SummaryI have $151,000 in student loans with an average rate of 6.41% (the highest one being $27k at 7.65%). I started my own law practice last year and it has taken off. My household income this year will probably be about $185,000. Necessary expenses are probably $65,000 (including law office expenses), so after taxes, I have about $75-80k to throw at something.
Can't decide whether to pay these loans off in two years, whether to refinance (I can get 10 years at about 4.5%), or something in between. I also have about $50,000 in cash right now (no 401k investments this year, though).
BackgroundI gained some notoriety on the forums a couple years ago with my "Gaming REPAYE (Student Loans)" thread:
https://forum.mrmoneymustache.com/ask-a-mustachian/gaming-repaye-and-the-student-loan-system-($148-000-debt)-to-achieve-fire-at-45/Basically, and because my income was relatively low compared to my standard loan payment, it was a theoretical plan to lower AGI in an effort to pay as little as possible towards my student loans and have the balance forgiven after 25 years. Alternatively, if income ever dramatically increased, then the program would have effectively been used as a temporary measure or hedge to allow me to get started in other financial areas other than focusing solely on my loans.
So about that: my loans were initially $148,000 in 2014. They have gained $3,000 in interest. I've paid about $20,000 towards them in these four years. But, our retirement accounts are at about $112,000, we bought a home, and we paid off our cars. So using this as a "hedge" until there was more income to tackle these loans is almost exactly what happened.
Getting to today, I started my own law practice last year and it has really taken off. I've already made $58,000 so far this year (without sending out May invoices) and things seem to be picking up, not slowing down. This amount of income means that there will never be any forgiveness, and my payments are about to go way up.
I expect to make about $140,000 this year. My wife should also make about $45,000. This leaves us with a ton of discretionary income to do...something.
This, and also having our first kid in March, has kind of caused me to freeze. I'm sitting on $50,000 excess cash (i.e., beyond our e-fund amount) and don't know what to do with it. It's important to note that we have not invested anything in 401ks this year, or HSA, or Roths, or anything. So maybe this cash should go to that? I don't know, see below.
OptionsThe loans total $151,000. There are nine separate loans with an average rate of 6.41%. The loans can be broken down as follows:
One loan at 7.65% totaling about $28,000
Five loans at 6.55% totaling about $60,000
Two loans at 6.16% totaling about $33,000
Two loans at 5.15% totaling about $30,000
Aggressively Pay Off Loans: Having focused on saving these past four years, I emotionally just want to get rid of these ASAP. I figure I could take my current cash, dump it on the loans (from highest interest rate to lowest), and pay them off by the end of next year.
The basic thought here is that this is an emotional win, and I don't see too much harm in foregoing investing for just two years.
The cons are missing that investment time and, further, paying significantly more in taxes. In other words, 401k is both investing (and the fruits of compounding) PLUS a huge tax win due to my tax bracket.
Refinance: While the above would be emotionally appealing, the math play might be to refinance. I can get 10 years at around 4.5%. This would allow me to invest, and I'm sure the math would lead to a theoretical increased net worth by the time I'm 40. It would also probably mean way less in taxes these next two years.
But the "by the time I'm 40" part is the problem to me -- having a $2,000 payment for nine years just strikes me as sucking too hard to deal with for almost a decade.
Middle Ground: While I'm not really leaning towards refinancing, the option I am more strongly considering is a hybrid approach where I stay on the income based plan, invest, and then dump whatever falls in my lap on the loans.
The thinking here is that this gives me the flexibility that federal student loans provide, which usually means low monthly payments. This in itself acts as a hedge. Then, at the end of the year, when I've invested enough to my satisfaction, I could just dump the remainder on the loans and hope to pay them off in 6 or 7 years. This seems like a no pressure solution that achieves a bunch of goals at once.
ConclusionAll that said, this thread is going to probably be talking me out of just paying these darn things off ASAP, which is where I'm strongly leaning after using the REPAYE program for four years.
Any thoughts?