Author Topic: Empty taxable account to pay down student loans?  (Read 3749 times)

Leggo

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Empty taxable account to pay down student loans?
« on: December 10, 2013, 01:04:54 PM »
I just found out that DH's student loans have gone up from 3% to 6%.  He has $64k of debt. (!!!WHAT???!!!)  Previously, I was happy paying the minimum, as I was sure we could beat 3% in the market.  Now that they are at 6%, my hair is on fire.  We have $230k in retirement savings, but only $33k in a taxable account that we can access before we are 59.5.  (I'm 39, DH is 34)  We contribute about $5500/mo to savings.  I will receive a military pension in 4 years, and I'd love to quit working at that time.  I'm certain we can live on my pension and DH's income (he has no desire to quit anytime soon) without dipping into our savings, but not sure that we'd be able to contribute anything meaningful toward additional savings at that point.  I think whether or not I keep working will be a game time decision.

Questions--should I pull the $33k out of the taxable investment acct to pay down the loan? 
Should I keep fully funding IRAs and TSP or should I send some of that money to either the loan or the taxable account?

A.) If we treat the debt like an emergency, we can kill it in a year, but during that year we will give NOTHING to any investment accounts.
B.) If we keep fully funding TSP and IRAs, we can kill the student loan debt in about 2.5 years while giving NOTHING to any taxable investments.
C.) If we sell our current taxable investments, then we can kill the debt in 6mos/12mos respectively using either A. or B. above for the balance

Which combo makes the most sense?

nawhite

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Re: Empty taxable account to pay down student loans?
« Reply #1 on: December 10, 2013, 01:19:32 PM »
Why did his rates go up? Variable rate student loans are usually linked to an index of some kind. What index went up 3% this year? Are his rates expected to go up more in the future or is 6% the highest they will ever be?

Regardless, In my opinion B is significantly better than A. This debt is bad, but not "miss out on IRA or TSP bad"... yet.

As for selling the taxable investments, I'd say it depends on taxes. If selling would incur large capital gains taxes, then selling probably isn't the best idea... yet.

But if the rates continue to go up then this really could turn into a hair on fire situation where no other accounts matter. I don't think you're there yet so I'd say go with option B and keep a careful eye on how his rates change.

Leggo

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Re: Empty taxable account to pay down student loans?
« Reply #2 on: December 10, 2013, 05:58:04 PM »
Thank you for the reply.  His rates went up b/c he finished school and consolidated the loans into one.  I'm not sure if he know that would lead to the higher rate, as I tried to trust him with his personal business and not be too "naggy"  :-)  He says they are fixed now.

Heart of Tin

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Re: Empty taxable account to pay down student loans?
« Reply #3 on: December 10, 2013, 08:18:11 PM »
This depends on the taxes that you would pay on the $33,000. I'm going to assume that you would pay 15% taxes on $11,000 of the $33,000 just for the sake of argument. Then you would owe $1,650 at tax time with option C. I'll also put you in the 25% bracket for regular income (again, for the sake of argument), so we will subtract 25% of any student loan interest that you pay. Here's my analysis of your options with these assumptions:

A.) Kill the debt in a year by paying about $5,500 per month. You would pay $2,100 in interest over the year earning $525 back in at tax time, so you would pay about $1,575 more than $64,000 over the year.

B.) Kill the debt in two-and-a-half years by paying about $2,150 per month. You would pay about $5,400 in interest over 2.5 years earning a total of $1,350 back at various tax times, so you would pay about $4,050 more than $64,000 over 2.5 years.

C.) Liquidate the taxable account, then pay off the loans over 6/12 months by paying $5,250/$2,670 per month. You would pay about $550/$1010 in interest over the six months/year earning $135/$250 back at tax time. You also owe $1,650 taxes on the liquidated account. Altogether you will pay about $2,060/$2,400 more than $64,000 over the year.

I am ignoring the fact that you will eventually pay taxes on the taxable account anyway, because you probably won't pay these taxes for a while and I am confident in your ability to minimize your taxes at that point in time. If you think that you would have experienced a taxable event (selling stock for a gain or receiving a taxable dividend, for example) in the taxable account in the near future, you need to add some taxes into options A and B for a more complete analysis.

According to this math, option A nets you the most immediate savings, but the math will change depending on your exact tax situation.

aj_yooper

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Re: Empty taxable account to pay down student loans?
« Reply #4 on: December 10, 2013, 08:52:05 PM »
Money is difficult to accumulate.  So I would not use a taxable account to pay off SL debt.  I dislike debt so I would solve the 6% SL debt as quickly as you can, even by reducing retirement contributions. 

fodder69

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Re: Empty taxable account to pay down student loans?
« Reply #5 on: December 11, 2013, 06:23:55 AM »
I agree with the last point, I'd keep the account. You are young enough that catching up your retirement accounts is pretty easy so I'd cut back as much as possible on those (up to any employer match) and any contributions to taxable accounts.

I'd also talk to your husband about being more upfront about big changes. Remember MMM's $10 rule. Its not being naggy, you guys need to be partners in all of this.

desrever

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Re: Empty taxable account to pay down student loans?
« Reply #6 on: December 14, 2013, 12:23:28 PM »
Can you take a loan from your TSP?

Nords

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Re: Empty taxable account to pay down student loans?
« Reply #7 on: December 14, 2013, 07:46:35 PM »
Thank you for the reply.  His rates went up b/c he finished school and consolidated the loans into one.  I'm not sure if he know that would lead to the higher rate, as I tried to trust him with his personal business and not be too "naggy"  :-)  He says they are fixed now.
That sounds suspiciously like the sneaky trick pulled by some lenders when the Servicemembers Civil Relief Act is invoked.  The SCRA requires loans to be reduced to 6%, and it does not permit to be interest rates to be raised to 6%. 

When you say "they are fixed now", does that mean the 6% problem has gone away, or does that mean the interest rate has gone from 3% variable rate to a 6% fixed rate?  Is there any period of rescission that will allow him to revert to the previous payment terms?  Because as a financial strategy, this one seems to have backfired. 

By any chance, are you homeowners who can tap a PenFed home equity line of credit?  That would give you a low-interest HELOC to use for paying off the student loan.