Author Topic: Pay off student loans or max retirement - Just added a case study as suggested!  (Read 8004 times)

MFratello

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This is the situation.  My husband and I (of less than one year) are in the process of paying off our debt.  We have paid off $20,000 since March of 2014.  We expect to have all of our consumer debt paid off by December 31, 2015.  Our plan is to then attack our significant student loan debt (specifics listed below); however, we do not anticipate paying off the student loans until October 31, 2018. 

We are not currently contributing money towards any retirement accounts to pay off our debt faster.  In fact, we have hardly any retirement at all.  I am 30 years old, and my husband is 36 years old.  Fortunately, we do make $180,000 (total gross household income). 

My question is, should we continue our “pay all debt before contributing towards retirement” plan or should we suspend paying off the student loans to max out retirement, etc.  The interest rates on the student loans are rather high.  I greatly appreciate any advice and look forward to your comments!

1.   Mohela (my loan) - Balance: $22,862.61. 

   Subsidized Loan = $7,482.80, 5.125% interest rate.

   Unsubsidized Loan = $15,379.81, 5.125% interest rate.

Pay-off date: May 31, 2016.

2.   Sallie Mae (husband’s loan) - Balance: $54,577.47. 

•   Law Student A = $13,267.22, 9.25% interest rate.

•   Bar Study Loan B = $11,556.26, 4.75% interest rate.

•   Law Student C = $11,627.23, 4.75% interest rate.

•   Law Student D = $18,126.76, 4.75% interest rate.

Pay-off date: February 28, 2017.

3.   NelNet (husband’s loan) – Balance: $116,042.45. 

•   Loan A = $48,527.34, 7.125% interest rate.

•   Loan B = $58,920.17, 7.125% interest rate.

Pay-off date: October 31, 2018.

ADDITION OF CASE STUDY - MY BUDGET

Here are the details:

Income: $180,000 gross household, $9,985.36 monthly net. 

(We also receive quarterly bonuses of $3,500 gross, which are not included in the $180,000 monthly net figure listed above.)

Current Monthly Expenses: $7,957.29.

Fixed –

1. Mortgage = $1,677.70.

2. Gym = $180.00.

3. Lawn treatment = $42.00.

4. Student loan payments (details referenced in the original post) = $1,601.37.

5. Credit card minimums = $404.00.

6. Honda = $366.35.

7. Acura = $270.87.

8. Pest control = $35.00.

9. Verizon - $225.00.

10. Utilities - $285.00.

11. Childcare - $150.

Total = $5,237.29.

Variable –

1. Food = $1,480.00.

2. Household = $1,020.00.

3. Tithe = $120.00.

4. Gas = $100.00.

Total = $2,720.00.

Assets:

1.  Equity = $370,000.00 (conservative estimate) - $233,840.75 (mortgage) = $136,159.25.

2. My 401k = $786.51.

3. College savings plan = $668.33.

Liabilities:

1. Credit cards = $25,565.14.

2. Vehicles = $25,024.77.

3. 2013 taxes = $4,291.57.

We anticipate paying off our credit cards, cars, and tax bill by December 31, 2015, with the overage in our monthly budget, quarterly bonuses, annual bonuses, and miscellaneous bonuses provided through husband’s firm (referrals, trials, etc.).  Therefore, by 12/31/15, we will be left with the student loans and mortgage, which prompts the original question, pay off the loans or max out our retirement . . .

Also, please hack this budget.  Thus far, I moved to a cash only system, cut cable, cut internet, cut lawn care, cut dining out, cut shopping, and cut our entertainment budget.  I feel like I have made some progress but am very open to everyone's thoughts.

I greatly appreciate your time and attention to this matter!
« Last Edit: February 12, 2015, 09:38:46 AM by MFratello »

clarkm04

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Re: Pay off student loans or max out retirement?
« Reply #1 on: February 11, 2015, 11:44:57 AM »
Since all your interest rates are above 4%, in your shoes I'd do the following:

1) Contribute to any amount you need to hit a company match.

2) Pay off all your debt going from highest interest rate to lowest.

3) Once the debt is paid off, ramp up the retirement.

Good luck!

MFratello

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Re: Pay off student loans or max out retirement?
« Reply #2 on: February 11, 2015, 11:49:33 AM »
Excellent idea.  Thank you so much!

Angie55

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Re: Pay off student loans or max out retirement?
« Reply #3 on: February 11, 2015, 11:52:36 AM »
First, make sure you are contributing enough to get the match TODAY. Then, after credit card debt, I would payoff the 9% loan ASAP.

After that, I would consider maxing out or drastically increasing retirement contributions to lower your taxes and catch-up on lost contributions. Normally I would say tackle everything above 5%. But, you will always be able to pay down your loans, but there are limits on how much you can contribute to retirement in each year. Since you are admittedly behind I don't know if I would pass up the contributions for 4 more years. I would think maxing out 401k's on your salary would still leave you a decent amount leftover to tackle the 7% loans on an accelerated time frame.

Exflyboy

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Re: Pay off student loans or max out retirement?
« Reply #4 on: February 11, 2015, 11:55:39 AM »
^^^^^^ THIS!^^^^^

That 9.25% is a beast!

So yeah.. the high interest loans followed by minimising your tax bill (maxing 401k contributions).. I mean your making 180k a year you should be able to be hitting this on multiple fronts.

One could argue that you can earn more in the stock market so why pay off the 4% loans.. That is a valid argument, it starts to come down to peace of mind i.e do you want to be in debt.. Personally I wouldn't.

Than again I paid off our house before I really started investing and that was about a 4.x% mortgage... The job market was very shaky at the time so it "felt" right, even though it probably cost me money ultimately.

All the best

Frank

MetalCap

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Re: Pay off student loans or max out retirement?
« Reply #5 on: February 11, 2015, 12:36:01 PM »
Angie's got it right.  At 180k, you've got to max the 401k's

Another thought is refinancing/consolidation of the loans (I didn't do it because I was half paid off before I even considered it) your balances are so high this could result in a significant savings. You may lose out on the $2,500 tax deduction a year but the % difference might make up for that.

Even after consolidation though, pay those suckers off as fast as you can.

rocketman48097

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Re: Pay off student loans or max out retirement?
« Reply #6 on: February 11, 2015, 12:42:37 PM »
You must, and I mean must, as in as soon as you're done reading this, contribute 6% to your 401k's in order to qualify for your company match.  If your company doesn't match, then please ignore. 

If they do match, stop reading this, log into your and your husband's 401k accounts, and immediately, ASAP, set up deductions to 6% for your 401k's.  Where else are you going to get an immediate 25-100% return on your investment?  It won't come via paying off your student loans early. 

Step two:  your income is way too high to pay a reasonable tax rate, reduce your income so that your taxes are paid in at a much lower rate.  max 401k contribution this year is 18k per person, this will reduce your taxable income by another 36k to a more manageable rate.

Step three:  If after this, you qualify for traditional 401k, deductible contributions, please make these contributions.

Step four:  Redo your student loans so that you have the LONGEST pay back period as possible.  Use the money you are amassing in your tax deferred retirement accounts as a safety net to perhaps pay them off someday.

There are only two kinds of good debt:

1.  Mortgage debt under 5%.
2.  Student loan debt under 5%.

Both are potentially tax deductible, but the key with you is you need to reduce your taxable income to net a higher percentage of your income. 

jackiechiles2

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Re: Pay off student loans or max out retirement?
« Reply #7 on: February 11, 2015, 12:46:23 PM »
You must, and I mean must, as in as soon as you're done reading this, contribute 6% to your 401k's in order to qualify for your company match.  If your company doesn't match, then please ignore. 

If they do match, stop reading this, log into your and your husband's 401k accounts, and immediately, ASAP, set up deductions to 6% for your 401k's.  Where else are you going to get an immediate 25-100% return on your investment?  It won't come via paying off your student loans early. 

Step two:  your income is way too high to pay a reasonable tax rate, reduce your income so that your taxes are paid in at a much lower rate.  max 401k contribution this year is 18k per person, this will reduce your taxable income by another 36k to a more manageable rate.

Step three:  If after this, you qualify for traditional 401k, deductible contributions, please make these contributions.

Step four:  Redo your student loans so that you have the LONGEST pay back period as possible.  Use the money you are amassing in your tax deferred retirement accounts as a safety net to perhaps pay them off someday.

There are only two kinds of good debt:

1.  Mortgage debt under 5%.
2.  Student loan debt under 5%.

Both are potentially tax deductible, but the key with you is you need to reduce your taxable income to net a higher percentage of your income.

Only up to $2500 of the student loan interest is deducted from your AGI, only if your AGI is below $155k.   They'd have to reduce their AGI an awful lot from $180k to get the student loan interest deduction.

rocketman48097

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Re: Pay off student loans or max out retirement?
« Reply #8 on: February 11, 2015, 12:59:58 PM »
My math tells me this is possible.

Gross income:  180k

Deductions for deductible benefits:  -4k (based on my amounts at my work)
Both spouses maxing out 401k plans:  -36k

Adjusted gross income:  140k

Sadly, they make too much to ALSO make deductible traditional IRA contributions.  I would stop at that, and pay off high interest student loan debt interest at this point.  Do not contribute to a Roth until all above 5% interest rates have been paid off. 

Gone Fishing

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Re: Pay off student loans or max out retirement?
« Reply #9 on: February 11, 2015, 02:03:26 PM »
You make $180k and only managed to pay off $20k in a year? Looks like we need a case study!

http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/

GetItRight

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Re: Pay off student loans or max out retirement?
« Reply #10 on: February 11, 2015, 03:16:14 PM »
Since all your interest rates are above 4%, in your shoes I'd do the following:

1) Contribute to any amount you need to hit a company match.

2) Pay off all your debt going from highest interest rate to lowest.

3) Once the debt is paid off, ramp up the retirement.

Good luck!

I like this plan.  You also should cut your expenses as much as possible to get out of this 200k hole, and try to raise your income.

^ All of this! Just think of all the extra cash you'll have when the debt is gone, you can live a bit and still be socking away huge amounts for retirement.

abhe8

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Re: Pay off student loans or max out retirement?
« Reply #11 on: February 11, 2015, 04:31:18 PM »
Would love a car study! I have about three same in income and loans, and wondering the same thing as op.

Gin1984

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Re: Pay off student loans or max out retirement?
« Reply #12 on: February 11, 2015, 04:42:46 PM »
Max out your retirement accounts and with any additional money kill off Law Student A.  In addition, can you refi the high loan rates?

MFratello

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Re: Pay off student loans or max out retirement?
« Reply #13 on: February 12, 2015, 08:13:41 AM »
This advice is fantastic.  I greatly appreciate everyone's comments.  I will prepare a case study ASAP to hack my budget. 

MFratello

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Re: Pay off student loans or max out retirement?
« Reply #14 on: February 12, 2015, 09:19:20 AM »
Here are the details:

Income: $180,000 gross household, $9,985.36 monthly net. 

(We also receive quarterly bonuses of $3,500 gross, which are not included in the $180,000 monthly net figure listed above.)

Current Monthly Expenses: $7,957.29.

Fixed –

1. Mortgage = $1,677.70.

2. Gym = $180.00.

3. Lawn treatment = $42.00.

4. Student loan payments (details referenced in the original post) = $1,601.37.

5. Credit card minimums = $404.00.

6. Honda = $366.35.

7. Acura = $270.87.

8. Pest control = $35.00.

9. Verizon - $225.00.

10. Utilities - $285.00.

11. Childcare - $150.

Total = $5,237.29.

Variable –

1. Food = $1,480.00.

2. Household = $1,020.00.

3. Tithe = $120.00.

4. Gas = $100.00.

Total = $2,720.00.

Assets:

1.  Equity = $370,000.00 (conservative estimate) - $233,840.75 (mortgage) = $136,159.25.

2. My 401k = $786.51.

3. College savings plan = $668.33.

Liabilities:

1. Credit cards = $25,565.14.

2. Vehicles = $25,024.77.

3. 2013 taxes = $4,291.57.

We anticipate paying off our credit cards, cars, and tax bill by December 31, 2015, with the overage in our monthly budget, quarterly bonuses, annual bonuses, and miscellaneous bonuses provided through husband’s firm (referrals, trials, etc.).  Therefore, by 12/31/15, we will be left with the student loans and mortgage, which prompts the original question, pay off the loans or max out our retirement . . .

Also, please hack this budget.  Thus far, I moved to a cash only system, cut cable, cut internet, cut lawn care, cut dining out, cut shopping, and cut our entertainment budget.  I feel like I have made some progress but am very open to everyone's thoughts.

I greatly appreciate your time and attention to this matter!
« Last Edit: February 12, 2015, 09:39:11 AM by MFratello »

ShoulderThingThatGoesUp

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2. Gym = $180.00.

3. Lawn treatment = $42.00.

8. Pest control = $35.00.

I just saved you $250/month.

Lis

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Can you break down your food and household budgets a bit more? Those seem awfully high for only two adults... even with a handful of kids you could probably go for way less.

MFratello

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Food includes every meal since we do not dine out.  I know it is extremely high.  We eat a Paleo diet, and cooking is my hobby, so it gets expensive (something I could probably hack).  The household expenses include anything from co-pays, haircuts, dry cleaning, my son's school lunches, gifts, contribution towards Christmas gifts, propane for the grill - various items that come up during the month.

Gone Fishing

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If I am reading correctly you are spending almost $3k a month on food??


Check out Rupublic Wireless you could easily cut your cell phone bill in half or more.


MFratello

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No, $1,480 per month in food.  The amounts listed are monthly expenses.

Gin1984

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What are your rates on the cars?  And how old are those cars?  You need to make some serious cuts here.  How is gym $180 per month?  Seriously?  What is household?

MFratello

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The household expenses include anything from co-pays, haircuts, dry cleaning, my son's school lunches, gifts, contribution towards Christmas gifts, propane for the grill - various items that come up during the month.

My husband's rates on his car is 5.09, and mine is 3.19.  His car is an Acura, honestly, I cannot recall the year.  Not new.  Not old.  Mine is 2010.

We attend a CrossFit gym at $90 per person.

Gone Fishing

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No, $1,480 per month in food.  The amounts listed are monthly expenses.

Got it, the biweekly cash statement threw me.

Does utilities include cable or internet?  If so, Netflix can substitute for cable and internet can probably be shopped, especially if your service has been in place for more than 12 months. 

MFratello

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No, we cancelled cable and internet.  No Netflix.  I removed the bi-weekly cash statement.  It was confusing.  Utilities include water, electricity, sewage, and trash.  We receive one bill for all of the services.

Gin1984

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The household expenses include anything from co-pays, haircuts, dry cleaning, my son's school lunches, gifts, contribution towards Christmas gifts, propane for the grill - various items that come up during the month.

My husband's rates on his car is 5.09, and mine is 3.19.  His car is an Acura, honestly, I cannot recall the year.  Not new.  Not old.  Mine is 2010.

We attend a CrossFit gym at $90 per person.
Do you have a FSA you can put money in, if you have that many copays?  If you have so much spending that you are spending $1000/month, you need separate it out if you want any chance of saying money.  Send your son with lunch, don't start him out buying lunch every day,  cut down gifts you are not even saying the basic amount you need to retire.  At thirty you need to be saving 20% bare minimum to retire at 65, assuming you don't cut down your bills.  That means you should at minimum be maxing our your 401ks.  Any "fun" needs to go until you get that 20%.
Side thing, how are you spending over $1400/month in food and on top having your son eat out?

MFratello

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We do not spend $1,000 in copays.  I was listing a specific example of a random household expense where I would pull money from that category.  HSA is not necessary.  I agree that household can be hacked. 

ShoulderThingThatGoesUp

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We attend a CrossFit gym at $90 per person.

You have $2600 in monthly debt minimums and you are paying $180 a month for a gym membership? Holy shit!

minimustache1985

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1) Like others have said, max your 401(k).  It won't affect your take home as much as you think because you are paying an epic amount of taxes on the top 20% of your income AND maxing these will ensure your AGI is low enough to actually deduct that SL interest.

2) You are spending over $16 per person per day on food.  That's apeshit, even for a paleo diet.  Meal plan, buy meat in bulk on sale, etc.  You shouldn't even need to really cut back in terms of the actual meals you're making to bring this down substantially.

3) Switch to a cheaper cell phone carrier.

Those are the easy ones, others will have more facepunch-y suggestions that are warranted, but I'd start with the low hanging fruit- seeing those 401k balances go up and the loan balances go down faster with some initial steps will likely motivate you to take more action in a month or two.

MFratello

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I greatly appreciate everyone's comments.  I will immediately begin hacking our budget and discuss our 401k options with my husband this evening.  Again, thank you for your time and suggestions.

FarmerPete

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I never had student loans, so I don't know how refinancing works, but if it was me, if you can't get a competitive SL rate, I'd refinance my mortgage to knock off some of the highest interest loans.  You can get a 30 year mortgage for 3.875% around here.  If you refinanced to 80% house to loan, you could free up $62,000 in cash to knock off some of those higher loans.  You could save $2324 in your first year by paying off the entire $13267 loan and $48733 of the 7.125% stuff.  Could totally be worth it.  Obviously, if your house is appraised for more than your conservative number, I would take out a bigger refi.