Should we change sl repayment plans?

[Mazzinator]

Hey, i'm a newbie. I've been reading here for a month or two and feel we are ready to take this to the next level.

Some background
Me 36 dh 39
Kids 9 months and 2.5yrs
Only debt SL:
$10k 0%
$26k 3.5% vary ($300 min)
$66k 4.75% (425 min) this is the one we could change
Roth ira
$15k (havent contributed since 2009)
Dh to retire from the army in 8 years (he will get approx $4k-$5k/month after tax, in todays dollar, according to the online calculator)
Snowball is $1000/mnth
We will pcs in June to Oahu and should be able to up the snowball to total $3-4k (we are going to downsize)
Going to sell my car then prob get $11k

So, if we stay on this plan, we should be debt free by mid/end of 2015.

But, because dh wants to retire in 8 yrs, we feel we should be maxing out at least the TSP. but this would add another yr or so to pay off all that debt.

So my question is, is it REALLY better to just knock out the debt first with 0 to retirement, or is it better to get investing due to the lack of time???

Thanks for all your help..

[Deimyts]

I just wrote a long reply, and it got deleted through wayward keypressing. Here's the gist of it:

If the 10K at 0% is a fixed rate loan, pay it off as slowly as you can, because you are actually making money on it due to inflation.

The 3.5% variable should be paid off as fast as possible, because you don't know when or if it will suddenly rise.

If the 4.75% is also variable, the same applies. Otherwise, it's likely that you could at least break even with investments, and whether you invest or pay off your loans is a factor of your personal risk tolerance - The loans are a guaranteed return, but the investments could potentially net you more money. Personally, if this is a fixed rate loan, I'd divert a small amount of the payment to investments, but use the majority of disposable income to pay off this loan and the 3.5%. If the 3.5% is variable and the 4.75% is not, I might even consider paying the 3.5 off first, just because of the higher risk.

[Mazzinator]

Thanks!!

The 0% is a cc, until april 2014. We estimate we will get back a few grand in taxes next yr, we just adjusted the withholdings, but tooo much has already been taken out, so i know we can knock it out early next yr. We have room on the card for $10k more..not sure if we should transfer it or not. (We are getting desperate at this point and are willing to do just about anything to save money / pay it off quicker) plus it being on a cc makes it a bigger emergency which helps with motivation!!

The 4.75% is fixed and that is fed loan. We thought about changing it to IBR plan, but haven't found a way to crunch the numbers whether it's worth it or not.

We are currently snowballing the 3.5% loan. Hoping to pay it off by end of this yr.

Also, if we max out the TSP, we would be paying even less in taxes, which will give us even more back next yr in feb. But it would take away from our snowball, which is in high need this yr.

I feel like any and every decision we make is costing us sooo much money and the weight of it is unbearable at times. But, this has also lead us here to MMM, which we might not have come across otherwise.

Thanks again!!!

[Deimyts]

Sorry, I disappeared from the forums for a while and didn't see your reply. I imagine your situation has changed a bit in the intervening months, but if it hasn't...depending on who your loan is with, you can call up your servicer to get a good idea of what you'll pay on IBR. I did it for 3 of my lower interest stafford student loans, and, because my income is really low, I'm not making any payments on these for a year - the money saved is being poured into higher-priority loans instead, to pay them off faster and save money on interest.

How's the rest of it coming along?

[Mazzinator]

Thanks so much for checking back in on me!!! Sometimes I feel like I have no clue what I'm doing and I'm just left out here floating around in life.

I also like the IBR plan idea, but for us to qualify for the fed loan (big one now at $56k 4.75% fixed) we would "have" to max out the TSP. we also have $5k available that could go to a tIRA, to lower our AGI even more. Payment would then be about $120/month, about $100/month would be forgiven (at least for a yr) total interest per month is about $220. Not sure if it's worth saving $100/month???

I've also been studying biggerpockets, and found a good area to invest in!!! But I can't get ahead of myself just yet!!!

Thanks again for your reply!!! Any and all help is appreciated!!

[Deimyts]

What's TSP? I think I missed that acronym.

I'm also a little confused by your explanation still - not sure how it fits into your overall situation.

If you still have that 0% cc loan, pay it off first 'cause you don't want to wait for it to jump. If not, then congratulations!

In general, when trying to decide if you should pay off debt or invest, you should look at them as two sides of the same coin. Any debt you have is losing you money to interest every second you own it. Likewise, any investment can be producing money in the same way.

Therefore, it can be helpful to not think of the debt payments as an alternative to investing, but rather as a very specific sort of investment, with a risk-free, guaranteed rate of return equal to the interest rate on the loan. You should only invest in other assets if you can be certain of a higher rate of gain then you will be loosing by not spending that money on loans, + a 
A retirement plan with employer matching is a good example of this - up to the point where your employer stops contributing, your return is the percentage that they contribute, plus any additional increase from the investment itself. So in that case, it makes sense to divert money to a plan like that, at least up to the point where your employer will no longer match. At that point, your return sinks back down to average rates, and you'd probably be better off paying down the debt (with the guaranteed return that entails.)

[Peony]

If you have reduced your big loan by $10,000 since April, and you are also snowballing the 3.5% loan, you are doing amazingly. Congratulations!

[Mazzinator]

Oh thanks, but we're not doing amazing. I'll try to better explain.

We still owe
9,600
22k
56k

But now have
10k cash
25k Roth
10k tsp (same as a 401k, no company match)

So, the plan is to max out 17,500 to the tsp so we can qualify for IBR payments to get the interest forgiven* and lower payments. We currently do not qualify for ibr. We started mid yr, so the tsp contribution is divided by 7 months not 12, so it's a lot per month.

Basically we are maxing out tsp, two Roths then all leftover to debt. We saved the cash we got from selling my car as our EF.

Thanks so much for reading, and sorry...maybe i'm making this harder than it has to be.

* What about interest? In some situations, your reduced payment under IBR may not cover the interest on your loans. If so, the government will pay that interest on your Subsidized Stafford Loans for your first three years in IBR. After three years and for other loan types, the interest will be added to the total amount you owe. While your debt may grow if your affordable payments are low enough, anything you still owe after 25 years of qualifying payments will be forgiven.

[Deimyts]

Thanks so much for reading, and sorry...maybe i'm making this harder than it has to be.

Not at all! Everybody's situation is different, sometimes it just takes a little clarification.

I assume the $10k in cash is your emergency fund? If it were me, I'd consider paring that down a bit and using the extra to pay off a chunk of the $9600 credit card debt before the interest rate jumps up again. But I think my living expenses per month are lower than yours, especially since you have 2 kids. How many months worth of expenses, including loan payments, does the emergency fund cover?

Also, you have to pay 17,500 per year on the tsp to max it out, right? Or is that 17,500 total, regardless of when you put it in?

And then, how much money will you save per month, on which loans, by switching to IBR?
What's the amount your payment will be reduced by, and how much interest will be forgiven?
You said earlier that your payment will drop to about 120 from 425, and you'll get an additional $100 interest forgiven each month?

The credit card jumps up in April next year, right? What will be the interest rate?

In the long run, you want to do whatever will save you the most money, and that can sometimes be really difficult to determine.

[Mazzinator]

The 10k cash is our EF. It represents about 2 months expenses (i know our expenses are a lot more than most but my dh isn't fully mustachian, so it is what it is) The EF is mainly there in case we need to fly back to our family (we live very far away from them) or if we feel like we need a second car.

The tsp (401k) max contribution is $17,500 for 2013. It is just like a 401k. I'm guessing most people would contribute a bit every month (12 months) to equal 17,500/yr. Since we didn't start contributing until June, we divided 17,500 by 7 (instead of 12) Not sure i'm explaining this correctly.

The federal loan (the only one eligible for IBR) currently adds about $220 in interest per month. So if the new minimum payment is $120, then the $100 excess is forgiven.

I didnt get much feedback, so we just went with this plan.

For the cc, the strategy was to pay min payments until jan 2014, then throw all money to it and pay it off before april 2014. If all else fails, we will drain the EF to pay it off before any interest is added.

Thanks again!

[Deimyts]

That sounds like a pretty solid plan. Since you've got enough in your EF to pay down the cc debt at any point you need to, there should be no point where you have to pay interest on that. Let us know how you do!

[seattlecyclone]

I followed your link from the "Ethical Dimensions of Student Loan Income Based Repayment Plans" thread. I think you should go ahead and sign up for the IBR plan, at least for the three years when any excess interest is forgiven.

You say the interest charged would go down from $220 to $120 and you would no longer have to make principal payments above that amount. That means your effective interest rate goes down from 4.75% to about 2.6%. Guess what? Now your 3.5% loan has the highest interest rate. Put all excess cash toward that loan, but be sure that you can also pay off the credit card before its introductory interest rate expires in the spring.

Once the three years are up, re-examine your decision to stay on the IBR plan. Do you hope to one day earn enough money that you would no longer qualify for IBR? If so, you should probably just pay off the student loan as quickly as possible from that point so the interest doesn't accrue.