Author Topic: Pay off shared student loan debt or keep our assets  (Read 2671 times)

daisytails

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Pay off shared student loan debt or keep our assets
« on: April 17, 2014, 12:29:05 PM »
My husband and I have student loans totaling about 32K at about 6.8% for the next maybe 8 years. We have a 401K plan that could pay off the whole thing. Is it worth taking the penalty to eliminate the debt in this case? We also have stock investments totaling about 24K which I'm weary of touching because it seems to be making money faster than the 401K and I'm not sure if we can recoup soon since we're about to have a baby.

jexy103

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Re: Pay off shared student loan debt or keep our assets
« Reply #1 on: April 17, 2014, 01:54:18 PM »
Since you're expecting a new addition to your family soon (congratulations!), I would hold off on making any major money decisions until you know that everyone involved is healthy. You may have the best health insurance in the world that pays for 100% of every medical bill, but you don't know if you'll need time off work, additional equipment, etc. that have costs outside the realm of health care/health insurance.

That said, I would absolutely not take the money from the 401(k) to pay off the student loans. The tax penalty plus the lost opportunity for gains will be far higher than the 6.8% saved on the loans. However, you need to get those loans paid off! For the taxable account situation, look at it this way: "would you take out a loan at 6.8% so you can use that money to invest?" If not, why would you invest when you have loans at 6.8%? There are no penalties (except maybe a capital gains tax, if you're in the 25%+ tax bracket) for cashing out stock in a taxable account and using that money to pay off some or all of your loans.

But again, I personally would make sure everyone is healthy before spending all/most of your liquid funds on debt.

Thegoblinchief

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Re: Pay off shared student loan debt or keep our assets
« Reply #2 on: April 17, 2014, 08:02:13 PM »
What about further budget details?

There might be a lot of low hanging fruit that could get those loans paid off rather quickly.

401(k) is a non starter, because you're taking a 10% penalty to pay off 6.8%.

The stocks depends on your tax situation, what the long-term capital gains are, etc. Need more details, but we're talking less than a 1-2% annual gain historically by paying loans instead of keeping the funds invested.

daisytails

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Re: Pay off shared student loan debt or keep our assets
« Reply #3 on: April 18, 2014, 06:50:36 AM »
Thank you for the replies. I figured the 401(k) was a no brainer but I thought I would inquire.

We have a couple of other things, a car payment that I have the money to pay off completely and I was thinking even though it's less interest (1.9%) it would put more money in our pocket initially that making larger portion payments to our student loans would be a lot easier. My car only has 6400 left and I have about 8000 in savings which was also what I was using to supplement my income while I was out of work for maternity leave before going back part time. I've been tightening our budget month by month and know I can cut it further. I do have another 500 in stock on my personal account that's just sitting there and $3500 in a retirement fund from a teaching job. Hearing you say that about the stocks, I'll go check that info and look at the percentage like you said. We'll probably cash it in and pay off the loans once the baby is here and in good health if that's the case. Those are all the extra assets I can think of right now besides our jeep wrangler, which is paid off.

Our biggest expenses are food right now, we spend way too much for two people but I've been trying to cook at home for dinner and eat all of my lunches and breakfasts at home. The hardest part sometimes is not giving in to husband who wants to save but likes his luxuries. (I would say we use to spend $900-$1000 each month on food which includes eating out and groceries, I've cut it to $700 per month but I have further to go.) My goal is to pay off everything so we can work on our mortgage and save more for "early retirement" or even his goal of running his own business building furniture. (I just got to keep reminding him of that). He makes 66k and currently I make about 30k but part time I'd probably make about 15-18k once the baby is here. I'm lucky and have a decent job I can work from home at random hours.

Everything in Moderation

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Re: Pay off shared student loan debt or keep our assets
« Reply #4 on: April 18, 2014, 08:45:13 AM »
Focus on cutting your food budget.  $700 is still really high. 

Hold off on doing anything until your finish your maternity leave, so you can see what your new income and budget looks like. 

Your car interest is really low and your savings low as well (not bad though).  I would keep your cash for an emergency and/or pay down your student loans, before ever paying extra on your car. 

Good luck.

CarDude

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Re: Pay off shared student loan debt or keep our assets
« Reply #5 on: April 18, 2014, 09:13:36 AM »
Thank you for the replies. I figured the 401(k) was a no brainer but I thought I would inquire.

We have a couple of other things, a car payment that I have the money to pay off completely and I was thinking even though it's less interest (1.9%) it would put more money in our pocket initially that making larger portion payments to our student loans would be a lot easier. My car only has 6400 left and I have about 8000 in savings which was also what I was using to supplement my income while I was out of work for maternity leave before going back part time. I've been tightening our budget month by month and know I can cut it further. I do have another 500 in stock on my personal account that's just sitting there and $3500 in a retirement fund from a teaching job. Hearing you say that about the stocks, I'll go check that info and look at the percentage like you said. We'll probably cash it in and pay off the loans once the baby is here and in good health if that's the case. Those are all the extra assets I can think of right now besides our jeep wrangler, which is paid off.

Our biggest expenses are food right now, we spend way too much for two people but I've been trying to cook at home for dinner and eat all of my lunches and breakfasts at home. The hardest part sometimes is not giving in to husband who wants to save but likes his luxuries. (I would say we use to spend $900-$1000 each month on food which includes eating out and groceries, I've cut it to $700 per month but I have further to go.) My goal is to pay off everything so we can work on our mortgage and save more for "early retirement" or even his goal of running his own business building furniture. (I just got to keep reminding him of that). He makes 66k and currently I make about 30k but part time I'd probably make about 15-18k once the baby is here. I'm lucky and have a decent job I can work from home at random hours.

Congratulations on the baby!

It sounds like you're starting to put together a plan for where to go from here. I'd focus on building up an emergency fund and wait until baby's here to make further plans on where to direct money. In the mean time, I'd save as much as possible (i.e., keep budget trimming), as that will help both in the event of health concerns (even a week's hospital stay can dramatically increase what you have to pay after insurance) and as a general long term strategy.

dude

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Re: Pay off shared student loan debt or keep our assets
« Reply #6 on: April 18, 2014, 09:20:03 AM »
Not worth taking the penalty.  Do you own a house?  Look into a HELOC at a lower rate than 6.8% to pay them off (right now, I can get a 5-year HELOC to 75% of LTV for as low as 2.75%).  Or just make extra payments.  If you use the 401k, you are not only taking the penalty, you are also paying income taxes on the money (and that withdrawal could very well bump you up into a higher tax bracket) AND you are losing the returns you might have made.  6.8% is the average return for the S&P 500 over its entire history, and with the penalties and taxes you incur on the 401k withdrawal, you are going to be paying a lot more than the 6.8% effective rate on those loans.  Your student loans do not appear to be the kind of "hair on fire" situation that would require emergency measures, IMHO.