Author Topic: Should I put bonus money into student loans or invest it?  (Read 11240 times)

atrian

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Should I put bonus money into student loans or invest it?
« on: May 22, 2014, 10:00:48 PM »
Hello fellow Mustachians,

After a good year at work, I've managed to secure a fantastic bonus.

Right now I have $10,000 worth of student loans left. The loans vary in interest rate (3% - 5%).

After tax, my bonus should be able to mostly pay off my student loans (I'm expecting < $500 remaining).

Would it better to my money into loans or should I save and invest? Or half-and-half?

Thanks,
Atrian


SDREMNGR

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Re: Should I put bonus money into student loans or invest it?
« Reply #1 on: May 22, 2014, 11:13:37 PM »
Pay it off.  Best feeling.  Also one less thing to worry about.

It's sufficiently high enough interest rate in today's uncertain investment landscape that I don't think the risk of stock market is worth it. 

Pay it and forget it.

Cheddar Stacker

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Re: Should I put bonus money into student loans or invest it?
« Reply #2 on: May 22, 2014, 11:16:11 PM »
Need more details.

Can you contribute a big chuck of your bonus into your 401K? Do you have an employer match? Can you contribute to an IRA?
Is your student loan interest tax deductible? It's phased out when you make a high wage, but it depends on the other details of your tax situation.

Obviously if you pay off the debts do the 5% first. Investing should provide a bigger return than those interest rates, but many people think the market is over valued right now so maybe not in the short-term.

My wife and I are still carrying $20K SL debt at 4% 14 years after graduation, so I bet you can guess what I do with my extra $. Max the 401K's, IRA's, any other tax deferred vehicles, then invest in post tax accounts.

If the interest rates are fixed they are a nice hedge against inflation.

atrian

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Re: Should I put bonus money into student loans or invest it?
« Reply #3 on: May 23, 2014, 12:28:12 AM »
It's sufficiently high enough interest rate in today's uncertain investment landscape that I don't think the risk of stock market is worth it. 

I feel this way about the stock market too right now.

Can you contribute a big chuck of your bonus into your 401K? Do you have an employer match? Can you contribute to an IRA?
Is your student loan interest tax deductible? It's phased out when you make a high wage, but it depends on the other details of your tax situation.

Obviously if you pay off the debts do the 5% first. Investing should provide a bigger return than those interest rates, but many people think the market is over valued right now so maybe not in the short-term.

My wife and I are still carrying $20K SL debt at 4% 14 years after graduation, so I bet you can guess what I do with my extra $. Max the 401K's, IRA's, any other tax deferred vehicles, then invest in post tax accounts.

If the interest rates are fixed they are a nice hedge against inflation.

Unfortunately, it just so happens in my case that I cannot deduct my student loan interest. There is a 401K match up to a limit of around $5000 at my company. No, I don't have an IRA yet.




nereo

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Re: Should I put bonus money into student loans or invest it?
« Reply #4 on: May 23, 2014, 05:58:44 AM »

Unfortunately, it just so happens in my case that I cannot deduct my student loan interest. There is a 401K match up to a limit of around $5000 at my company. No, I don't have an IRA yet.
It's your call - but given what you said about not having an IRA, and that the SL rates are 3-5%, I would fully fund your IRA before paying down an extra cent of student loans.  You said there's a 401(k) match - are you taking advantage of it?  if not, DO SO - that's the closest thing to 'free money' you're ever likely to get.
Quit worrying about whether the market is "over/undervalued right now".  As long as your time horizon is >>10 years the price right now isn't very important.

jrhampt

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Re: Should I put bonus money into student loans or invest it?
« Reply #5 on: May 23, 2014, 09:58:07 AM »
Since you'll be able to knock out nearly all of your loan at one blow, I would put it all into your student loan (and then pay off the few hundred dollars remaining ASAP so you can get the benefit of the freed-up cash flow).  I paid off my loans partly with bonus money, and it was great to get rid of them.  Now I put bonus money toward my mortgage, and I'm looking forward to knocking that out in the next year or so.

Catbert

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Re: Should I put bonus money into student loans or invest it?
« Reply #6 on: May 23, 2014, 12:58:43 PM »
In your situation I would pay off the Sls.  It's always nice to use a bonus towards something specific that you can rememeber later.  I'd always remember that the bonus paid off (almost) my SLs.

frugaliknowit

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Re: Should I put bonus money into student loans or invest it?
« Reply #7 on: May 23, 2014, 01:35:57 PM »
You should be able to cover any 401K match with your regular salary directly out of your pay.  If you cannot, your expenses are probably too high and need to be evaluated.

If you have not yet fully funded a roth IRA (assuming you are eligible) for 2014, I would do so.  Come Jan. 1, I would also max out 2015.  This would cover the 10K.  Anything left should be used for the student loans. 

If you are ineligible for a Roth, I would pay the loans down and not do the IRA nor the unmatched 401k (I think the risk/return is better paying off the loan).