My wife and I are trying to decide whether we should eliminate her student debt before maxing out our tax free accounts (401k, 457, Traditional IRA, and HSA).
Current Liquid Assets:- Savings: $38,000
- Stocks (taxable account): $31,000
Student Loan Information:- $54,000 @ 5.68%
- The minimum payment is $660 per month for 112 months
Tax Information: Expected marginal tax rate - wife and I's combined taxable income $114,000. Since we are filing jointly, this places us in the 22% bracket.
Tax-deferred Investment Options:- My investment choices: S&P 500 index fund with an expense ratio of .45%. Currently placing 7% of my income in 401k. ($5,460 of the max $18,500 contribution - 29% of possible)
- Wife's investment choices: S&P 500 index fund with an expense ratio of .03%. Currently placing 6% of her income in 457/401k. ($2,340 of the max $18,500 contribution - 12% of possible)
(There aren't any total stock market indexes available in our 401k/457s, so I've opted for S&P 500 indexes instead. This is recommended by jcollins as the best alternative (
https://jlcollinsnh.com).)
Based on case study I posted a week ago, there were several people saying that we should use our savings/stocks to pay off the student debt. I figured I'd simplify that case study and focus it on this specific issue. Afterwards, we could rebuild or savings account to comfortable level.
Step 7 of "Investment Order" article states, "Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield." Our student loan's interest rate is below that value, so it sounds like we should perform steps 1-6
before contributing above the minimum payment. Contributing money to all 6 steps would greatly minimize the amount of money above the minimum payment that we could place on the loan. This would result in the loan sticking around for a long time.
I'd assume that this order is based of solid math and statistics, so I imagine we should stick to it?
Second, we have a combined savings/stocks of $69,000. We could liquidate either: a) the majority of the account (~$40,000) or b) the entire loan amount, which would leave us with $15,000 in a savings account. Or perhaps it doesn't make sense to liquidate the taxable stock account, and only contribute a subset of our money from the savings account.
I imagine our decision could greatly impact our ability to retire early, so I wanted to make sure that we are informed with the various options and what makes the most sense. I'm hoping someone with more experience and knowledge than myself could chime in.