Just want to understand the math

[newelljack]

I'm new to all of this (as evidenced by my wacky posts I'm sure) but I just want to check with you guys on my math...

Wife and I currently do not put anything extra into retirement (automatically deducted for CA state teachers retirement plan) and we are down to 12k in student loans, 7k at 6.55% interest, the rest at only 3.15%.

So this is how my math works out. That 7k in student loan debt will cost us $455 this year making minimum payments (7,000 x 0.065 = 455) but we have 1k that I have been throwing towards it recently. Would that 1k be better served going into a 403b pre-tax since our tax rate is nearly 25% (12,000 x 0.25 = 3,000)? Or should I wait until the 7k of high interest is paid first? Is there more to this that I am missing? Would you rather I write a full case study?

[nereo]

I'm new to all of this (as evidenced by my wacky posts I'm sure) but I just want to check with you guys on my math...

Wife and I currently do not put anything extra into retirement (automatically deducted for CA state teachers retirement plan) and we are down to 12k in student loans, 7k at 6.55% interest, the rest at only 3.15%.

So this is how my math works out. That 7k in student loan debt will cost us $455 this year making minimum payments (7,000 x 0.065 = 455) but we have 1k that I have been throwing towards it recently. Would that 1k be better served going into a 403b pre-tax since our tax rate is nearly 25% (12,000 x 0.25 = 3,000)? Or should I wait until the 7k of high interest is paid first? Is there more to this that I am missing? Would you rather I write a full case study?

A full case study would be best.

Without more information I wouldn't pass up the chance to contribute more to your tax-advantaged accounts, but there are other important factors, like the state of your e-fund, annual income, goals, etc.  I'm not sure why your tax rate is "nearly" 25% if we are talking marginal rates.  How quickly can you knock out that 7k @ 6.55%?

[ooeei]

Really it depends.  Retirement stuff gets tricky because you're still taxed, but it's when you retire.  Then again, you dodge capital gains tax by putting money in there (if you would have to pay capital gains tax).

Personally, I'd want the loan out of the way.  The only situation I can think of where I'd rather invest is if next year I'll be maxing out my 403b, so I wouldn't be able to put the money I now have available because the loan is paid off into a tax shelter.  Does that make sense?  If I was planning on contributing $18k to my 403b next year regardless of the loan status, I'd try and get more into it this year even if it means slowing down on the loan.  If I was only planning on contributing $5k next year, I'd just pay off the loan, THEN start putting extra in the 403b.  Basically if you're missing out on 403b capacity by waiting until the loan is paid off to contribute, don't wait.  It doesn't matter much whether you put the extra $7k or so in the 403b this year or next year. 

[sisto]

I'm with nereo, a full case study would be best.

You say you have an extra $1K you have been throwing at the higher interest student loan. Is that $1K extra per month? If' that's the case, I'd be inclined to tell you to definitely knock that out first since it will only take 7 months. At that point I'd then look at maxing out tax advantaged options. We definitely need more details though to provide the best advice.

[MDM]

I'm new to all of this (as evidenced by my wacky posts I'm sure) but I just want to check with you guys on my math...

If you compare paying ahead on the loan vs. investing, all that matters are the two interest rates: what you are paying on the loan vs. what you would get by investing.

Marginal tax rates and other inputs will affect the absolute numbers, but only the two interest rates affect which is better.

So, you pays your money and you takes your chances....

[marty998]

For only $7k, I would kill the loan.

But I am always on the side of killing these type of loans. I like a clean slate.

You then get more cash flow each month to chase those other savings. Math probably works out differently, but there is psychological benefit in killing off obligations.

[rupanama]

Your math should also include the risk associated with investing your money in a 403b: your return there isn't guaranteed. Your return on extra loan payments is guaranteed at the interest rate.

Without more information, I think the following statements might help you make a decision:

- You'll save more in taxes, and you'll potentially have better return on investment, by committing your extra capital to the 403b and paying the minimum on your loans.

- If you value being debt-free, which is a valid intangible to value, then pay off the loan. Even if it's not the most financially valuable choice, it may be the most valuable choice for you psychologically or for your quality of life.

- You could also look at the time-horizon of your investments and interest rate: a guaranteed 6.55% return for 7 months is a great ROI for a 7-month obligation. Then you can focus on getting your pre-tax benefits from the 403b.

[newelljack]

Thanks for all of the help here. I posted the full case study on "New" Family Case Study. MDM helped me with the spreadsheet to calculate the FI timeline, which isn't as bad as I thought. I'll post there now.