The Money Mustache Community
Around the Internet => Antimustachian Wall of Shame and Comedy => Topic started by: zephyr911 on February 10, 2015, 01:28:02 PM
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http://money.cnn.com/2014/12/11/investing/dont-pay-off-your-student-loans/index.html?iid=obinsite
Read article before commenting... I arrived ready to heap scorn on the author. But lo and behold, it turns out the title is just clickbait: the guy actually did the math and (most important) only diverted money from his accelerated loan paydown so he could make higher returns elsewhere. He actually kinda sounds like a young MMM, only with a lower SR.
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When I first started paying my student loans (30k) I had a friend tell me (without any further explanation) to pay the minimum and invest instead. Unfortunately he was smarmy enough that I just rolled my eyes, thought he was nuts, and didn't think anything more of it. What the hell did I know about investing?!!
Wish I'd looked into it more at the time, but too late for that now.
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I have a minor quibble about his decision not to pay off the 6% loans (based on his assumption of 11% stock market returns, vs. considering the risk-adjusted return), but otherwise I agree with it and am following the same strategy.
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yeah change that 5 to a 6 and i would agree with his article.
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Don't forget the tax deduction of student loan interest that many people get (there are some exceptions, but I don't remember them). My student loans are the last on the list to be paid off, partially because of that deduction.
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Don't forget the tax deduction of student loan interest that many people get (there are some exceptions, but I don't remember them). My student loans are the last on the list to be paid off, partially because of that deduction.
I believe that starts to get phased out after you're making over $65k and completely phased out at around $75k.
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Don't forget the tax deduction of student loan interest that many people get (there are some exceptions, but I don't remember them). My student loans are the last on the list to be paid off, partially because of that deduction.
I believe that starts to get phased out after you're making over $65k and completely phased out at around $75k.
that and the cap your can use for the deduction is $2500/year.
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that and the cap your can use for the deduction is $2500/year.
At current interest rates, that sounds very reasonable still. If your student loans averaged 4%, you wouldn't hit the $2500 interest/year until you had $62,500 in student loans. Yes, there are some who have more than that when they first graduate, but when you consider the lifetime of the loans and the fact that a lot of jobs really don't pay much more than $65,000/year, it's probably still pretty good. Also, is that $65k based on AGI? Because then you could be talking about gross income of $93,000 minus $18k for 401k and $10k of standard deduction & a bare minimum of itemized deductions like state taxes, the student loan interest, mortgage interest, donations, and so on.
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that and the cap your can use for the deduction is $2500/year.
At current interest rates, that sounds very reasonable still. If your student loans averaged 4%, you wouldn't hit the $2500 interest/year until you had $62,500 in student loans. Yes, there are some who have more than that when they first graduate, but when you consider the lifetime of the loans and the fact that a lot of jobs really don't pay much more than $65,000/year, it's probably still pretty good. Also, is that $65k based on AGI? Because then you could be talking about gross income of $93,000 minus $18k for 401k and $10k of standard deduction & a bare minimum of itemized deductions like state taxes, the student loan interest, mortgage interest, donations, and so on.
What do you mean at current interest rates? Student loans are a set rate, and that rate is higher than 4%.
As for the original article: There is nothing earth shattering there. He essentially invested on leverage, but rather than borrowing new money to invest with, he chose to forgo repaying a loan. It's the exact same thing anyone does when they invest rather than pay off a house more quickly. It's an incredibly easy calculation: cost of leverage vs. your investing returns and your risk tolerance. Obviously every single person who has paid a penny on non-CC debt over the last few years made a huge financial blunder, if all you're doing is looking at it with hindsight; same could be said for paying off debt rather than buying a house given the runup in house prices and the fact that the low interest rate window is closing.
I am in that group, having paid off $170k in loans averaging at ~6% from 2011 - end of 2013 instead of (a) buying a house in 2011 or (b) investing. Massive, massive mistake in hindsight. Do I regret it? Sure, when I think of where I'd be financially today if I had been more aggressive. Anyone who says they don't wish they had the ability to go back and apply their financial knowledge from time X at time X-[any period of time long enough to put in a trade] doesn't understand the instant and unfathomable wealth that would come from such a power.
But then I ask myself: would I really invest on margin? I haven't even looked into the margin rates I could get at this point, but if someone offered me a 6% loan today, would I take it and use the proceeds to invest? NOPE. At 5%? NOPE. At 4%? Maybe, though it would be world war with my spouse (who is more conservative than me). At 3%, I'd fight my spouse harder than at 4%. At 2%, I think my spouse would be on board, at 1%, I'd do it without asking my spouse (not really, but you get the point), and at 0%, well duh. But 0%--hell, even -1%--still has risks, because if the market declines significantly, what happens if your debt comes due? Whoops. So do I really regret buying out my massive student loans early? Rationally, I certainly should not, because I wouldn't put myself back in the same place on the balance sheet intentionally. And the psychic benefit of having "murdered that [insert string of expletives] Sally Mae" has a value too.