Author Topic: Pay off loans now or later?  (Read 2750 times)

stacheasaurus

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Pay off loans now or later?
« on: December 29, 2016, 09:58:12 PM »
The struggle over whether or not to pay off my student loans now or later is a question I have struggled with all year.  Basically, IMO it comes down to how are my other investments doing compared to the interest rate of my student loan.  Seems simple, but the emotional baggage knowing that I am tied to these loans is playing a big part in my decision.  Here are some stats:
  • Age: 24
  • Income: $65k/yr

  • Student Loan: $23,000 at 6.6%
  • Student loan monthly payment: $680
  • Liquid Investment: $33,000, current 10-yr returns are 10%, average around 5% yoy

I could reasonable liquidate my investment and pay off the loan today; however, that would reduce an investment currently growing faster than the student loans.  Cold, calculating me says just stay the course due to the returns, while emotional me says pay off that loan ASAP so you can forget about it!  What would you smart people recommend?

MrMonkeyMoustache

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Re: Pay off loans now or later?
« Reply #1 on: December 29, 2016, 10:00:49 PM »
IMO, I'd say that with just about any investment, there's no way you'll maintain a 10% average return. Even with 10%, that still doesn't include inflation.

I'm assuming by liquid investment, you're referring to some kind of stocks or ETFs. Would have to know more to truly make an educated guess, but me personally, I'd pay off the loans.


omega13

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Re: Pay off loans now or later?
« Reply #2 on: December 30, 2016, 12:03:20 AM »
Is this the only loan you have? What's your savings rate?

Could you possibly pay off a big chunk every 6 months?

Murse

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Re: Pay off loans now or later?
« Reply #3 on: December 30, 2016, 12:14:53 AM »
Make life easy, just pay it off. I would take a guaranteed 6.6% return in a heartbeat.

Quidnon?

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Re: Pay off loans now or later?
« Reply #4 on: December 30, 2016, 12:22:24 AM »
I'd take a certain 6.6% savings over a risky 10% gains anytime, but particularly in the current market.  The stock market is way overvalued, and will eventually return to the average price to earnings ratio.  You won't have to worry about that when it happens.

Metric Mouse

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Re: Pay off loans now or later?
« Reply #5 on: December 30, 2016, 05:11:18 AM »
Is this the only loan you have? What's your savings rate?

Could you possibly pay off a big chunk every 6 months?

This. Start tossing extra cashflow at it; leave the investment accounts to grow while aggressively attacking debt. I wouldn't liquidate accounts and possibly incur taxes jut to pay off student loans.

boarder42

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Re: Pay off loans now or later?
« Reply #6 on: December 30, 2016, 05:36:15 AM »
dont touch the investment you'll owe taxes on it just throw some extra money at it.  have you checked into SOFI or others to possibly drop that rate.  if you can get it at or under 5% it wouldnt make sense to pay down any faster.

Frugalman19

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Re: Pay off loans now or later?
« Reply #7 on: December 30, 2016, 08:25:48 AM »
I would keep the investments, with your income you could pay that loan off in a year or less. 6% is high, I would get focused on paying that thing off and just do it through cash flow.

stacheasaurus

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Re: Pay off loans now or later?
« Reply #8 on: December 30, 2016, 09:04:52 AM »
Thanks everyone for providing input!  The idea that I shouldn't incur taxes just to pay student loans is something that hits biggest with me, and in conjuncture with a guaranteed 6.6% return vs risky 10% is a great selling point.  Looks like I'll just start throwing all of my additional income at it until it's gone!


Greenback Reproduction Specialist

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Re: Pay off loans now or later?
« Reply #9 on: December 30, 2016, 09:14:49 AM »
I've struggled with the same thing in the past, If it were me I would set a goal to pay the thing off in under a year. Throw everything at it in 2017, then if there is still a balance at the end of 2017, maybe consider selling some of the stocks(if you can lock in gains, no way would I sell at a loss), or take a side job to get er done.

Just my 2 cents.

boarder42

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Re: Pay off loans now or later?
« Reply #10 on: December 30, 2016, 09:20:33 AM »
Thanks everyone for providing input!  The idea that I shouldn't incur taxes just to pay student loans is something that hits biggest with me, and in conjuncture with a guaranteed 6.6% return vs risky 10% is a great selling point.  Looks like I'll just start throwing all of my additional income at it until it's gone!

most people assume 6% return after you account for inflation around here.  also go to the investor's alley and look at the top sticky for investment order.  whether you pay down a loan or invest in tax advantaged accounts depends on the 10 year treasury Yield MDM has outlined it very well.  stick to that and you'll do fine.

Ebrat

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Re: Pay off loans now or later?
« Reply #11 on: December 30, 2016, 10:18:10 AM »
I agree that you should look into refinancing.

Remember that student loan interest is tax deductible up to a MAGI of $80k for people filing an individual return ($160k for joint returns), so you're actually paying 6.6%*(1-your marginal tax rate).  So about 5% if you're in the 25% tax bracket.  But I get the emotional component.  I'm working on paying off the rest of mine in the next year, even though they're only at 4.5%.

Catbert

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Re: Pay off loans now or later?
« Reply #12 on: December 30, 2016, 11:13:00 AM »
Thanks everyone for providing input!  The idea that I shouldn't incur taxes just to pay student loans is something that hits biggest with me, and in conjuncture with a guaranteed 6.6% return vs risky 10% is a great selling point.  Looks like I'll just start throwing all of my additional income at it until it's gone!

I hate paying taxes, including capital gains, also, but really how much would you owe?  There is no capital gains within the 15% income bracket so depending on your income/marital status, etc you might be able to liquidate  some of your asset without incurring any taxes.  Even above the 15% bracket, you'll only owe tax on the capital gains.  You've already paid any taxes due on growth, due to dividends or interest.

If I were you, I'd figure out what it would really cost me to cash other part of the investment to pay off the loans.  If it would cost too much then I'd hit it hard with other discretionary cash. 

boarder42

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Re: Pay off loans now or later?
« Reply #13 on: December 30, 2016, 11:17:59 AM »
Thanks everyone for providing input!  The idea that I shouldn't incur taxes just to pay student loans is something that hits biggest with me, and in conjuncture with a guaranteed 6.6% return vs risky 10% is a great selling point.  Looks like I'll just start throwing all of my additional income at it until it's gone!

I hate paying taxes, including capital gains, also, but really how much would you owe?  There is no capital gains within the 15% income bracket so depending on your income/marital status, etc you might be able to liquidate  some of your asset without incurring any taxes.  Even above the 15% bracket, you'll only owe tax on the capital gains.  You've already paid any taxes due on growth, due to dividends or interest.

If I were you, I'd figure out what it would really cost me to cash other part of the investment to pay off the loans.  If it would cost too much then I'd hit it hard with other discretionary cash.

thats an emotional reaction to do something like that.  there is a mathmatical equation behind the actual right answer.

Fiscal_Hawk

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Re: Pay off loans now or later?
« Reply #14 on: December 30, 2016, 12:42:23 PM »
First of all, leave the investments as they are. Don't touch those.

Secondly, without knowing your full picture (you should do a case study btw) your income is pretty good compared to the debt. If your monthly expenses are pretty low you should be able to knock this thing out fairly quickly within a year or so.

I would really hammer these down in 2017. Look for ways to lower your expenses (cut cable if you have it, shop around for better insurance rates, cell phone plans etc... ) and really focus on getting rid of this debt. It sounds like you feel like it's a burden regardless of interest rate. I can appreciate that as we are in the same boat.

ZagNation

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Re: Pay off loans now or later?
« Reply #15 on: December 30, 2016, 03:18:10 PM »
As mentioned by previous posters, I agree with allowing your investments to continue increasing your stache. My remaining student loan balance is slightly lower than yours at ~17K yet we both earn the same amount. Back in 2015 I took advantage of refinancing through SoFi to reduce my interest rate from 6.8% to 4.25% on a 5yr variable loan. The emotional part of me kept nagging to just pay that bad boy off early yet the pragmatic Vulcan side argued that if I made extra payments and let my investments ride I'd be in a better position. I've adopted a hybrid approach thus far yet saving aggressively to FIRE is paramount so I've decided to finally slay the student loan beast and become debt free by the end of 2017. Ultimately your net worth will continue to increase either way; there is no wrong decision in this scenario in my humble opinion.