The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: lbonga1 on March 05, 2016, 05:15:22 PM
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Hello everyone! I've been a lurker for a few months, but I decided to register to ask a question. I'm trying to decide if I should use the money that I currently have saved for retirement to put toward paying down my student loans. The money is in a Roth IRA at Vanguard, 100% in VTSMX, and it's just over $9k. Here's the details on my student loans:
1. Subsidized Stafford, 4.25%, $5659
2. Subsidized Stafford, 3.15%, $5643
3. Subsidized Stafford, 3.15%, $3815
4. Unsubsidized Stafford, 6.55%, $8993
5. Unsubsidized Stafford, 6.55%, $8719
6. Unsubsidized Stafford, 6.55%, $5605
These loans are from my Bachelors degree. I'm in school quarter time right now for my Masters, and when fall semester starts I'll be attending half time, so the subsidized loans will go into deferment and I won't be paying interest on them then. I was thinking I could at least pay off the highest balance unsubsidized loan, but I'm hesitant because then I won't have any money saved for retirement.
Further information: I'm 26, engaged with 2 kids (3 and 1.5). My job prospects after graduation are good. I'm attending a top rated school for software engineering. My mom is loaning me a portion of the current tuition at 1% interest, and the rest I'm trying to apply for scholarships and/or pay with my own cash.
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Leave the Roth. You effectively have an interest free loan until you graduate--no reason to pay it off by cashing out your Roth.
Since you indicate that your job prospects are very good after school, you can focus on kicking some debt ass then. $9k will disappear quickly with a good, high-paying, software job.
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Are you not combining finances as part of the marriage? Can some of your fiance's income be going towards those 6.55% ones?
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The unsubsidized loans, which have the highest interest, will not be deferred while I'm in school. The balances will continue to grow.
My fiance and I already combine our finances, but he has not been able to work consistently due to some health problems. So at the moment he doesn't have any extra money to contribute to them. We're getting closer to finding a good treatment plan for him, so hopefully soon!
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Might help to know a little more about your situation. See http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-%27case-study%27-topic/. Even if you decide not to post, going through the data gathering itself could be useful to you. E.g., see the Investment Order tab on the spreadsheet mentioned in the above link. The 6.55% rate makes it ~a coin flip between paying those loans and putting money into an IRA. In other words, you could reasonably defend either strategy in your subject question.
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The unsubsidized loans, which have the highest interest, will not be deferred while I'm in school. The balances will continue to grow.
My fiance and I already combine our finances, but he has not been able to work consistently due to some health problems. So at the moment he doesn't have any extra money to contribute to them. We're getting closer to finding a good treatment plan for him, so hopefully soon!
Thanks for the clarification. I must've misread! I still think it's an unwise decision to pull $$ out of the Roth. If you've got extra income each month, use that money to attack the debt.
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I will put in another vote for leaving the money in the Roth IRA for the reasons below.
1. At 6.55% interest it is probably a coin flip in the long run, but you are getting interest free growth.
2. If you pull the money out of your Roth, you can't go back once your loans are paid off and recontribute for these years that you are pulling out from
3. Although it is not recommended, that Roth may come in handy if a TRUE emergency comes up in the future.benefit
4. You will get a small tax break from interest that you pay from your student loans
However, I do recommend destroying those 6.55% loans as quickly as you can without stopping your retirement saving in tax-advantaged accounts.
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You can pay the loans later (with interest), but you can't make up for the years of Roth contributions that you'd be pulling out.
Keep it in the Roth. Use it as a challenge to push yourself to find other ways to pay the loans.