Author Topic: Should I pay off my student loans?  (Read 882 times)

music'stache

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Should I pay off my student loans?
« on: March 08, 2019, 01:11:59 PM »
I have $8k left in student loans (4.25%-6.5% interest rates and payoff dates by 2023). I have $17k in savings. I am 30 yrs old and self-employed. I run a pretty lean business, but I like having a reserve of cash to draw upon. Thoughts?

35andFI

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Re: Should I pay off my student loans?
« Reply #1 on: March 08, 2019, 01:36:30 PM »
Hello and welcome to the forum.

I have been at your decision point myself (although was not self-employed). I chose to pay my student loans off ASAP.
That being said, only you will know if a savings of $9k is enough for you.
That would be more than enough for me but my expenses are pretty low and income has been steady.

I understand that the market "could" return more in the short term but I'll personally take a guaranteed return of 4.25%-6.5% and a reduction of debt any day.

music'stache

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Re: Should I pay off my student loans?
« Reply #2 on: March 08, 2019, 01:44:06 PM »
Thanks for the welcome and the thoughts 35andFI!

You make a good point regarding debt elimination and guaranteeing a 4.25%-6.5% return. It will be nice to get rid of the debt and make those monthly payments to myself. Then, I can focus on building the reserves back up.

jps

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Re: Should I pay off my student loans?
« Reply #3 on: March 08, 2019, 01:48:50 PM »
How much are your payments each month? A few hundred? How excited would you be to get a few-hundred-dollar raise each month?

Do ittttt

FIRE@50

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Re: Should I pay off my student loans?
« Reply #4 on: March 08, 2019, 01:53:02 PM »
I'm in a similar spot and I'm leaning towards paying them off this year.

music'stache

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Re: Should I pay off my student loans?
« Reply #5 on: March 08, 2019, 02:12:34 PM »
They're $230 per month, jps. Good point about getting a "raise".

Looks like many are leaning towards yes. Any one make an argument for not paying them off and keeping the money to play with?

ixtap

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Re: Should I pay off my student loans?
« Reply #6 on: March 08, 2019, 02:16:49 PM »
They're $230 per month, jps. Good point about getting a "raise".

Looks like many are leaning towards yes. Any one make an argument for not paying them off and keeping the money to play with?

How stable is your business income?

I don't think I would like to fall below $20k on hand without a steady income. But then, that also depends on your expenses, rather than mine.

MrThatsDifferent

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Re: Should I pay off my student loans?
« Reply #7 on: March 08, 2019, 02:26:43 PM »
Absolutely yes, do it tomorrow. You canít imagine how freeing it is to not have debt or being chased for money.

music'stache

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Re: Should I pay off my student loans?
« Reply #8 on: March 08, 2019, 02:36:25 PM »
ixtap, business income is stable. I don't like parting with the $8k, but I realize that I should have enough of a cushion with the $9k while I build back up. Monthly expenses are low.

MrThatsDifferent, I do like that thought. I am excited to pay it off and save that extra $ each month.

jps

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Re: Should I pay off my student loans?
« Reply #9 on: March 08, 2019, 03:00:44 PM »
MrThatsDifferent, I do like that thought. I am excited to pay it off and save that extra $ each month.

And without the loans, plus whatever else you can save each month, you should be able to get back to your $17K or whatever you're comfortable with very quickly.

marty998

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Re: Should I pay off my student loans?
« Reply #10 on: March 08, 2019, 03:12:35 PM »
MrThatsDifferent, I do like that thought. I am excited to pay it off and save that extra $ each month.

And without the loans, plus whatever else you can save each month, you should be able to get back to your $17K or whatever you're comfortable with very quickly.

Yeah seriously, $8k is not that much in the grand scheme of things. Pay it off and be free of one more obligation.

music'stache

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Re: Should I pay off my student loans?
« Reply #11 on: March 08, 2019, 06:25:19 PM »
Good points jps and marty998. It's a small chunk in the bigger picture and the benefits of getting rid of it are appealing.

Kayad

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Re: Should I pay off my student loans?
« Reply #12 on: March 09, 2019, 02:08:19 AM »
What is the alternate use for this money?  Do you have any other assets you could tap in the event of an emergency of more than 9k?   Is your work or income particularly unstable?  How many x monthly living expenses is the remaining 9k? 

There is an argument that it is financially optimal to invest it rather than to accelerate the loan pay down.  But it sounds like this is just cash you have sitting in a savings account.  If that is right, I would pay them off, and enjoy the immediate psychological and financial benefit.   For most single, frugal folks, a temporary reduction to 9k in the emergency fund would not be cause for worry.  Even more true if you have other assets you could access in the unlikely event of a >9k emergency.

The intermediate path would be to kill the higher interest loans first. Investment order, https://forum.mrmoneymustache.com/investor-alley/investment-order/, which is a good rule of thumb approach, suggests your 6.5% loans should be a priority (as they are just about 4% above 10 year Treasury bill yield).  On the other hand, it suggests the 4% loans, just 1.5% above T bill yield, should not be accelerated at all.   


« Last Edit: March 09, 2019, 02:14:18 AM by Kayad »

clarkfan1979

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Re: Should I pay off my student loans?
« Reply #13 on: March 09, 2019, 10:14:10 AM »
There are good arguments on both sides, so it's more of a personal choice. When I left grad school in 2011, I decided to purchase real estate instead of paying off my student loans.

My original student loan balance was $56,600 in 2011 and it's now $31,500 in 2019. However, during this time, I think I accrued approximately 500K in real estate equity. I think I'm going to buy one more property before I get serious about paying off my student loans.

I think my overall interest rate is currently around 4.5%. I paid $1,500 in student loan interest in 2018. My payment is $184/month. Approximately $114 goes toward interest and $70 to principle.




FatFI2025

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Re: Should I pay off my student loans?
« Reply #14 on: March 09, 2019, 04:16:26 PM »
There are good arguments on both sides, so it's more of a personal choice. When I left grad school in 2011, I decided to purchase real estate instead of paying off my student loans.

My original student loan balance was $56,600 in 2011 and it's now $31,500 in 2019. However, during this time, I think I accrued approximately 500K in real estate equity. I think I'm going to buy one more property before I get serious about paying off my student loans.

I think my overall interest rate is currently around 4.5%. I paid $1,500 in student loan interest in 2018. My payment is $184/month. Approximately $114 goes toward interest and $70 to principle.

Same thought process for me. Whenever I run an alternate projection paying off SLs vs buying more RE, my NW at 5 years is significantly lower if I pay off the loans. My priority is to build my wealth so I accept the additional risk of the leverage, even though I'm the first to admit that it totally sucks.

But even if you're not going to use that money to grow business or invest aggressively, I'm wondering how you can safely go down to $9K in reserves. Even if you're super mustachian with a stable SE gig, I have a hard time imagining how $9K can be reasonable without something else to fall back on.

35andFI

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Re: Should I pay off my student loans?
« Reply #15 on: March 09, 2019, 09:20:38 PM »
.
But even if you're not going to use that money to grow business or invest aggressively, I'm wondering how you can safely go down to $9K in reserves. Even if you're super mustachian with a stable SE gig, I have a hard time imagining how $9K can be reasonable without something else to fall back on.

It all depends on what their expenses are, right?
For example, my monthly expenses are around $1200/mo so $9k would be 7.5 months of expenses for me.
7.5 months of expenses is plenty for an emergency fund.

music'stache

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Re: Should I pay off my student loans?
« Reply #16 on: March 10, 2019, 05:12:36 PM »
Good points to consider. The $8k is not currently earmarked for anything; although, now I'm considering using it to invest and/or grow business. I have approx. $10k liquid that I can tap into in the event of an emergency. Living expenses are $1370 currently and $1140 once student loan is eliminated, so the $9k covers 7-8 months living expenses.

Any investment ideas to consider using the $8k?


35andFI

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Re: Should I pay off my student loans?
« Reply #17 on: March 10, 2019, 05:32:00 PM »
Any investment ideas to consider using the $8k?

Low cost index funds. Iím a fan of Vanguard personally.

I chose to invest in the whole U.S. market.
If that is not available, I go with something that tracks the S&P 500.

Fill retirement buckets before taxable. See investment order link provided above.

All that being said, I would still chose to get these student loans behind you  before putting your money in the market but Iím sure others would argue that.