Author Topic: Investing vs. Paying Down Student Loan  (Read 4471 times)

Hedge_87

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Investing vs. Paying Down Student Loan
« on: July 05, 2014, 10:24:27 AM »
MOD NOTE: This discussion was split off from a conversation about when you became debt free, here: http://forum.mrmoneymustache.com/share-your-badassity/when-did-you-become-debt-free/

Got it. I think he just means he wishes he had access to the inflation hedge for a longer period. Hard to take out a student loan when you're in your 30's and not attending school you know.

Yea. I was just sitting here thinking about how I wish I had taken out student loans and bought property with them. :/  Although my parents would have probably flipped since they funded my studies.

Yes, this exactly.  We paid for our Master's degrees in cash and really regret that, I wish we had more student loans. :)

Anyways, I'll let the thread go back to people listing when they go debt free (or when they hope to) - cause debt free is an admirable goal!

Just wanted to give some food for thought that it's not the only path out there, and in fact may be a slower path to FIRE than utilizing leverage.  :)

I've never thought about it this way. I was debt free until I got married. DW has ~40K in student loans at different interest rates (most at 2.75%). Are you suggesting that I'm better off to just pay the minimum amount on these and invest the difference?
« Last Edit: July 05, 2014, 01:40:53 PM by arebelspy »

arebelspy

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Re: Investing vs. Paying Down Student Loan
« Reply #1 on: July 05, 2014, 10:30:40 AM »
Got it. I think he just means he wishes he had access to the inflation hedge for a longer period. Hard to take out a student loan when you're in your 30's and not attending school you know.

Yea. I was just sitting here thinking about how I wish I had taken out student loans and bought property with them. :/  Although my parents would have probably flipped since they funded my studies.

Yes, this exactly.  We paid for our Master's degrees in cash and really regret that, I wish we had more student loans. :)

Anyways, I'll let the thread go back to people listing when they go debt free (or when they hope to) - cause debt free is an admirable goal!

Just wanted to give some food for thought that it's not the only path out there, and in fact may be a slower path to FIRE than utilizing leverage.  :)

I've never thought about it this way. I was debt free until I got married. DW has ~40K in student loans at different interest rates (most at 2.75%). Are you suggesting that I'm better off to just pay the minimum amount on these and invest the difference?

I certainly would.  Whether or not you should will depend on your goals, risk tolerance, attitude towards debt, etc.

Mathematically you will very likely end up with more money paying the SL minimums and investing any extra money you have than sending that extra money to the SLs.
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Hedge_87

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Re: Investing vs. Paying Down Student Loan
« Reply #2 on: July 05, 2014, 10:53:22 AM »
Just when I think I have things figured out arebelspy comes by and flips my whole world upside down. I feel like DW and I are in stable careers and we live off the smaller paycheck so  don't see a problem with taking on some risk. My biggest hurdle will be my attitude towards debt.

arebelspy

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Re: Investing vs. Paying Down Student Loan
« Reply #3 on: July 05, 2014, 11:08:02 AM »
Just when I think I have things figured out arebelspy comes by and flips my whole world upside down. I feel like DW and I are in stable careers and we live off the smaller paycheck so  don't see a problem with taking on some risk. My biggest hurdle will be my attitude towards debt.

lol.  Glad I posted it then. :)

Your student loan interest is tax deductible too.  It's at a rate that's lower than inflation, which means it's basically free money.  Run some excel scenarios with investing versus paying off, but historically there is no 20-30 year period where you wouldn't have made a good chunk of money investing instead of paying off that debt.

This post may help convince you too:
http://www.getrichslowly.org/blog/2008/12/16/how-much-does-the-stock-market-actually-return/

On a short time period, obviously the stock market could be down while you'd have made 2.75% paying off the student loans, but if you look it it over a long time period, you should end up with more money not paying it off.

Note: this is if and only if you have the discipline to invest the money you'd be using to pay it off.  If you're going to spend it, obviously paying down the mortgage is better.

EDIT: We should let the thread get back on topic, feel free to start a new thread if you'd like to discuss more. :)
« Last Edit: July 05, 2014, 11:09:54 AM by arebelspy »
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

medinaj2160

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Re: Investing vs. Paying Down Student Loan
« Reply #4 on: July 05, 2014, 12:12:23 PM »
Just when I think I have things figured out arebelspy comes by and flips my whole world upside down. I feel like DW and I are in stable careers and we live off the smaller paycheck so  don't see a problem with taking on some risk. My biggest hurdle will be my attitude towards debt.

lol.  Glad I posted it then. :)

Your student loan interest is tax deductible too.  It's at a rate that's lower than inflation, which means it's basically free money.  Run some excel scenarios with investing versus paying off, but historically there is no 20-30 year period where you wouldn't have made a good chunk of money investing instead of paying off that debt.

This post may help convince you too:
http://www.getrichslowly.org/blog/2008/12/16/how-much-does-the-stock-market-actually-return/

On a short time period, obviously the stock market could be down while you'd have made 2.75% paying off the student loans, but if you look it it over a long time period, you should end up with more money not paying it off.

Note: this is if and only if you have the discipline to invest the money you'd be using to pay it off.  If you're going to spend it, obviously paying down the mortgage is better.

EDIT: We should let the thread get back on topic, feel free to start a new thread if you'd like to discuss more. :)


Most of the people on this forum are trying to retire early (really early) so they are not going to have benefit of compounding the money for a long period of time.

Hotstreak

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Re: Investing vs. Paying Down Student Loan
« Reply #5 on: July 05, 2014, 12:32:33 PM »
Just when I think I have things figured out arebelspy comes by and flips my whole world upside down. I feel like DW and I are in stable careers and we live off the smaller paycheck so  don't see a problem with taking on some risk. My biggest hurdle will be my attitude towards debt.

lol.  Glad I posted it then. :)

Your student loan interest is tax deductible too.  It's at a rate that's lower than inflation, which means it's basically free money.  Run some excel scenarios with investing versus paying off, but historically there is no 20-30 year period where you wouldn't have made a good chunk of money investing instead of paying off that debt.

This post may help convince you too:
http://www.getrichslowly.org/blog/2008/12/16/how-much-does-the-stock-market-actually-return/

On a short time period, obviously the stock market could be down while you'd have made 2.75% paying off the student loans, but if you look it it over a long time period, you should end up with more money not paying it off.

Note: this is if and only if you have the discipline to invest the money you'd be using to pay it off.  If you're going to spend it, obviously paying down the mortgage is better.

EDIT: We should let the thread get back on topic, feel free to start a new thread if you'd like to discuss more. :)


Most of the people on this forum are trying to retire early (really early) so they are not going to have benefit of compounding the money for a long period of time.


Ahh, but you can keep that student loan after you retire too, and expect the returns on your invested dollars to continue producing more income than you pay in interest.  That money is still compounding while it is being used over the next 60+ years :).

stevesteve

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Re: Investing vs. Paying Down Student Loan
« Reply #6 on: July 05, 2014, 12:33:37 PM »
Just when I think I have things figured out arebelspy comes by and flips my whole world upside down. I feel like DW and I are in stable careers and we live off the smaller paycheck so  don't see a problem with taking on some risk. My biggest hurdle will be my attitude towards debt.

lol.  Glad I posted it then. :)

Your student loan interest is tax deductible too.  It's at a rate that's lower than inflation, which means it's basically free money.  Run some excel scenarios with investing versus paying off, but historically there is no 20-30 year period where you wouldn't have made a good chunk of money investing instead of paying off that debt.

This post may help convince you too:
http://www.getrichslowly.org/blog/2008/12/16/how-much-does-the-stock-market-actually-return/

On a short time period, obviously the stock market could be down while you'd have made 2.75% paying off the student loans, but if you look it it over a long time period, you should end up with more money not paying it off.

Note: this is if and only if you have the discipline to invest the money you'd be using to pay it off.  If you're going to spend it, obviously paying down the mortgage is better.

EDIT: We should let the thread get back on topic, feel free to start a new thread if you'd like to discuss more. :)


Most of the people on this forum are trying to retire early (really early) so they are not going to have benefit of compounding the money for a long period of time.

Of course they are!  You can't retire early if your money doesn't 'compound' over a long period of time.

arebelspy

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Re: Investing vs. Paying Down Student Loan
« Reply #7 on: July 05, 2014, 01:36:58 PM »
Most of the people on this forum are trying to retire early (really early) so they are not going to have benefit of compounding the money for a long period of time.

Your investment timeframe is the rest of your life, not your time from now to ER.

Keep paying the minimum and invest the money and the timeframe you should be comparing is the length of time it will take to pay it off at the minimum.  How long is that period, and what is the liklihood that the market will be > 2.75% over that time period?  That's the question, and the answer is that it's very likely best to invest it, rather than pay that 2.75% loan down.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Hedge_87

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Re: Investing vs. Paying Down Student Loan
« Reply #8 on: July 05, 2014, 02:13:09 PM »
Sorry for derailing the Debt free thread everybody. I've always considered student loan debt as bad debt on the grounds of not having an asset to sell and pay of the balance if need be. I'll ask your opinion on my personal situation. I got a promotion and we had to move out of a house that we bought on foreclosure and where in the process of fixing up. Being in rural KS the real estate market isn't the fastest moving. We where concerned about having our house sit on the market for a while so we decided our best option was to rent for a little until we could get our equity out of the house.
  To make a long story short we had a buyer for the property before we even got it on the market (social media doesn't have shit on small town gossip lol). We have made a pretty decent profit on the sale and are back in the market to buy a house again. My question is when we find a place should we?
A) put all the money we have from the sale into a down payment for a new mortgage If we find something in the price range we are looking at it should be ~50%.
B) Put only 20% down on the house and use the rest to pay of the two really high interest sl of my wife 6.8% interest
C) Put only 20% down on the house fully fund or Roths which would happen anyway for the year and put the rest on the 6.8% interest loans to speed up paying them off  the rest are at 2.75%

arebelspy

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Re: Investing vs. Paying Down Student Loan
« Reply #9 on: July 05, 2014, 03:34:28 PM »
Here's what I'd do: Assuming the new loan is at less than 6.8%, pay off the SLs at that rate, keep the ones at 2.75%, put whatever down payment you need to not have PMI, and if there's any left after the down payment and paying off the 6.8% loans, invest the rest or put it as more down, depending on the interest rate of the new mortgage (most likely the former, based on today's rates).
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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G-dog

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Re: Investing vs. Paying Down Student Loan
« Reply #10 on: July 05, 2014, 06:11:29 PM »
Sorry for derailing the Debt free thread everybody. I've always considered student loan debt as bad debt on the grounds of not having an asset to sell and pay of the balance if need be.

I don't consider this as derailing at all - I think this, and Arebelspy's early post on the original thread brought up important different perspectives.

We all want to figure out the smartest way to use our money - and the answer is fact dependent. I was biased, based on my parents views, that all debt is bad.  But clearly, if you can use money that costs you 2% and invest it to make %8 (and maybe get some tax benefit on top of it) - that is some important information to consider vs. your specific facts, comfort level, etc.

arebelspy

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Re: Investing vs. Paying Down Student Loan
« Reply #11 on: July 05, 2014, 06:45:24 PM »
Sorry for derailing the Debt free thread everybody. I've always considered student loan debt as bad debt on the grounds of not having an asset to sell and pay of the balance if need be.

I don't consider this as derailing at all - I think this, and Arebelspy's early post on the original thread brought up important different perspectives.

Yeah, that's why I posted it initially - even though it was slightly OT - to hopefully get people thinking/considering their goals and questioning the best way to achieve them (whether that's getting to debt free as soon as possible, or using debt to get you there faster).

But once we got into a side conversation, I didn't want to derail the original, so I split it off.

We all want to figure out the smartest way to use our money - and the answer is fact dependent.

True story.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Hedge_87

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Re: Investing vs. Paying Down Student Loan
« Reply #12 on: July 05, 2014, 07:41:40 PM »
Thanks everybody for the food for thought. I was kind of closed minded in the line of thought that the only good debt is zero debt. I've been raised to save money not invest it. Like i said, thats how I found MMM with the first world problem of what to do with the excess. I guess I just really need to start learning more about the investment side of the equation.