Author Topic: Just graduated, weighing out student debt vs investing  (Read 3393 times)

iva

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Just graduated, weighing out student debt vs investing
« on: July 23, 2017, 01:02:13 PM »
Sup Mustachios. I've been reading MMM for a few years now and it's really been inspiring to me. The 2008 recession was quite a jarring experience for my whole family so I've been worried about money and over-spending from a young age. Luckily, I've made some strides to be able shed that anxiety and now I'd like to talk about my future!

I just finished four years of college with two degrees to show for it and an $88K starting salary or about $64K after taxes. Now, despite working part time throughout college, plus working as an RA for room and board for 2 years, two summers of full-time work, and not actually being old enough to go out to bars for most of that time, I've still got about $75K in student debt (about half of which was for that second degree; the tuition and fees were high for a state school and I didn't get many scholarships). About $20K of that debt is in the form of a private loan that I plan to pay off within the next year or less. The rest is federal debt that enters repayment in March.

So my main question now is: do I rush to pay off the rest, or is my money better off invested elsewhere? I have various interest rates on each semester's loans, ranging from about 3.8% up to 6.3%. I think I could pay all of the debt off in two years, but I'm not sure if that's the best use of my money since an index fund would likely have a higher return than those rates. I do fear future financial instability, but I also don't want to make sub-optimal financial decisions out of an irrational fear. Although I have no payments due until March, but have been paying all of the interest down already and I'll probably request the Revised Pay As You Earn plan, at least to start.

As an aside, I'm definitely already putting as much as my employer will match into my 401K before paying down debt. Hopefully, no matter what, I'm well on my way to FI. I'm also hoping I can somehow help my parents retire soon, so if anyone has experience with that kind of process, please share....

Thanks MMM!
« Last Edit: June 06, 2019, 02:09:18 PM by iva »

Dicey

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Re: Just graduated, weighing out student debt vs investing
« Reply #1 on: July 23, 2017, 01:15:46 PM »
I'd look into lowering the higher SL rates as soon as you can. Then I'd do the things that have annual limits and matching, such as your 401k (yay you!) and Roth and HSA if you're eligible. Focus on keeping your cost of living low, investing regularly and then laser in on slaying the SL's with all your might.

Should you find yourself one day with, say 20k left in SL's at <3%, I'd revise the strategy, but for now,  I'd start with the above.

iva

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Re: Just graduated, weighing out student debt vs investing
« Reply #2 on: July 23, 2017, 01:27:47 PM »
I'd look into lowering the higher SL rates as soon as you can. Then I'd do the things that have annual limits and matching, such as your 401k (yay you!) and Roth and HSA if you're eligible. Focus on keeping your cost of living low, investing regularly and then laser in on slaying the SL's with all your might.

Should you find yourself one day with, say 20k left in SL's at <3%, I'd revise the strategy, but for now,  I'd start with the above.

I know I can set aside money in an HSA/FSA and get about a $500 match each year, but I've never really considered doing that. I'm only 21 and don't plan on having children/dependents any time soon, if ever. Should I still contribute to get the match? I guess I should expect health expenses eventually... As for the 401k, as I understand it, I can contribute with any combination of pre-tax and Roth so I need to figure that out, and my employer contributes an extra $8K or so each year in matching at my salary. I'm thinking I should do pre-tax, though, since I don't plan to be in a higher tax bracket post-retirement?

As far as cost of living, I'm still getting a feel for the area but it seems like I can keep it down to $17k in annual expenses pretty comfortably around here. So it's not that I'm worried about the loans necessarily - but I've seen advice to only make minimum payments if the rate is as high as 7%, and to put the rest in the market. Why do you advise <3%?
« Last Edit: July 23, 2017, 01:44:46 PM by mariah »

MDM

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Re: Just graduated, weighing out student debt vs investing
« Reply #3 on: July 23, 2017, 03:01:08 PM »
Should I still contribute to get the match?
Yes.

See Investment Order for general suggestions.

See also SoFi or other vendor about refinancing the SLs to lower rates.

iva

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Re: Just graduated, weighing out student debt vs investing
« Reply #4 on: July 23, 2017, 06:04:02 PM »
Should I still contribute to get the match?
Yes.

See Investment Order for general suggestions.

See also SoFi or other vendor about refinancing the SLs to lower rates.

Thank you, I hadn't seen that thread. I need to up my financial literacy! I have looked into SoFi but they did not offer a much better rate.

MDM

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Re: Just graduated, weighing out student debt vs investing
« Reply #5 on: July 23, 2017, 07:33:26 PM »
Thank you, I hadn't seen that thread. I need to up my financial literacy!
So did we all when starting.

Just as with school work, make a reasonable effort to understand, then ask questions when needed.  Good luck!

Lady SA

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Re: Just graduated, weighing out student debt vs investing
« Reply #6 on: July 24, 2017, 08:23:41 AM »
If Sofi didn't offer significantly lower rates, you can also try Earnest (link in my sig).
I'd try just refinancing the highest rate loan(s), not consolidate all of your loans. Rates of 3.8% are fantastic and if those are fixed you'll want to keep those. Are your loans fixed rate or variable rate?

Drifterrider

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Re: Just graduated, weighing out student debt vs investing
« Reply #7 on: July 24, 2017, 08:35:57 AM »
How much money do you have (your emergency fund)?

robartsd

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Re: Just graduated, weighing out student debt vs investing
« Reply #8 on: July 24, 2017, 09:27:20 AM »
I know I can set aside money in an HSA/FSA and get about a $500 match each year, but I've never really considered doing that. I'm only 21 and don't plan on having children/dependents any time soon, if ever. Should I still contribute to get the match? I guess I should expect health expenses eventually...
If you are healthy and qualify for a Health Savings Account, it is in your financial interests to use it to save on taxes taxes. Money goes into and grows within a HSA pre-tax. Money spent on medical comes out of a HSA tax free. Any thing remaining in a HSA when you reach retirement age can be used just like a traditional IRA (taxed as income when dispersed). To qualify for a HSA you must have a qualifying high-deductible medical insurance plan (usually a good idea if you're healthy and can meet the out of pocket match if needed). I'm a little concerned because you listed HSA/FSA - Flexible Spending Accounts (which can be either medical or childcare) are very different than Health Savings Accounts. You should not contriubte any more to a Flexible Spending Account than you EXPECT to spend in a year - any excess is lost. FSA can help spend on qualifying expenses tax free, but cannot be used as savings.

So it's not that I'm worried about the loans necessarily - but I've seen advice to only make minimum payments if the rate is as high as 7%, and to put the rest in the market. Why do you advise <3%?
Carrying loans at 7% in order to invest more in a taxable account is not wise. Paying off a fixed rate loan has a guarenteed rate of return (the interest rate), I don't think anyone here thinks market returns are strong enough to compete with a guarenteed 7% rate of return. Employer matches are the only opportunities people usually get to exceed 7% guarenteed returns.

iva

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Re: Just graduated, weighing out student debt vs investing
« Reply #9 on: July 24, 2017, 10:58:38 AM »
How much money do you have (your emergency fund)?


Enough to cover three months' expenses in case of a layoff and to pay the deductible for my car and renter's policies in case of catastrophe (I'm required to have the renter's policy but I find it worthwhile regardless). It's in a decently high-interest savings account, though the amount is small enough that interest doesn't make much of a difference.


I'm a little concerned because you listed HSA/FSA - Flexible Spending Accounts (which can be either medical or childcare) are very different than Health Savings Accounts. You should not contriubte any more to a Flexible Spending Account than you EXPECT to spend in a year - any excess is lost. FSA can help spend on qualifying expenses tax free, but cannot be used as savings.


Yeah, I thought I had a choice between the two but I just looked into it and it's just an FSA with a separate management tool for health expenses. So it's use it or lose it. Much less incentive to contribute there, but I'll still crunch some annual estimates since I could get an employer match. Thanks for pointing out the difference.


If Sofi didn't offer significantly lower rates, you can also try Earnest (link in my sig).
I'd try just refinancing the highest rate loan(s), not consolidate all of your loans. Rates of 3.8% are fantastic and if those are fixed you'll want to keep those. Are your loans fixed rate or variable rate?


Thanks! They're fixed. I'll look into Earnest and try getting a new estimate from SoFi since it's been a while.

robartsd

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Re: Just graduated, weighing out student debt vs investing
« Reply #10 on: July 24, 2017, 11:33:04 AM »
I'm a little concerned because you listed HSA/FSA - Flexible Spending Accounts (which can be either medical or childcare) are very different than Health Savings Accounts. You should not contriubte any more to a Flexible Spending Account than you EXPECT to spend in a year - any excess is lost. FSA can help spend on qualifying expenses tax free, but cannot be used as savings.
Yeah, I thought I had a choice between the two but I just looked into it and it's just an FSA with a separate management tool for health expenses. So it's use it or lose it. Much less incentive to contribute there, but I'll still crunch some annual estimates since I could get an employer match. Thanks for pointing out the difference.
In that case, you just want to figure out your expected qualified medical expenses and fund it just enough that you use the funds. A tax break and employer contribution towards expected medical expenses are nice but won't make much financial difference to a young, healthy person with no dependants.

tsmith321

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Re: Just graduated, weighing out student debt vs investing
« Reply #11 on: July 24, 2017, 12:27:40 PM »
I would suggest debt snowballing the higher interest loans first, and work your way down.  You want to get rid of these as soon as possible.  Freeing up cash flow helps in so many decisions down the road.  Trust me when I tell you, you do not want to have these loans around for the long term.  I think two years is realistic, and then you will have the rest of your life to invest.  I was right where you were not too long ago, and the only debt I have now is my very manageable mortgage at 3.75%.

czr

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Re: Just graduated, weighing out student debt vs investing
« Reply #12 on: August 08, 2017, 12:07:19 PM »
I am going to adjust something different for this first half year: If you are just starting work right now you will only have less than half a year of that income so you can really take advantage of some tax breaks for people in the lower tax brackets only the rest of 2017. Definitely be super frugal this half year and max out your HSA, ROTH IRA, 401k to match, maybe FSA (only if you can spend it buying contacts and health stuff because you have to use it by Mar 2018). If you have any money left over you can max out your 401k. I would do this even before paying extra on your student loans. And next year you will have full annual income so you can adjust your tax optimization strategy so you are investing less and paying more to the 6.3% loan. Next year you will be in the 25% bracket and this year you could squeeze into the 15% and maybe even the 10% bracket.

H.S.A    3,400.00
ROTH IRA    5,500.00
401K    18,000.00
FSA (optional)    2,550.00
    29,450.00
« Last Edit: August 08, 2017, 12:11:27 PM by czr »

Goldielocks

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Re: Just graduated, weighing out student debt vs investing
« Reply #13 on: August 08, 2017, 12:53:36 PM »
Analyst jobs can be fairly intense / high stress.

Some people need to switch to a related job after a couple of years, or you may get a great offer in a LCOL area with lower pay.   I would definitely set up the loans and pay down a major chunk of it, to allow me the freedom to move forward with new goals (home, new job, car, or whatever), within 3 years.

So -- 401K Match - always.
Then drop the SL debt to a reasonable amount, with lower rates as quickly as possible.

Finances_With_Purpose

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Re: Just graduated, weighing out student debt vs investing
« Reply #14 on: August 24, 2017, 05:40:39 AM »
I'll differ with some and relay the advice I was given: your student loans ARE your investment for now.  They're the worst type of debt to have.  You pay them, and you'll have crazy flexibility.  You could start your own business off your friend's sofa if you like.  They're the biggest impediment to doing all kinds of crazy fun things in life. 

I paid every dime on mine and never looked back.  Once they were done, life really moved forward, too.  I thought, at the time, I would stay in my first job for years, too, so I had no rush to repay...but by two years in, I was already there longer than average, and we had people burning out constantly.  So I was glad to have options when I needed them. 

Now, all my money makes money for me. 

robartsd

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Re: Just graduated, weighing out student debt vs investing
« Reply #15 on: August 28, 2017, 01:03:13 PM »
I'll differ with some and relay the advice I was given: your student loans ARE your investment for now.  They're the worst type of debt to have.  You pay them, and you'll have crazy flexibility.  You could start your own business off your friend's sofa if you like.  They're the biggest impediment to doing all kinds of crazy fun things in life.
I agree that having debt is a big impediment to having financial flexibility. I don't see any reason to lable student debt "the worst type of debt to have." I'd say high interest variable rate credit card debt is likely the worst type of debt most people have. I agree that labeling student loans "good debt" is misleading many; however, student loans often have more flexibility (defferment, forebearance, and forgiveness programs) that simply does not exist with any other loan type. The only time student loans are the worst type of debt is if you file for bankruptcy - pretty much the only unsecured debt that cannot be dismissed in a bankruptcy ruling.

As an investment, paying of any fixed rate loan is going to have a guarenteed nominal rate of return. Only time will tell if this return is greater than or less than what an alternative "risky" investment would get you instead. Personally I'm happy with my choice to pay off loans with rates higher than 5% and make minimum payments on student loans and an auto loan with rates below 3% (these will all be paid off in about 2.5 more years - meanwhile the aggregate return in my IRAs actually outperformed paying off even my highest rate student loan).

Finances_With_Purpose

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Re: Just graduated, weighing out student debt vs investing
« Reply #16 on: August 29, 2017, 10:28:09 PM »
I'll differ with some and relay the advice I was given: your student loans ARE your investment for now.  They're the worst type of debt to have.  You pay them, and you'll have crazy flexibility.  You could start your own business off your friend's sofa if you like.  They're the biggest impediment to doing all kinds of crazy fun things in life.
I agree that having debt is a big impediment to having financial flexibility. I don't see any reason to lable student debt "the worst type of debt to have." I'd say high interest variable rate credit card debt is likely the worst type of debt most people have. I agree that labeling student loans "good debt" is misleading many; however, student loans often have more flexibility (defferment, forebearance, and forgiveness programs) that simply does not exist with any other loan type. The only time student loans are the worst type of debt is if you file for bankruptcy - pretty much the only unsecured debt that cannot be dismissed in a bankruptcy ruling.

As an investment, paying of any fixed rate loan is going to have a guarenteed nominal rate of return. Only time will tell if this return is greater than or less than what an alternative "risky" investment would get you instead. Personally I'm happy with my choice to pay off loans with rates higher than 5% and make minimum payments on student loans and an auto loan with rates below 3% (these will all be paid off in about 2.5 more years - meanwhile the aggregate return in my IRAs actually outperformed paying off even my highest rate student loan).

It seems like we agree on most things.  And you've even nailed why I call it the worst debt ever: you'll never, ever, be free of it.  All you can do is repay.  Get injured?  It's often deducted from your benefits.  Lose a job?  Too bad, interest accrues even faster.  Want to switch careers, and need more training?  Same story.  Recession kill your income?  Ah well, those loan payments remain there.  You can get totally upside-down/underwater on student loans and you may not realize it until you're really far down that road.  (Some of my friends who deferred their loans realized that the hard way.) 

Only a lifetime will tell whether the investments - and the extra risk on top - paid off, but you'll be absolutely free as soon as the loans are gone.  And your income requirements drop.  You can do crazy things, living on very little.

You can read my story here (not even on my blog: https://www.lessdebtmorewine.com/finances-with-purpose-paid-off-200k-of-student-loan-debt/), and know that repayment went fabulously well for me - even though I put it off altogether for the first two years.  Still I recommend paying loans first regardless. 

Coming right out of school, you're more likely to be fired during a recession, lose your job, realize you want to change careers, and so on.  I have friends who cratered coming out and are still paying massive loans years and years later.  The future is hard to predict, and I'd want to have maximum flexibility going forward, rather than dragging a bankruptcy-proof anchor. 

There's also a big opportunity cost to carrying all that debt: it requires you to maintain a certain salary, or defer repayment further (say, by income-based repayment), simply putting off the pain.  But that prevents you from taking some of the absolute best jobs - jobs that may not pay well but will give a young worker tremendous amounts of experience.  (E.g., some government jobs.)  That may be invaluable early on in your working life. 

Sounds like you were wise with things (robartsd) - I'm not implying otherwise, and it has clearly worked out well for you.  I actually don't disagree all that much with your strategy, especially once you're several years out.  By then, folks can adjust because they're a few years out and have a firm handle on the work world and their place in it.  They know a lot more about themselves. 

But at year one (where op is), I'd pay 100% on loans.  It's a guaranteed return.  That's the wisdom my millionaire mentors gave me when I graduated, and it's the same I dispense to graduates today. 

robartsd

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Re: Just graduated, weighing out student debt vs investing
« Reply #17 on: August 30, 2017, 11:32:28 AM »
My total student loan debt was much less that yours FWP. OP's balance is half of what yours was. All of his loans are at a higher rate than the loans I chose not to accelerate (but if I did have loans at 3.8% I'm uncertain how much I would accelerate repayment). I certainly agree that the flexibility student loans provide (defferment, forebearence, and income based repayment) is a double edged sword that lets some people do financially stupid things (take on way too much debt, let interest balloon the loan balance).

I like the advice of using this year with only part-year full-time earings to put some money in a Roth IRA. I'd also make sure to get any available 401k match. Some would argue that you should max all your tax advantaged savings before accellerating payment on a 6.3% student loan, but I agree with FWP's advice to accelerate this loan payment. Each time I paid off a loan, I'd reevaluate how accelerating pay off of the next highest rate loan fits into my overall financial picture. At some point, your increased work experience, reduced total loan balance, reduced minimum loan payment, and reduced aggregate interest rate will be sufficient that you feel confident in choosing to maximize your tax addvantaged savings over continuing to accelerating loan repayment.

AmberTheCat

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Re: Just graduated, weighing out student debt vs investing
« Reply #18 on: August 31, 2017, 07:41:17 PM »
Ok: question if you dont mind from a soccer-type mom with 4 kids. What were your degrees in? and analytics  . . . .  is that maybe CS related or Financial related? Just curious as my HS sophomore is looking/thinking about careers/degrees and i'm impressed by your starting salary. thanks!

nawhite

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Re: Just graduated, weighing out student debt vs investing
« Reply #19 on: September 01, 2017, 01:48:44 PM »
The Investment Order thread here is the best answer here: https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

Quote
Follow that investment order:
0. Establish an emergency fund to your satisfaction           
1. Contribute to your 401k up to any company match           
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.           
3. Max HSA             
4. Max Traditional IRA or Roth or backdoor Roth (in best to worst order) based on income level           
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)           
6. Fund mega backdoor Roth if applicable           
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.           
8. Invest in a taxable account with any extra.

All other advice is based on feelings and math beats feelings in long term returns a statistically significant portion of the time.

iva

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Re: Just graduated, weighing out student debt vs investing
« Reply #20 on: September 02, 2017, 01:35:50 PM »
Ok: question if you dont mind from a soccer-type mom with 4 kids. What were your degrees in? and analytics  . . . .  is that maybe CS related or Financial related? Just curious as my HS sophomore is looking/thinking about careers/degrees and i'm impressed by your starting salary. thanks!

Hi Amber. I have a BA in Biology (was pre-med but decided med school was not the life for me) and got an MS in Business Analytics. I will say that I've seen the stats for my MS program and the average starting salary is more around $65k. A CS degree from a good undergraduate school, in the hands of a driven individual, would probably offer a surer payoff. The pivot to the MS was an expensive one.