Poll

Cash out my personal ESPP account to apply to Wife's Student Loans?

Continue the grind
Cash out ESPP and apply to loans, stop contributions to ESPP, but continue 401(k) match
Completely stop all investments, apply every penny to the student loans
Sell the house, cash out of all investments and move to a third world country to retire now
Take out more Student Loans and get a PhD in Sandscript

Author Topic: Cash out my personal ESPP account to apply to Wife's Student Loans?  (Read 3767 times)

Grindin' Away

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I have a question regarding a large Student Loan balance and Company Stock Plan.
My wife currently has a large Student Loan balance.  (See details below)  We are paying off about $455.00 of principal a month, and throwing any windfall money at the one with the highest interest rate.  We are paying about $230.00 of interest on these a month right now.  (OUCH!)

Reamaining balance   $49,000  (interest rates scattered between 4.18% and 8.4%)
Minimum PMT             $533
Actual Payment          $686 (Min payments on all loans, any extra goes to the one with highest interest rate)


Now, I understand that my TOP priority is to get rid of these loans.  My company offers a nice 401(k) match.  They match 75% of my contribution up to 8% of my paycheck.  So, I contribute 8% and actually get 14%.  That seems like a no-brainer to continue.  But, they also offer an Employee Stock Purchase Plan at 85% of the stock’s value on either the first or last business day of the six month cycle, whichever is lower.  I have been using 2% of my paychecks towards this (about $40 a month), and the value of that account is currently $5,300 and growing fast between the contributions and quarterly dividends.
By my calculations, we will have the Student Loans paid off in about 6 years if we maintain the above monthly payments and apply our annual tax return and work bonus windfall each March (about $4,000 to $5,000).  Plus, we are working on becoming more mustachian, and increasing our monthly payments towards the loans cutting that time down as well.
My plan was to just continue what we have been doing, and have a large ESPP account by the time we pay off the loans in 6 years.  But after reading this site more, I am considering the option to cash out my whole ESPP account to apply to the loans, and not contribute again until the loans are fully paid off.
What do you think?

Our combined income is about $100,000
Between retirement accounts, a house, day care/general child needs, and other fixed expenses, we have very little left over each month.  (as stated above, working on becoming more mustachian to increase this!)
No other major debt besides a mortgage ($155,000 @ 3.5% on a $205,000 house)
Wife is completely on board with whatever financial decision I make
« Last Edit: October 03, 2013, 09:46:40 AM by CloneISU2005 »

JessieImproved

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Re: Cash out my personal ESPP account to apply to Wife's Student Loans?
« Reply #1 on: October 02, 2013, 01:26:43 PM »
I voted cash out ESPP but I want to clarify.

1) Max out your 401K contribution.  This is free money.

THEN...

a) Calculate your average return on your ESPP.  Take out enough money to pay off any student loan with a higher interest rate than the return.

OR
 
b) If you're getting a higher rate than the highest loan, don't take any money out of your ESPP.  Consider (seriously) the stability of your company, and decide what percentage of your remaining funds should go to the ESPP and debt repayments, based on the risk assessment.  If the ESPP gets crazy higher returns, you may want to consider the minimum loan payments so you can throw more money at that.

seattlecyclone

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Re: Cash out my personal ESPP account to apply to Wife's Student Loans?
« Reply #2 on: October 02, 2013, 02:05:33 PM »
One wrinkle of ESPP programs is the tax consequence of selling early. A common way these programs are structured is that the company issues you an option to buy the stock at a 15% discount off the current date's price at the beginning of the contribution period. The option vests six months later, at which point the money that you had withheld from your paychecks in the last six months is invested at the discount price. To get favorable tax treatment, you must hold on to the stock until the later of one year after purchase or two years after the option was granted. So for a typical ESPP, you must hold on to the stock for 18 months after you actually purchase (since the option was granted six months before the purchase date).

If you sell early, you have to report the sale to your employer, and they will be required to report the discount you received on the shares as regular income, and you'll have to pay taxes on this income at your full marginal rate. By contrast, you pay lower capital gains rates on this money if you satisfy the holding period requirements. More info about this is available here.

In your situation I might actually suggest increasing your ESPP contributions if possible. The reason is that you're getting a minimum 15% discount on the shares, more if the stock went up in the past six months. That's like getting a 15% match on your contributions. You max out your 401(k) match; why not max out your ESPP match? You want to avoid having too much of your net worth tied up in your employer's stock. Diversification is important. That said, if you are reasonably confident your employer's stock will do all right compared to the rest of the market, I don't think you're taking an outrageous risk by putting as much as 10% of your salary into the ESPP and selling any shares you've had for more than 18 months.

Yes, paying down your debt is important. Sell any ESPP shares that you've had more than 18 months to help with this. Reduce your spending in other areas as well. But don't ignore opportunities for free money when they come your way.

Oh, and go Cyclones! :)