Advice on tackling student loans vs investing

[el duderino]

Hi all, long time lurking, first post. My wife and I are started to gain some traction on our journey to FI. We're 30 with two young kids. I'm about to start a new job that with a significant increase in income. Combined, GAI will be ~110k. We live in Michigan with a fairly LCOL.

We're in the process of paying off some small debts we picked up from some less educated moves in the last couple of years. Should have those paid down in the next couple of months. From there we need to decide what our next best step is. Here's where we're at:

• (45,000) in student debt - interest rate is currently at 5%, but is variable through Commonbond
• (140,000) mortgage - 15 yr fixed rate at 3.375%
• No credit card debt
• 5,300 in current employer 401k (via Vanguard, new job will be 403b via Voya).
• 2,000 in HSA

We're motivated to pay off our student loans. I don't feel extremely confident that the variable rate isn't going to keep going up and I feel there will we could benefit from the treadmill "effect". La duderina is on the same page in terms of life goals (very thankful for this), but not currently as frugal/motivated as me. As the primary income earner, I understand where she is coming from, and we're working on aligning our goals into one. I just think the student loans will provide a good bit of shared motivation (they are her's, which increases her motivation).

I don't yet have my head fully wrapped around all the different investment accounts (working on that). I have a few questions around this and would be very grateful for your educated advice.

• Given the current rate of the student loans, would we be better off investing in index funds (as long as rate of return is higher than the variable interest rate on loans), and then pulling money out of investment account to pay off loans when we have the balance? La duderina is motivated to feel like we're making progress on an investment account rather than treading water on loans - even if that means we pull contributions out when we have enough to pay down the balance on SL.
• If I did the above, what type of account would be best to use? IE, what fees/limitations do I need to be aware of, and is it even a good idea given the short-ish time frame.
• Would you advise to just keep paying minimums on SL (again, as long as interest rates remain below returns on investments) and go full force on investments (I need to do more researching on the approach to this, but am building on a basic understanding).

Worth noting that we're not sure yet what our annual living expenses are. I have budget tracking all set up, just need another month to have some data around it. We bought our house a couple years ago, and between some major rehabbing to that and having 2 kids, our extra income has poured into medical bills, diapers, new furnace, etc. We're just getting to a more stable point, and combined with my income bump (~20k extra/yr), we're in a great spot and excited to really get after things.

Let me know if I left any helpful info out. Thanks in advance for any help!

[Heroes821]

I'm a fan of this threads advice

https://forum.mrmoneymustache.com/investor-alley/investment-order/

[Proud Foot]

Read through the thread Heroes821 posted.  What I wouldn't do is what you are asking in number 1.  I would not invest and then pull out when the investment balance meets or exceeds the loan balance.  Too much risk in returns and the taxes on those investments will add more complexity to your analysis.  If you want to do that I would skip the investment and just pay down the loans to receive the guaranteed 5% (or whatever it adjusts to).  If you go the route of paying minimums and investing the rest I would leave the amount invested and not pull contributions to pay off the loans.  If you wanted you could use the dividends received from the investments to pay down the loans since they will already be subject to tax.  If your wife wants motivation and to feel like you two are making progress then I think it would be more beneficial to put the loans in #2 of the investment order in the previously linked thread.

[JustGettingStarted1980]

Now that your income is rising, it is very likely you can refinance your student loans to a lower rate. Try SOFI. With good credit scores, you can get Variable rates <3.5%

JGS

[frugaliknowit]

Take the guaranteed 5% return (phenomenal!!) and pay down the SLs. 

If you are able to refi them MUCH lower, reconsider (personally, I wouldn't even invest against 3%...).  I am not a fan of having a hurdle against an investment account (false sense of security, lots of risk).  If that feels too safe, you can always go to a casino once per quarter.

[therethere]

We did the invest with our snowball payments method. It worked okay the past two years mainly due to the big rise in the market but I have conflicted feelings. It was definitely a rollercoaster and at one point we were "down" 3k. So its not guaranteed to work out in your favor at all. Its tough when you finally get the investment balance greater than loans because you aren't officially "done". Very anticlimactic. We came out about 8k ahead thus far. But I would really like to switch to part time or take a sabbatical in the next 1-2 years but we will still have our loan payment minimums. So its tricky and plays with your emotions.

With loans at 5% and variable I would not do it. I'm not even sure I would do it again with my loans the way they are. I paid all mine above 5%. And refinanced the rest to variable rates but were <4%. Once they rise to above 6-7% I plan to pull out the investment money to pay them off. You also don't seem to have a good handle on your finances quite yet with changes in job and expenses. I would have that sured up first. We had already been aggressively paying loans for 8 years so I  was pretty comfortable with projections and how much interest we could potentially be paying extra.

[el duderino]

Thank you all so much for the responses. I've been heads down at my new job and just getting a chance to really go through all these.

Based on conversations duderina and I have had the last few weeks and the advice here, we're going to attack the student loans.

That said, I'm still interested in re-financing with the increase in income (hadn't thought about that, great tip). Considering we just re-financed 6 months ago (through commonbond), are there any fees or loss of efficiency in pursuing another re-fi so quickly?

Again, thanks all. I really enjoy this community.

[therethere]

Nope, refinance as much as you want. Make sure you get the referral bonuses! I just looked at refinancing my loans again to chase a slightly lower rate, and the referral bonus alone is more than the interest savings. I noticed Earnest gives lower rates for higher savings/401k balances. While Sofi rates were more dependent on income.

[el duderino]

Awesome. In your experience, does the referral bonus need to be from another active loan holder? Or just another email address? IE - can I bank this internally, or do I need to find someone with a SoFi/etc account?

[therethere]

It needs to be from a loan holder. I used one from the forum for my refinance. Then I referred DH to refinance his loan also, which let us double up on the referral the second time.