Author Topic: Pay off Student Loans, Invest, or Can/Should I Do Both?  (Read 339 times)

ebella

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Pay off Student Loans, Invest, or Can/Should I Do Both?
« on: April 30, 2021, 08:01:54 AM »
Today we close on the sale of our condo/first home.  Yay! You can see my other threads when I was stressed about selling it for the particualr of that but, for this post, the relevant info is I should be getting $56,000 out of it (more like $5000 when we factor in what we put to downpayment when we bought almost 3 years ago and repairs and refi costs). 
We have no intention of buying anything right now, market it way too frothy and are not sure where we want to live.  We will be renting a larger single family house for what our initial motgage (plus taxes, HOA etc were). I will also be starting a new job (my dream job working for major civil rights non-profit) and taking a 1/3 paycut.  But the benenfits are amazing and we will be maxxing out our retirement/tax advantaged accounts like we've been doing the last couple years.
So thins brings me to my student loan:  I had about $80k 2 years ago when I entered private sector (abnd got a big pay bump) so I refinanced with one of the private lenders for a varibale rate (now at 1.2%) and aggressively paid it off.  It now sits ay $36,000 and I have to pay $1300 every month.  I could use the the entire proceeds of the home sale to just wipe that debt out.  But at 1.2% interest, does that make sense?
We have an ample savings/emergency fund ($30k) as well as about $96k for a future downpayment (given by in-laws for that specific purpose and they aren't exactly suportive of the idea of us investing it outside real estate). 
Our total household income is $135,000 (no kids, no plans for any), we're in our late 30s, and our monthly expenses (without my student debt) arr incredibly manageable. 
We really don't want to own property right now since we don't love the city/state where we live (only staying because I got my dream job here and the work is very local in terms of political advocacy and organizing).  But we do want to maximize our net worth so we can move/stop working/start our own business in 10 years. We have a couple free/low cost family properties we could move to when we no longer are tied to a specific work location.
So my question is: Should I wipe out all that student debt and invest the rest (if so, how/where) or wipe out some of it since interest is so low (and invest rest)?

therethere

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Re: Pay off Student Loans, Invest, or Can/Should I Do Both?
« Reply #1 on: April 30, 2021, 08:35:05 AM »
Nope, I wouldn't pay them off. Keep the loans. Follow the investment order. It has worked out for me!

ebella

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Re: Pay off Student Loans, Invest, or Can/Should I Do Both?
« Reply #2 on: April 30, 2021, 08:46:17 AM »
Nope, I wouldn't pay them off. Keep the loans. Follow the investment order. It has worked out for me!
I am , I think?
WHAT           
0. Establish an emergency fund to your satisfaction: Done           
1. Contribute to your 401k up to any company match: Done     
2. Pay off any debts with interest rates ~5% or more above the current 10-year Treasury note yield: Done         
3. Max Health Savings Account (HSA) if eligible: Done
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level: Done
5. Max 401k (if
    - 401k fees are lower than available in an IRA, or
    - you need the 401k deduction to be eligible for (and desire) a tIRA deduction, or
    - you earn too much for an IRA deduction and prefer traditional to Roth, then
    swap #4 and #5): Done
6. Fund a mega backdoor Roth if applicable.   Don;t think ths is applicable (we're not self-employed)     
7. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.    Done/ Not applicable (though conceivable my student loan interest could get above 3% since variable)       
8. Invest in a taxable account and/or fund a 529 with any extra.  So do this before paying off the student loans?

yachi

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Re: Pay off Student Loans, Invest, or Can/Should I Do Both?
« Reply #3 on: April 30, 2021, 09:08:25 AM »
     
7. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.    Done/ Not applicable (though conceivable my student loan interest could get above 3% since variable)       
8. Invest in a taxable account and/or fund a 529 with any extra.  So do this before paying off the student loans?
The current 10-year Treasury note yield is here: https://www.cnbc.com/quotes/US10Y
It's at 1.635%, so you would want to pay off any debts with interest rates at or above 5.635% before investing in a taxable account or 529 plan. 

The investing order would basically not have you pay off any debt at less that 5.635% interest early.


yachi

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Re: Pay off Student Loans, Invest, or Can/Should I Do Both?
« Reply #4 on: April 30, 2021, 09:13:43 AM »
     
7. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.    Done/ Not applicable (though conceivable my student loan interest could get above 3% since variable)       
8. Invest in a taxable account and/or fund a 529 with any extra.  So do this before paying off the student loans?
The current 10-year Treasury note yield is here: https://www.cnbc.com/quotes/US10Y
It's at 1.635%, so you would want to pay off any debts with interest rates at or above 5.635% before investing in a taxable account or 529 plan. 

The investing order would basically not have you pay off any debt at less that 5.635% interest early.

I should add, I guess, that the corollary to step 7, ought to be:
Always take out any loan you can with interest rates lower than ~3% above the current 10-year Treasury note yield.

But I haven't really seen that preached around here.

yachi

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Re: Pay off Student Loans, Invest, or Can/Should I Do Both?
« Reply #5 on: April 30, 2021, 09:21:47 AM »
One more thing and then I'll go away.  Throwing your interest, balance and payment in a loan calculator suggests you're on your way to pay this off in 32 months, so you'll be done with it soon enough.  If you want to lower the payment to be less bothersome, you could look into refinancing it for a longer period.

tweezers

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Re: Pay off Student Loans, Invest, or Can/Should I Do Both?
« Reply #6 on: April 30, 2021, 09:26:18 AM »
At an interest rate of 1.2%, I would hold onto the loan payment and direct surplus money into a taxable account (where it will do more for you than paying off the student loan).   

robartsd

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Re: Pay off Student Loans, Invest, or Can/Should I Do Both?
« Reply #7 on: April 30, 2021, 10:48:42 AM »
I should add, I guess, that the corollary to step 7, ought to be:
Always take out any loan you can with interest rates lower than ~3% above the current 10-year Treasury note yield.

But I haven't really seen that preached around here.
Closest we get is the people preaching to perpetually carry a mortgage by refinancing. MMM also posted about taking out a Margin Loan to facilitate purchase in hypercompetitive housing market without actually selling investments in January. I certainly wouldn't encourage seeking out debt at 10-year Treasury rate + 3% as that just expects to break even; but below 10-year Treasury rate + 1% it starts to sound tempting.

Dee18

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Re: Pay off Student Loans, Invest, or Can/Should I Do Both?
« Reply #8 on: April 30, 2021, 04:53:01 PM »
You have probably already looked into this, but does your new non-profit job qualify you for some student loan forgiveness?