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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: MyAlterEgoIsTaller on September 06, 2019, 09:18:22 AM

Title: Pay student loans: fast or slow?
Post by: MyAlterEgoIsTaller on September 06, 2019, 09:18:22 AM
Hello wise mustache people:  I am very new to this forum, which is because I'm very new to having much "extra" money about which to make decisions.  I have $68k in student loans with a 3.89% interest rate.  I have about $110k left on my mortgage at 2.65%. I have an emergency fund with about $36k in it, which would cover more than 12 months of my living expenses.  I am currently maxing out my 401k and my HSA - but combined they only add up to about $140k, because it's only been so recently that I've been making enough money to do that.  Now I have about $2400 per month "extra" available to do ... something... with.  I would appreciate thoughts as to what I should be doing with that.  Pay off my student loans in 2-3 years (or faster if I put some of my emergency fund into that)?  Or stretch out loans and invest the whole "extra"? Or some combination of those?  Thank you for any thoughts.
Title: Re: Pay student loans: fast or slow?
Post by: JGS1980 on September 06, 2019, 11:16:26 AM
Hello, and Welcome to MMM Forum!

I was in a similar position once upon a time.

1st question -> do you really need a 12 month Emergency Fund? If you have a very stable job, perhaps a 3-6 month fund would do the job for you, and you wouldn't be losing so much to inflation over time.

2nd question -> what's your yearly gross income?

3rd question -> do you have any other tax-advantaged accounts at your job (457?)

Folks here can give you a better answer with more info.

All the best, JGS
Title: Re: Pay student loans: fast or slow?
Post by: MyAlterEgoIsTaller on September 06, 2019, 11:39:35 AM
Hello and thanks for the followup questions.

Yeah I know, I've thought about probably not really needing a 12-month emergency fund.  My job seems very stable for the moment.  But I'm in an industry that can have dramatic up- and down-swings, and about 4 years ago, immediately prior to this job, I had been laid off from a previous job. Since then I've been a little overly cautious in squirreling away rainy day funds - though I was only out of work for about 5 weeks at that time and never got anywhere near a financial crisis.

My gross income will be around 100k this year.

I don't have any other tax-advantaged accounts at my job.

Title: Re: Pay student loans: fast or slow?
Post by: minimustache1985 on September 06, 2019, 12:16:41 PM
Since you are already maxing your 401k and HSA and have a super solid EF (great job btw!!) I would probably split the ďextraĒ between the SLs and investing in a taxable account.  3.89% guaranteed return ainít shabby (I wouldnít pay the mortgage early unless you have PMI in which case get rid of that ASAP and then resume making standard payments) but the market will outperform it over the long haul.

Of course, itís a very personal decision too, some people value being free of debt as fast as they can, and for them it makes more emotional sense to pay off any loan (especially non mortgage loans) before saving taxable money above an EF.  Others prefer the flexibility of cash and tangible assets over less debt (if crap hits the fan you canít get early SL payments back to your account, you can sell stocks though potentially at a loss), or simply choose to invest as much as they can while it has the maximum amount of time to grow because the math makes sense.  Iím a middle of the road person myself so would probably split the contributions at something like $1000 SL/$1400 investment, and like many here recommend Vanguard for the latter.

To be clear, no option is wrong- be it 100% SL, 100% invest, or a split of your choosing- itís just making the choice that you are most comfortable with.
Title: Re: Pay student loans: fast or slow?
Post by: frugaliknowit on September 06, 2019, 12:22:34 PM
4% risk free and tax free when "the street" is 2% taxable, plus the "peace of mind" factor, and with a recession looming, I'd clobber the loans.
Title: Re: Pay student loans: fast or slow?
Post by: RWD on September 06, 2019, 12:42:09 PM
Investment Order (https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153)

I vote for paying off slow and investing. At the very least, don't put any extra towards that incredibly good mortgage rate.
Title: Re: Pay student loans: fast or slow?
Post by: minimustache1985 on September 06, 2019, 01:06:03 PM
Oh!  Almost forgot and canít believe it hasnít been mentioned already, but assuming you can (and I believe youíre under the limit but if not could backdoor) open a Roth IRA for tax free growth- thatís $6000 a year more you can shelter, and Iíd absolutely do that before either paying down the SLs or investing in taxable accounts.
Title: Re: Pay student loans: fast or slow?
Post by: JGS1980 on September 06, 2019, 05:32:46 PM
With that income, I agree with above, Max Out Roth IRA every year to 6K

After that, I'd start a Taxable account while slowly paying off your student loans per your current plan.

If your Taxable account reaches the number owed on your loans, and you want to pay it off, so so then!

I'd probably cut your E-Fund in half and use that to take a chunk out of your student loans.

Good look to you in your journey.

JGS
Title: Re: Pay student loans: fast or slow?
Post by: Kayad on September 06, 2019, 09:52:46 PM
I would:

1. Max Roth IRA if your income is not too high.

2. Look into SL refi.  Earnestís best rate right now (variable) is ~2.2%, for example.  Be sure to use a referral link for a few $$ free.

3.  Weigh your priorities to decide how you want to allocate between debt and investing.  There are so many personal and psychological factors that there is no right answer.  For instance, I just yesterday killed the last of my SL, which has been my 100% focus this year (after maxing all tax advantaged accounts) even though I had that great 2.2% rate.  Thereís no doubt it was an economically suboptimal approach, but I have zero regrets.  With my dwís debt, which does not cause me the same psychological chafage, we will probably split the baby 80-20% in favor of investing.
Title: Re: Pay student loans: fast or slow?
Post by: mistymoney on September 07, 2019, 11:11:32 AM
Investment Order (https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153)

I vote for paying off slow and investing. At the very least, don't put any extra towards that incredibly good mortgage rate.

second!
Title: Re: Pay student loans: fast or slow?
Post by: SavinMaven on September 07, 2019, 04:57:41 PM
What I see as the most important component of this decision hasn't been asked yet:

is your interest rate on your student loans fixed or variable? then I have the same question with your mortgage. variable debt must go asap!
Title: Re: Pay student loans: fast or slow?
Post by: Zamboni on September 07, 2019, 05:05:23 PM
In your shoes I would max a Roth and then kill the student loans with the extra money. It is the "wrong order" and I don't care. Being debt free is that nice.

Even my mortgage gets on my nerves (although I resist paying that early since it is at 2.875%). At least with a mortgage you are getting a place to live and hopefully home value appreciation. You can sell the home and pay off the mortgage in an instant. The student loans, on the other hand, just hang there over your head doing nothing for you at this point.
Title: Re: Pay student loans: fast or slow?
Post by: 35andFI on September 07, 2019, 06:31:15 PM
I would pay down that student loan. Sure you will likely do better (over time) putting your money in the market instead but what if you lose your job?

You can stop investments but not debt payments.

I would also consider lowering that emergency fund. Thatís a lot of cash to be sitting around.
Make sure all but whatever you need for monthly transactions are at least held in a high yield savings account (I use wealthfront at 2.32%) if you donít want to hold them in a Roth IRA or taxable account.
Title: Re: Pay student loans: fast or slow?
Post by: RWD on September 07, 2019, 08:31:30 PM
I would pay down that student loan. Sure you will likely do better (over time) putting your money in the market instead but what if you lose your job?

You can stop investments but not debt payments.

I would also consider lowering that emergency fund. Thatís a lot of cash to be sitting around.
Make sure all but whatever you need for monthly transactions are at least held in a high yield savings account (I use wealthfront at 2.32%) if you donít want to hold them in a Roth IRA or taxable account.

Your concern is losing one's job and you recommend lowering the emergency fund and putting spare income towards debt? That doesn't make any sense. In that case if they lost their job they would be on the hook for debt payments without any income, savings, or investments to pull from. At least if you invest you can sell your investments to continue making payments. If you are worried about losing your job it only makes sense to pay off the debt when you can do it all at once so the payment goes away entirely.
Title: Re: Pay student loans: fast or slow?
Post by: 35andFI on September 07, 2019, 09:15:38 PM
Your concern is losing one's job and you recommend lowering the emergency fund and putting spare income towards debt?
If an emergency fund is too high, yes I would lower it.

Quote
In that case if they lost their job they would be on the hook for debt payments without any income, savings, or investments to pull from. At least if you invest you can sell your investments to continue making payments.
The idea would be to pay it off completely while income is high and stable which would then lower the minimum amount needed to get by per month.
They would still have enough in an emergency fund to get them by until they find another job.
I believe that a yearís worth is likely more than needed.
Title: Re: Pay student loans: fast or slow?
Post by: MyAlterEgoIsTaller on September 08, 2019, 09:23:48 AM
Thank you everybody for your responses.  So far I'm finding this forum to be more friendly and open to newbies than many.
It's reassuring that it doesn't seem like everybody's exactly on the same page about this - it makes me feel like my own inner debate about what to do doesn't necessarily mean I'm a total idiot about money - there's hope I can learn.

I will max out a Roth IRA - I think what I'll do is take that out of my emergency fund this year, to shrink that down a little and not have so much sitting there hardly making any interest.  You're right that it doesn't need to have so much in it - my lifestyle has pretty much stayed the same as when I wasn't making as much money, so I have more than enough in there even if some long layoff happens.
Then I'll split the rest 50/50 between investing and student loans. As long as the end is in sight within a few years for my student loans I think I'll feel ok about that. 

Title: Re: Pay student loans: fast or slow?
Post by: 35andFI on September 08, 2019, 12:20:50 PM
Sounds like a good plan!

Glad we could help you make an informed decision.

They say personal finance is personal.
There is usually not one ďright wayĒ to go about it.

Know that you can withdraw contributions from a Roth IRA at any time.
Obviously youíll want to avoid this if you can but itís a nice backup if needed.
Title: Re: Pay student loans: fast or slow?
Post by: marty998 on September 08, 2019, 03:18:56 PM
The idea would be to pay it off completely while income is high and stable which would then lower the minimum amount needed to get by per month.
They would still have enough in an emergency fund to get them by until they find another job.
I believe that a yearís worth is likely more than needed.


Agree. Hard to go broke when you don't have any debt.
Title: Re: Pay student loans: fast or slow?
Post by: Nick_Miller on September 09, 2019, 12:46:07 PM
I would pay down that student loan. Sure you will likely do better (over time) putting your money in the market instead but what if you lose your job?

You can stop investments but not debt payments.

I would also consider lowering that emergency fund. Thatís a lot of cash to be sitting around.
Make sure all but whatever you need for monthly transactions are at least held in a high yield savings account (I use wealthfront at 2.32%) if you donít want to hold them in a Roth IRA or taxable account.

Your concern is losing one's job and you recommend lowering the emergency fund and putting spare income towards debt? That doesn't make any sense. In that case if they lost their job they would be on the hook for debt payments without any income, savings, or investments to pull from. At least if you invest you can sell your investments to continue making payments. If you are worried about losing your job it only makes sense to pay off the debt when you can do it all at once so the payment goes away entirely.

My student loans allow me to "get ahead" on them, which affects the next payment date. Basically, I am 3 years ahead on my loans right now, so I could choose not to make payments for three years without defaulting (but interest would obviously accrue, slowly increasing my total owed. I don't know if this is common, but in my situation, I could always stop making payments for a while if things got tight, I lost my job, etc.

OP, is your student loan structured like this?
Title: Re: Pay student loans: fast or slow?
Post by: MyAlterEgoIsTaller on September 09, 2019, 01:07:31 PM

My student loans allow me to "get ahead" on them, which affects the next payment date. Basically, I am 3 years ahead on my loans right now, so I could choose not to make payments for three years without defaulting (but interest would obviously accrue, slowly increasing my total owed. I don't know if this is common, but in my situation, I could always stop making payments for a while if things got tight, I lost my job, etc.

OP, is your student loan structured like this?

Yes, mine works like that too.  Thus far I've not gotten far enough ahead on them that I was looking at that as a meaningful buffer zone, but I suppose if I got years ahead then it would be. 
Title: Re: Pay student loans: fast or slow?
Post by: RWD on September 09, 2019, 01:16:11 PM
I would pay down that student loan. Sure you will likely do better (over time) putting your money in the market instead but what if you lose your job?

You can stop investments but not debt payments.

I would also consider lowering that emergency fund. Thatís a lot of cash to be sitting around.
Make sure all but whatever you need for monthly transactions are at least held in a high yield savings account (I use wealthfront at 2.32%) if you donít want to hold them in a Roth IRA or taxable account.

Your concern is losing one's job and you recommend lowering the emergency fund and putting spare income towards debt? That doesn't make any sense. In that case if they lost their job they would be on the hook for debt payments without any income, savings, or investments to pull from. At least if you invest you can sell your investments to continue making payments. If you are worried about losing your job it only makes sense to pay off the debt when you can do it all at once so the payment goes away entirely.

My student loans allow me to "get ahead" on them, which affects the next payment date. Basically, I am 3 years ahead on my loans right now, so I could choose not to make payments for three years without defaulting (but interest would obviously accrue, slowly increasing my total owed. I don't know if this is common, but in my situation, I could always stop making payments for a while if things got tight, I lost my job, etc.

OP, is your student loan structured like this?

I was under the impression that paying your loans ahead like that did not actually reduce the amount of interest you paid. It just set aside money towards future payments instead of going towards principal. Unless I am mistaken that kinda defeats the point of paying extra on your loans.
Title: Re: Pay student loans: fast or slow?
Post by: MyAlterEgoIsTaller on September 09, 2019, 01:28:12 PM

I was under the impression that paying your loans ahead like that did not actually reduce the amount of interest you paid. It just set aside money towards future payments instead of going towards principal. Unless I am mistaken that kinda defeats the point of paying extra on your loans.

When I pay my loans online there are boxes to check to direct what an over payment is supposed to do: reduce principal, advance due date, or both (if the overpayment is sufficient to do both).