Author Topic: Am I doing this wrong?  (Read 4161 times)

hownowbrowncow

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Am I doing this wrong?
« on: November 05, 2013, 11:36:57 PM »
So I was all proud of myself for my progress on my student debt

Balance 3/13/13 $65,017.97 (Grad Plus Loan $26.4k at 7.9%, Direct Loan 38.6k at 6.55%)
Balance 10/31/13 $23,303.43 (all at 6.55%)

but now I wonder if I was penny wise/pound foolish.  I switched jobs in June -  took a slight paycut - but my taxable wages for 2013 will be about $88k. With my 2013 income that high I don't qualify for the $2.5k student loan deduction.   I did not contribute to a 403(b) this year because my employer funds a 401 (a) account for me and I have a rollover account from previous jobs.  Plus I figured I could catch up once this stupid loan was gone.

In 2014 my taxable wages will be around $83k assuming I stay in this role.  Once the loan is gone I would max out my 403(b) and my rollover and maybe open a Roth which would bring my income down below $75k.  But if I stick to my current payment schedule my total interest in 2014 would only be about $130.

So that means 2013 paid at least $2.5k in interest but don't qualify for deduction.  2014 pay $130 in interest but qualify for deduction.

For 2013, I sold a stock going nowhere for a $1k loss but if I wanted to get my income below the $75k threshold I'd have to take $12k (from remaining paychecks and a bit of my emergency fund) that would have gone to the loan and put it in a 403(b).   That moves my expected payoff date from 2/28/14 out at least 3, maybe 4 or 5 months.  It would cost me more in interest but I might still come out ahead. 

Still I hate the idea of holding on to debt a second longer than I have to.  What should I do?  Slow down my student loan repayment to lower my income to get the deduction?  Or just keeping throwing everything at the debt and be glad to be done in under four month?




lackofstache

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Re: Am I doing this wrong?
« Reply #1 on: November 06, 2013, 07:32:43 AM »
I think you're in a great spot! You're making good money, you're paying off debt (saving). From here, I would focus on optimization since you're doing so well. An extra 5 months of paying on a loan isn't a big deal (to me) if it means you come out further ahead financially in the future. Contributing to the 403(b) this year means that money has an extra year to compound and work for you & also means you get to take a deduction on the interest you've paid. Seems like a win-win to me.

If you want to just get rid of the debt, though, there's nothing wrong with it, but again, becuase of your situation, I'd focus on optimization.

AdrianM

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Re: Am I doing this wrong?
« Reply #2 on: November 07, 2013, 10:12:59 PM »
You are doing nothing wrong.

You just have a personal choice to make. Debt free now or debt free later.

Do the math and work out how much you would save and then based on that number decide if that is a big enough number for you to shoulder the debt burden a while longer, or its not enough and you will just repay the debt and be debt free asap.

projekt

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Re: Am I doing this wrong?
« Reply #3 on: November 08, 2013, 09:22:08 AM »
Opening a Roth IRA will not decrease your taxable income.

Exflyboy

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Re: Am I doing this wrong?
« Reply #4 on: November 08, 2013, 02:51:18 PM »
Bottom line.. your paying 7.9% to borrow your own money.

Put another way.. Paying that 7.9% loan off is a GURANTEED 7.9% return... You can't get that anywhere.

Forget the tax games.. pay off the loans.

Frank

seattlecyclone

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Re: Am I doing this wrong?
« Reply #5 on: November 08, 2013, 04:02:03 PM »
Yeah, it's possible you would have done slightly better by maxing out your 403(b) and only paying your loan down by $25k instead of $42k, but that's in the past. Nothing you can do about it now. I doubt it would have made much difference either way, and paying off the debt will prove to be its own reward if you find yourself with a lower income in the future.

abhe8

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Re: Am I doing this wrong?
« Reply #6 on: November 08, 2013, 04:11:02 PM »
Bottom line.. your paying 7.9% to borrow your own money.

Put another way.. Paying that 7.9% loan off is a GURANTEED 7.9% return... You can't get that anywhere.

Forget the tax games.. pay off the loans.

Frank
+1

Mazzinator

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Re: Am I doing this wrong?
« Reply #7 on: November 08, 2013, 10:48:05 PM »
I may be reading this wrong...damn beer...

But you do know that the deduction is only a reduction of your agi and not a credit. So if you're in the 25% bracket x $2500 equals. Savings of $625 in taxes.

Sorry if i'm misunderstanding you..

lhamo

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Re: Am I doing this wrong?
« Reply #8 on: November 09, 2013, 12:35:35 AM »
Do you have enough to cashflow your expenses if you max out your 403(b) between now and the end of the year?  According to Publication 970, the phaseout for student loan interest for a single person starts at 60k and ends at 75k.  If you can get your MAGI down to below 75k, you might still be able to deduct some of the interest you paid.

Kind of depends on if your employer allows you to make huge contributions at the end of the year.  Mine does, but not all do.  And of course you have to have the cash to cover your monthly expenses, as well.


hownowbrowncow

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Re: Am I doing this wrong?
« Reply #9 on: November 12, 2013, 11:31:32 AM »
Thanks for the replies!  Interesting seeing thoughts from both sides.

In the end, I decide to use my last four 2013 paycheck for 403(b) deductions.  I ran the numbers and doing so slices $3k off my 2013 tax bill.  [for 2013, I have already paid way more than my total 2012 taxes so I won't get a penalty].  Cutting these last four paychecks means about $180 extra in interest costs than if I had paid off the loan as originally scheduled - late April vs late Feb -
but hey $3k is more than $180 so I'm okay with my decision. 

Either way looking forward to being totally debt free in the spring!