Author Topic: Purposefully delay paying student loans?  (Read 1269 times)

ingrownstudentloans

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Purposefully delay paying student loans?
« on: November 16, 2017, 07:51:52 AM »
My wife and I both have about $60,000 in student loans ($120,000 in total).  1 year ago we refinanced with Sofi to lock in low fixed rates on a 7 year term (3.88% for me and 4.00% for her).  Our monthly payments are $890.03 and $895.11 respectively.  We can afford these amounts without straining any part of the budget.

I checked on refinancing the loans again and rates have stayed about the same.  The refinance options for my loan are:

5 year - $1,064/mo - 3.5%
7 year - $799/mo - 3.86%
10 year - $608/mo - 4.375%
15 year - $465/mo - 4.865%
20 year - $406/mo - 5.365%

For ease of this evaluation, I am just doubling my loan quotes to account for hers, with the understanding it might be off by +/-$20/mo if she gets a slightly higher rate again.

5 year - $2,128/mo - 3.5% ($343 more/mo)
7 year - $1,600/mo - 3.86% ($185 less/mo)
10 year - $1,216/mo - 4.375% ($570 less/mo)
15 year - $930/mo - 4.865% ($855 less/mo)
20 year - $812/mo - 5.365% ($973 less/mo)

We have other debts (mortgage on principal residence at 3.5%, heloc on principal residence at 4.0% variable, mortgage on rental property at 4.0%, rental property PMI at $190/mo until I get another $13K in principal paid down), and we currently max one 401k and put just over $10k/year in the other.

My thoughts are to refinance to the 20-year loan, max the second 401K (using about $500 post-tax dollars/month) and target the rental property with rest $473) until the PMI is paid off.  Once the PMI is paid off (about 2 years), I knock out the HELOC before returning focus to the student loans.  I think this is the most effective approach, but would like to hear the thoughts of those that are brighter than I.

I am not asking for a full case study here, just thoughts on this approach using the closed-universe of these funds and the information provided.

Thanks in advance

Proud Foot

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Re: Purposefully delay paying student loans?
« Reply #1 on: November 16, 2017, 09:13:06 AM »
So you have 6 years left and want to more than triple the payoff length while also increasing the interest rate by 75%.  If the rates were going from 2% to 3% I might be more inclined to say yes as the rates would still be low enough that investing is more beneficial, however you are moving up into the personal preference area and my preference would be to continue to pay as is. 

Quote
We can afford these amounts without straining any part of the budget.

Since you can afford the payments without straining your budget why not find some areas in the budget you can cut so you can start working towards maxing the second 401k and rental PMI.

jc4

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Re: Purposefully delay paying student loans?
« Reply #2 on: November 16, 2017, 09:40:55 AM »
What you list is the "highest expected value" plan. As in, if all goes as expected, you should end up coming out ahead 20 years from now vs your current loans. The $190 PMI is a 17.5% return on that $13k, but only over the horizon when you'd have to pay it anyway. At some point that shifts to a 0% return.

I would build a spreadsheet over 20 years in quarterly(?) increments. List each of your payments, balances, interest rates, expected returns, etc, and see which plan comes out ahead over that horizon. The 5.8% student loan rate is garbage, but not when compared to the 4% mortgage you'd be carrying anyway. It's really just a 2% bump.

I'd also check that there's no refi cost. That's pretty typical, but if I remmeber correctly, it's free with Sofi.

simonsez

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Re: Purposefully delay paying student loans?
« Reply #3 on: November 16, 2017, 09:45:04 AM »
I'd probably stay as is or refinance to the 7 year term again or even go to the 5 year if you can trim fat elsewhere.  You're already putting ~30k/yr into 401k accounts.  I wouldn't take a guaranteed significant rate hike on your student loans so you can feel better about maxing 401k accounts.  But you might have a different risk tolerance and think that it's worth it to pay a higher rate so you can invest more/get rid of PMI sooner.

ingrownstudentloans

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Re: Purposefully delay paying student loans?
« Reply #4 on: November 16, 2017, 10:04:41 AM »
So you have 6 years left and want to more than triple the payoff length while also increasing the interest rate by 75%.  If the rates were going from 2% to 3% I might be more inclined to say yes as the rates would still be low enough that investing is more beneficial, however you are moving up into the personal preference area and my preference would be to continue to pay as is. 

Yes, triple the stated payoff length and increase the rate by 75% to optimize the closed-universe set of funds that are offered up in the scenario.  I understand trimming fat elsewhere and continuously work on improving where I can, but am focused on this set of funds right now to optimize my resources.  I am pretty sure that is what MMM is all about, working smarter, not harder, with what you have. 

What you list is the "highest expected value" plan. As in, if all goes as expected, you should end up coming out ahead 20 years from now vs your current loans. The $190 PMI is a 17.5% return on that $13k, but only over the horizon when you'd have to pay it anyway. At some point that shifts to a 0% return.

I would build a spreadsheet over 20 years in quarterly(?) increments. List each of your payments, balances, interest rates, expected returns, etc, and see which plan comes out ahead over that horizon. The 5.8% student loan rate is garbage, but not when compared to the 4% mortgage you'd be carrying anyway. It's really just a 2% bump.

I'd also check that there's no refi cost. That's pretty typical, but if I remmeber correctly, it's free with Sofi.

Actually a negative return as I would shift that money back to paying off the student loans, but at a higher rate.

I will try to build the spreadsheet - I can tinker in excel, but this might be above my pay grade.  That is a good idea.

There are no refi costs with SoFi.

FINate

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Re: Purposefully delay paying student loans?
« Reply #5 on: November 16, 2017, 10:04:56 AM »
I would not extend payment of your student loans to 20 years. The other debts can be discharged in bankruptcy, which is generally not the case with student loans (there are exceptions, but they are rare and difficult to get). All it takes is one problem -- medical issue, extended job loss -- and you fall behind on those student loans and then the penalties explode and you're trapped for life. I just wouldn't want that hanging over my head any longer than necessary.

You requested a "closed-universe" analysis of the situation, but this is MMM so I'm going to challenge you to not compartmentalize this decision in such a simplistic way because everything is related. You don't need to post details here, but I think you should take a very hard look at all spending and assets. Phones, cable, cars, gas, eating out, entertainment, insurance, .... you get the idea...and look for a way to pay of the PMI ASAP. (Perhaps you're driving a $30k car and can sell it and get a decent used car for much less and pay more on the PIM.) Once PMI is paid off start snowballing payments on the other debts.

tomorrowsomewherenew

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Re: Purposefully delay paying student loans?
« Reply #6 on: November 17, 2017, 03:28:58 PM »
I would refinance to the 7 yr. It's a good rate, you can do better than 3.8% by investing, and it lowers your payment.