Morbid Question About Student Loan Repayment

[jax8]

I'm very new to the MMM ways and registered hoping to dive into the community and find motivation to keep going!  So...hello, and thanks for having me!

Can you give me some advice on which debt to pay down first?  Student loan or house?

FFEL Consolidated Student Loan - $62,000 @ 3.75% fixed  ($400 per month payment)

House - $120,000 / 30 year / 5.5% fixed ---> balance of $98,000 / 20 years left


Here's the trick: the student loans belong to my 45 year old husband, and if he were to pass away the loans would die with him.  His parents never co-signed, he took them all out well before we were married, and they are 100% in his name.

He argues that we should ignore the student loans and pay down the house, that way if something were to happen to him the kids and I would have less to owe on the house.  Any extra sent towards the loans would be lost, so he'd rather pay the minimum on the student loan and sink extra into the house.

I know that student loans can't be claimed in bankruptcy, and eventually the government will garnish wages and social security to get their money back.  It's a pretty gross debt to have hanging over our heads.

What would you do?

[MrsPete]

Logic dictates that you are right.  First, your interest rate is higher on your house, so you're losing more as you hold onto that debt.  Second, you're right that if he were to die, that debt would disappear and neither you nor his parents would be "hurt" by that debt. 

However, unless you're skipping some important details, 45 would be pretty young to suddenly keel over.

[czr]

I am following through on this same strategy and using the student loan as some sort of life insurance policy and prioritizing paying off the mortgage and once the house is paid off, focus those payments on the student loans, so I don'e see any problems with it. The other point is you can deduct some of the student loan interest paid on your federal tax return.

[patchyfacialhair]

I'll ignore your concerns OP and simply say that you probably want to go with the higher interest rate to pay it down.

That being said, a quick google search shows 20 year loan rates around 3.625. Is refinancing an option? If yes, do that, then reevaluate. If you get less than the rate for the student loan, then start paying down the student loan more quickly.

The good news? There is no right answer. As long as you're continuing to make the payments on both, any extra you put in is good...who cares if it's mathematically optimal.

[rubybeth]

Not a bad idea. You'd be paying down the higher interest rate house, and if they're federal loans, the option to do forbearance or deferment if something came up, and like you said, the loans would die with him, just in case.

[jax8]

I am following through on this same strategy and using the student loan as some sort of life insurance policy and prioritizing paying off the mortgage and once the house is paid off, focus those payments on the student loans, so I don'e see any problems with it. The other point is you can deduct some of the student loan interest paid on your federal tax return.

I'm glad someone else is doing this!  I'm used to Dave Ramsey's world where all debt must be paid off before you even think of touching your house.  Written in stone/the end.

My husband has had 2 emergency surgeries in the past 3 years.  Round one was for a perforated colon where--thank the lord--no waste had leaked into his abdomen. Round two was this spring, for the gallbladder.  Twice now my perfectly healthy husband has suddenly left me twisting my hands in the lobby of the hospital praying he makes it through surgery. Life isn't guaranteed.

[rageth]

I'm in a very similar boat in terms of debt, but I'm wondering about your retirement? Yes paying off debt is great but the more you put away into retirement now is more you'll have later. I always struggle with what to do with extra money but I keep telling myself that it's more important to invest now and pay off the debt consistently at least until I'm capable of maxing out my retirement accounts.

[jax8]

Our retirement contributions are:

Husband (age 45) - 6% (meets company match) - current balance $37,000

Me (age 37) - 9% (company matches 4%) - current balance $11,000

We're no where near maxing out our contributions at $18K per year.  That would be a little less than half of my salary!  I'd like my husband to up his contributions to 10%, but I think he feels like it's a permanent decision.  Once he submits the request to HR, he'll never be able to change his mind or get his money back if it's needed.  He hems and haws and in the end, leaves it alone.

My balance is so low because, at 32, I got my first REAL ADULT JOB with benefits.  Before that I worked temp agencies, retail, and stayed home with the kids.  His balance is so low because we've lived on a social worker's salary and were always one emergency away from bankruptcy.

We're turning this machine around late in life, but I'm determined to get there!!!! 

[rageth]

Hmmmm what about a Roth IRA? It'd still be money towards retirement and it'd be more accessible in case of an emergency.

[jax8]

Hmmmm what about a Roth IRA? It'd still be money towards retirement and it'd be more accessible in case of an emergency.

Thank you for bringing this up! I didn't know you could take money out of an IRA. I thought it was exactly like a 401K except the money went in after taxes instead of before.

!!!

I had no idea the funds you put in (but not gains) could be withdrawn penalty free after 5 years! I also didn't know that it could be pulled for college expenses, either.  You just made me look into a whole new world...

[rubybeth]

Hmmmm what about a Roth IRA? It'd still be money towards retirement and it'd be more accessible in case of an emergency.

Thank you for bringing this up! I didn't know you could take money out of an IRA. I thought it was exactly like a 401K except the money went in after taxes instead of before.

!!!

I had no idea the funds you put in (but not gains) could be withdrawn penalty free after 5 years! I also didn't know that it could be pulled for college expenses, either.  You just made me look into a whole new world...

There are two types of IRAs:

1) a traditional IRA, sometimes just called an IRA or t-IRA, where you put in money and can get a tax deduction when you file your taxes. The money is essentially pre-tax, like a 401k, but you take out the funds after 59.5 and pay taxes then.

2) a Roth IRA, sometimes just called a Roth (but there are also Roth 401ks), where you put in money AFTER tax (no deduction your taxes when you file), but you can take out the money before 59.5.

The one being recommended to you is the Roth IRA. Please do more reading on both types to make sure you understand the limitations before opening an account.

[sequoia]

Our retirement contributions are:

Husband (age 45) - 6% (meets company match) - current balance $37,000

Me (age 37) - 9% (company matches 4%) - current balance $11,000

We're no where near maxing out our contributions at $18K per year.  That would be a little less than half of my salary!  I'd like my husband to up his contributions to 10%, but I think he feels like it's a permanent decision.  Once he submits the request to HR, he'll never be able to change his mind or get his money back if it's needed.  He hems and haws and in the end, leaves it alone.

My balance is so low because, at 32, I got my first REAL ADULT JOB with benefits.  Before that I worked temp agencies, retail, and stayed home with the kids.  His balance is so low because we've lived on a social worker's salary and were always one emergency away from bankruptcy.

We're turning this machine around late in life, but I'm determined to get there!!!!

That is a great goal to have. Do you and/or hubby have life insurance? Something to consider to make sure the person get left behind is in good shape financially.

[Michael in ABQ]

I would buy some term life insurance for both of you rather than worry about being able to discharge student loan debt if your husband died. $100k of term life insurance will probably be about $10-15/month. Realistically you should probably have $500k or so. I'm younger (32) but I just got a $500k 20-year term policy for $250/year. Granted I'm in excellent health but we bought a $250k policy for my wife who has some medical issues and that was about $300/year.

I would focus on paying off your student loans rather than the mortgage. As you already said the only way to get rid of them is if he dies. If he's uninsurable for medical reasons in the individual market than find some group insurance (like through an employer) that doesn't require a medical exam.

[koshtra]

I think you're having trouble deciding because it really is six of one, half dozen of the other. I'd definitely look into refinancing the mortgage, as Patchy suggested. If you could knock a point or two off the mortgage rate, that might tip the scale. (And it would help your financial situation, in any case!)

The various options -- paying off this loan or that, or investing whatever you can -- seem to me to work out close enough that there isn't really a clear winner. In which case I'd do it however you'd both feel best about, and most motivated for.

I don't really think an early death is likely enough to even figure in the calculations, despite the scary emergency surgeries (yikes!). And I don't think life insurance in your case makes a lot of sense: the main risk you two are facing isn't death, it's ending up with nothing to live on, and sticking your kids with having to take care of you when you're too old to work. Addressing that risk is where I'd throw all my resources.

[jax8]

Just noticed there were more replies on here!  Thank you, everyone!

Term Life Insurance - I have a policy on my own ($250,000 / $260 per year) plus some piddling amount ($10,000?) from work.  Husband has $150,000 policy through work, plus the $62,000 student loan "dies" with him. The purpose of the life insurance is to help the surviving spouse--not set them up for life--so we don't want to invest in larger policies.

With the refinance underway, I upped the student loan monthly payment by $75.  I have 7 years until my oldest hits college--how sad will it be if Dad is still paying on his loans instead of helping his own kid?!?!  The shame of that really hit me this past week and motivated me to divert some more funds to the student loan.