Author Topic: Would you pay off this little student loan?  (Read 4863 times)

mozar

  • Magnum Stache
  • ******
  • Posts: 2963
Would you pay off this little student loan?
« on: August 29, 2015, 06:31:39 PM »
I know it's an individual judgement, but bouncing off ideas would help.
Here are the details:
Loan 1: $7k at 2.8% currently paying
Loan 2: $2k at 4.5% pay back starts 12/01/16
Loan 3: $3500 at 4.5 % pay back starts 01/01/16

Gross salary: $79,500 (just got a 6 % raise)
Tenant/roommate $6k

Monthly bills:
Mortgage/HOA/Taxes: $1230 (15yr 3.5%)
Electricity: $100
Bus/metro:$150
Phone: $37
Internet: $50
Water: $30
Grocery: $250
Loan 1: $110
Misc: $300 this is averaged out for the year, included 2 weddings, a coat, tests, vitamix, birthday dinners for parents, food trucks I can't resist...

Assets
401k: $55k (bucket is full)
IRA: $8k (bucket is full)
Other mutual fund: $8k
HSA: $2500 (118 goes here every month)

Liabilities:
Credit card:$1k (will pay soon)

Next year
Will pay $1k for a vacation with mom
Will pay $6k for badly needed insulation in house

Question: I hate to have to start paying another $100 a month starting in January '16.  Seems silly for just $3500 and the interest is so high. Or should I just sit tight?
« Last Edit: August 29, 2015, 06:33:46 PM by mozar »

Bracken_Joy

  • Walrus Stache
  • *******
  • Posts: 8852
  • Location: Oregon
Re: Would you pay off this little student loan?
« Reply #1 on: August 29, 2015, 06:35:05 PM »
Do you have any cash on hand? For the annoyance factor, I would pay the two 4.5% loans and have them out of my hair, but it depends on how much of a cash buffer you keep and how likely you are to need it. (Ie- do you have dependents? An old car? A medical history?) You pretty much need to decide for yourself whether having them off your plate is better, and freeing up that cash flow, or if seeking higher returns and maintaining a cash buffer are priority.

mozar

  • Magnum Stache
  • ******
  • Posts: 2963
Re: Would you pay off this little student loan?
« Reply #2 on: August 29, 2015, 06:48:34 PM »
No dependents, don't own a car, no complicated medical history. Job is as secure as jobs are these days. I don't keep cash on hand. My CC goes up to 8k and I will be depositing at least another 8k over the next few months into after tax vanguard index funds.
It's hard to quantify annoyance factor but $3500 over 10 years at 6% is 6400.  I will probably end up paying about 4k over the next 3 years if I don't pay it off.

Kaikou

  • Pencil Stache
  • ****
  • Posts: 503
  • Location: United States
  • Kermit is like a box of chocolates
Re: Would you pay off this little student loan?
« Reply #3 on: August 29, 2015, 06:59:28 PM »
yes

CmFtns

  • Pencil Stache
  • ****
  • Posts: 583
  • Age: 28
  • Location: Melbourne, Fl
Re: Would you pay off this little student loan?
« Reply #4 on: August 29, 2015, 07:02:10 PM »
Personally I would pay the loan off just so it was not there. Eventually they will have to be paid back and it is nice to just not have debt. With the loans being relativelly small and with your salary you really should be able to knock them out quickly just to simplify your situation.

protostache

  • Pencil Stache
  • ****
  • Posts: 896
Re: Would you pay off this little student loan?
« Reply #5 on: August 29, 2015, 07:07:11 PM »
Your monthly cash flow looks sort of like this:

In: $5,000 ($4,500 net salary + $500 tenant)
Out: $2,375
Net: $2,625

You need $7,000 for short term savings goals, let's say targeting May 2016. That's 9 months, meaning you should put away $778/mo, leaving you with $1,847/mo free cash flow. Your total non-mortgage debts are $13,500 (including the cc). If you put all of your free cash toward the debt you can be completely done with it all in 8 months.

The two little loans are just sitting there waiting to be cash flow bombs. If I were in your shoes I would just pay them off.

Bracken_Joy

  • Walrus Stache
  • *******
  • Posts: 8852
  • Location: Oregon
Re: Would you pay off this little student loan?
« Reply #6 on: August 29, 2015, 07:12:37 PM »
Pay them off, but not if it puts you in CC debt. This is an excellent example of why keeping a cash buffer can be quite useful. If CC debt is a risk, I would wait a couple months to build up the cash first.

forummm

  • Walrus Stache
  • *******
  • Posts: 7396
  • Senior Mustachian
Re: Would you pay off this little student loan?
« Reply #7 on: August 29, 2015, 07:18:00 PM »
I would pay the 4.5% loans off. That's a decent guaranteed return these days. And pay off the CC each month in full.

Debts_of_Despair

  • Pencil Stache
  • ****
  • Posts: 535
  • Location: NY
Re: Would you pay off this little student loan?
« Reply #8 on: August 29, 2015, 07:20:19 PM »
Yes, but I'd take care of the CC first.

mozar

  • Magnum Stache
  • ******
  • Posts: 2963
Re: Would you pay off this little student loan?
« Reply #9 on: August 29, 2015, 07:47:08 PM »
I will pay half the cc on Monday, and the rest with my regular monthly cc payment on the 23rd. I was planning on not investing what I get from the tenant going forward. Good points all around.

MDM

  • Walrus Stache
  • *******
  • Posts: 9494
Re: Would you pay off this little student loan?
« Reply #10 on: August 29, 2015, 08:38:25 PM »
Question: I hate to have to start paying another $100 a month starting in January '16.  Seems silly for just $3500 and the interest is so high. Or should I just sit tight?

Assumptions based on reading (sometimes between the lines) the OP:
1) You already are putting $18K/yr into your 401k and $5500/yr into your traditional IRA.
2) You pay your CC bill in full every month, and $1K is simply the amount currently due.
3) State+local income tax is ~$2K/yr
4) You could set up the SL payments to be automatic each month
5) You will invest any excess cash flow each month (or, better yet, you will set a fixed monthly investment amount and spend only whatever is left over).
6) Market returns will be ~average (i.e., >7%).

Given the items above, and knowing that your effective rate on the 4.5% loans is ~3.4% due to the federal SL interest deduction, I'd pay the loan minimums to get historical market returns instead - which, due to the 15% tax on LTCG and QD need be only ~4% to beat the SL pay-off.

mozar

  • Magnum Stache
  • ******
  • Posts: 2963
Re: Would you pay off this little student loan?
« Reply #11 on: August 29, 2015, 08:47:54 PM »
what does ltcg and qd stand for?

MDM

  • Walrus Stache
  • *******
  • Posts: 9494
Re: Would you pay off this little student loan?
« Reply #12 on: August 29, 2015, 09:40:33 PM »
what does ltcg and qd stand for?
Long Term Capital Gains and Qualified Dividends.

dunhamjr

  • Stubble
  • **
  • Posts: 242
  • Age: 43
  • Location: Kent, WA (Seattle)
  • mustachian in training est. July 14
Re: Would you pay off this little student loan?
« Reply #13 on: August 30, 2015, 05:08:51 PM »
yes.

I wouldn't want to keep it around for 10yrs just to invest elsewhere instead.

the past 18 months I have been attacking all of my and my wife's student loan debt, and our interest rates are better than yours.  I just want them gone so I don't need to consider them anymore.

mozar

  • Magnum Stache
  • ******
  • Posts: 2963
Re: Would you pay off this little student loan?
« Reply #14 on: August 30, 2015, 06:02:35 PM »
Truth is I'm kind of grumpy about it because my balance used to be much much higher. But I'll probably pay it off sooner than later (definitely sooner than 10 years).

rmendpara

  • Pencil Stache
  • ****
  • Posts: 602
Re: Would you pay off this little student loan?
« Reply #15 on: August 30, 2015, 08:24:17 PM »
Mathematically, you should keep the 2.8% loan, and pay down the 4.5% loans once you have the cash (plus a remaining cash buffer) to pay them down. If anything, I would just pay them down over the next year to get rid of them. the amounts are too small to be a big benefit by keeping the low interest rate debt anyway.


Kingsmen

  • 5 O'Clock Shadow
  • *
  • Posts: 9
  • Age: 40
  • Location: California
Re: Would you pay off this little student loan?
« Reply #16 on: August 30, 2015, 11:52:42 PM »
Personally, if you have the cash and your job is pretty secure I would pay them off.  I just paid off my student loans and car in one day.  It was a little depressing seeing my savings balance go from $35,000 to $18,000, but it was a rational decision when I did the math on all the interest I would have otherwise paid.

MDM

  • Walrus Stache
  • *******
  • Posts: 9494
Re: Would you pay off this little student loan?
« Reply #17 on: August 30, 2015, 11:57:56 PM »
Mathematically, you should keep the 2.8% loan, and pay down the 4.5% loans once you have the cash (plus a remaining cash buffer) to pay them down.

Could you explain the math behind that?

boarder42

  • Walrus Stache
  • *******
  • Posts: 7849
Re: Would you pay off this little student loan?
« Reply #18 on: August 31, 2015, 04:58:25 AM »
I wouldn't pay any off early. Invest what you would pay them with in vtsax. Anything under 6% isn't worth paying off faster than the schedule

ShoulderThingThatGoesUp

  • Magnum Stache
  • ******
  • Posts: 3057
  • Location: Emmaus, PA
Re: Would you pay off this little student loan?
« Reply #19 on: August 31, 2015, 05:17:46 AM »
I wouldn't pay any off early. Invest what you would pay them with in vtsax. Anything under 6% isn't worth paying off faster than the schedule

I think 7% is the standard market return people estimate, and you've got to factor in something for the guaranteed return of paying off debt. To me that's worth more than a 1% delta. I have no debt but 4.5% is high enough that paying it off seems reasonable.

That said, these are little loans and there's an argument for going either way. Certainly don't do anything stupid just to pay them off, but emotionally I could see paying them off being very rewarding.

I'm a red panda

  • Walrus Stache
  • *******
  • Posts: 8009
  • Location: United States
Re: Would you pay off this little student loan?
« Reply #20 on: August 31, 2015, 06:41:50 AM »
I would pay of the CC first as it is presumably higher.
Then I would pay off the student loans. It isn't worth the hassle of payments.  Although you may try paying them down to only $1,000 left and then go back to payments and see what happens- when we had just about that we got a forgiveness letter on my husband's loan and never had to pay the last bit.