invested each month in the payoff then invest scenario was $123.61.

Adjusting to a 33.33% marginal tax rate I get basically the same numbers as you for lump sum and monthly investment. If the student loan interest is tax deductible and that reduced tax liability is also invested, that can add about $150 to the lump sum total.

Certainly, the average result of the lump sum investment is better, but actual investment returns vary enough that sometimes paying off the loan and investing over time would work out better.

[boarder42]

Thanks for catching that.  I notice that you're compounding $12,500 and only investing $98.89,  Shouldn't the $10,000 be $13,333 and the $98.89 be $131.85?  Adding back the taxes should happen on both.

For the lump sum investment I'm getting a final number of $26,794 and for the monthly investment I'm getting $22,821.  This is more in line with what I expected, but it does demonstrate that even with really uneven returns, the numbers come out close.  However, I should definitely have taken my time more with the math and appreciate the help!

I used 25% (based on your original example) marginal tax rate in both calculations, so the total invested each month in the payoff then invest scenario was $123.61.

Adjusting to a 33.33% marginal tax rate I get basically the same numbers as you for lump sum and monthly investment. If the student loan interest is tax deductible and that reduced tax liability is also invested, that can add about $150 to the lump sum total.

Certainly, the average result of the lump sum investment is better, but actual investment returns vary enough that sometimes paying off the loan and investing over time would work out better.

Sometimes is only in very rare circumstances.  you're litterally looking for a needle in a haystack historically here.

[thd7t]

Thanks for catching that.  I notice that you're compounding $12,500 and only investing $98.89,  Shouldn't the $10,000 be $13,333 and the $98.89 be $131.85?  Adding back the taxes should happen on both.

For the lump sum investment I'm getting a final number of $26,794 and for the monthly investment I'm getting $22,821.  This is more in line with what I expected, but it does demonstrate that even with really uneven returns, the numbers come out close.  However, I should definitely have taken my time more with the math and appreciate the help!

I used 25% (based on your original example) marginal tax rate in both calculations, so the total invested each month in the payoff then invest scenario was $123.61.

Adjusting to a 33.33% marginal tax rate I get basically the same numbers as you for lump sum and monthly investment. If the student loan interest is tax deductible and that reduced tax liability is also invested, that can add about $150 to the lump sum total.

Certainly, the average result of the lump sum investment is better, but actual investment returns vary enough that sometimes paying off the loan and investing over time would work out better.

Adding back 33.33% is using the 25% tax rate.

[thd7t]

Thanks for catching that.  I notice that you're compounding $12,500 and only investing $98.89,  Shouldn't the $10,000 be $13,333 and the $98.89 be $131.85?  Adding back the taxes should happen on both.

For the lump sum investment I'm getting a final number of $26,794 and for the monthly investment I'm getting $22,821.  This is more in line with what I expected, but it does demonstrate that even with really uneven returns, the numbers come out close.  However, I should definitely have taken my time more with the math and appreciate the help!

I used 25% (based on your original example) marginal tax rate in both calculations, so the total invested each month in the payoff then invest scenario was $123.61.

Adjusting to a 33.33% marginal tax rate I get basically the same numbers as you for lump sum and monthly investment. If the student loan interest is tax deductible and that reduced tax liability is also invested, that can add about $150 to the lump sum total.

Certainly, the average result of the lump sum investment is better, but actual investment returns vary enough that sometimes paying off the loan and investing over time would work out better.

Sometimes is only in very rare circumstances.  you're litterally looking for a needle in a haystack historically here.

I absolutely agree with you if tax exempt accounts aren't available, but my original point was to show that paying off debt to allow you to utilize pre-tax accounts can make the returns much closer.  Again, I used 3.5% for the debt.  At 5-8%, paying off the debt and then filling a 401k (or the like) gives very good results (particularly where interest deductions are capped at low numbers like in the case of student loans).

[boarder42]

Thanks for catching that.  I notice that you're compounding $12,500 and only investing $98.89,  Shouldn't the $10,000 be $13,333 and the $98.89 be $131.85?  Adding back the taxes should happen on both.

For the lump sum investment I'm getting a final number of $26,794 and for the monthly investment I'm getting $22,821.  This is more in line with what I expected, but it does demonstrate that even with really uneven returns, the numbers come out close.  However, I should definitely have taken my time more with the math and appreciate the help!

I used 25% (based on your original example) marginal tax rate in both calculations, so the total invested each month in the payoff then invest scenario was $123.61.

Adjusting to a 33.33% marginal tax rate I get basically the same numbers as you for lump sum and monthly investment. If the student loan interest is tax deductible and that reduced tax liability is also invested, that can add about $150 to the lump sum total.

Certainly, the average result of the lump sum investment is better, but actual investment returns vary enough that sometimes paying off the loan and investing over time would work out better.

Sometimes is only in very rare circumstances.  you're litterally looking for a needle in a haystack historically here.

I absolutely agree with you if tax exempt accounts aren't available, but my original point was to show that paying off debt to allow you to utilize pre-tax accounts can make the returns much closer.  Again, I used 3.5% for the debt.  At 5-8%, paying off the debt and then filling a 401k (or the like) gives very good results (particularly where interest deductions are capped at low numbers like in the case of student loans).

i disagree that paying off debt in this range makes any sense today before filling a pretax vehicle.  esp. when its tax deductible interest even when capped. a 20% difference every 10 years isnt a small difference its huge.

[boarder42]

i'd also say you're compounding conservatively at 7% - you shouldnt be removing inflation b/c the student loan doesnt index to inflation so you should compound at the typical market return of 10%.

at the end of 30 years the 26k number grows to 467k compounded at 10% - and the 22k number grows to - 398k - a difffernce of 70k - thats nothing to turn your head up to.

[thd7t]

i'd also say you're compounding conservatively at 7% - you shouldnt be removing inflation b/c the student loan doesnt index to inflation so you should compound at the typical market return of 10%.

at the end of 30 years the 26k number grows to 467k compounded at 10% - and the 22k number grows to - 398k - a difffernce of 70k - thats nothing to turn your head up to.

I agree that 7% is overly conservative and I only used it because I had a student loan at 3.5% and wanted to compare it to modest gains. 

I will admit that after looking at it, I paid the loan as slowly as I could, because I believed (rightly, because I looked at it five years ago) that a broad based index fund would outperform the alternative.  I was still surprised by how close the outcomes were on this hypothetical at the end of 10 years.

Also, I've corrected the math in my initial post, because it's not on you to do that.  I rushed and it was (obviously) riddled with errors.