Author Topic: debt, debt, and more debt- and investment?  (Read 7764 times)

thurston howell iv

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debt, debt, and more debt- and investment?
« on: December 23, 2014, 08:00:34 AM »
Not sure if this is the right place to post so if it's not I will have it moved.

Here's the scenario:

Both DW and I have student loan debt ($220k for her and $50k for me- mine is older and locked in at a lower rate. Hers is newer and costing $1300 in interest per month!) (It's broken down into several loans at several rates. Highest is 7.9%) Loan repayment is due to start this month and at regular repayment schedule it was $2500!- So, I put it into forbearance so that I could take a breath and figure out WTF.

We have 2 houses. One in her name, one in mine. We live in mine and rent the other (it's in another state)- Current value according to zillow would theoretically net us $78k if we sold it (after commissions).

I have a few cars that I want to sell. Best case scenario is a net of $30k for the pair.

So, there's a little over $100k to work with.

Issues:
1. Would the loss of the "investment property" negatively impact her as far as taxes are concerned? (I used to use HR Block or turbo tax but it's starting to get too complicated)  She earns too much to write off student loan interest but is not considered "full time" in order to take advantage of the loan forgiveness programs.

1.5. Would keeping the rental property be a wiser choice even though the market is up and could support a nice ROI?

2. Capital Gains (we've not lived in it for more than 7 years) on the sale is what? (not sure what the calculation is)

3. Debt on my house is $175k

SO:
How do I maximize this mess?  I want to pay down the student loan debt but it's freakin' huge. Even throwing $100k at it seems to barely make a dent. I was thinking investing the $100k into a Vanguard Index fund and letting it grow while we attack the loan by throwing regular payments at it for the next few years...

I'm really looking for some creative thoughts, ideas, options... I don't really trust "wealth managers" that want to sell me stuff. So, I figured I'd see what my fellow Mustachian's might think.

Any and all input is appreciated. If you need more info please let me know.

Forcus

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Re: debt, debt, and more debt- and investment?
« Reply #1 on: December 23, 2014, 08:21:04 AM »
I don't  have much to offer here but was wondering what her profession is for the 220k in debt. I'd have to assume lawyer or doctor. Also you didn't mention income which to me would be the deciding factor. If her / your income is a slow ramp up in to future high earnings then I would throw the $100k at the student loan debt now. If it's a fairly quick ramp up for her / your income I'd think about keeping that $100k separate in investments - either rental + traditional investments or all in to traditional - and then throwing income at the student loan debt.

DrF

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Re: debt, debt, and more debt- and investment?
« Reply #2 on: December 23, 2014, 08:28:46 AM »
Ummmm, pardon me but your hair is on fire!

Extra payments to the highest interest student loan debt pronto.

As much as you can manage. I bet you can pay it all off in 2 years, because you would never go into that much student loan debt to get an anthropology degree right?

GGNoob

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Re: debt, debt, and more debt- and investment?
« Reply #3 on: December 23, 2014, 08:30:43 AM »
Usually you'd be safe to make minimum payments on anything under 4% interest and invest the rest of your money. Anything over 5% you should probably pay off as quickly as possible. Debt between 4 and 5% would be up to you to decide if you want to pay it off or invest.

If you are making a nice profit on the rental, it's probably worth keeping. But I know nothing about real estate and renting and will probably never own more than my own house.

Certainly get rid of any extra cars you don't need and then put that money towards your highest debt.

I'm sure you guys make a lot of money, but you may need to cut back and live like college students while paying off debt. $270k in student loans is crazy!

waltworks

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Re: debt, debt, and more debt- and investment?
« Reply #4 on: December 23, 2014, 08:41:16 AM »
You have several distinct questions there.

-First, you need to analyze the return you are getting on the house. Use the 50%/1% rules to start (ie, does the house rent monthly for 1% of the purchase price?) There's a sticky on the RE board about this. Based on your RE knowledge level, it's *probably* not a good investment but we'd need more info to say.

-You are not getting any very meaningful tax benefits out of the rental. Depreciation will lower your tax bill but you've got to pay it back when you sell. You only pay taxes on net rental income but thats no different than any other business. Don't keep the house for tax reasons, keep it if it's making money.

-You should definitely be paying your 7+% loans before doing any further investing. Between 4 and 7 percent, I'd still just pay them but you could make an argument for investing instead. Below 4% just pay the minimum unless you have an emotional problem with debt and paying it off will improve your happiness/life.

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Jack

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Re: debt, debt, and more debt- and investment?
« Reply #5 on: December 23, 2014, 08:44:44 AM »
I have a hard time believing that the rental property could be making a risk-adjusted return greater than the 7.9% necessary to justify keeping it instead of selling it to pay down the student loan.

Of course, that doesn't mean that situation couldn't happen -- you need to do the math.

She earns too much to write off student loan interest but is not considered "full time" in order to take advantage of the loan forgiveness programs.

IMO, this is one of the more important things to fix: what would it take to get her considered "full time?"

thurston howell iv

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Re: debt, debt, and more debt- and investment?
« Reply #6 on: December 23, 2014, 09:47:16 AM »
Thanks you all for the input.

More info as requested.

1. Both of us have professional degrees.
2. She is on a prn (as needed) status. Full time will be available when a position opens up.
3. With the extra hours she should earn around $90k or better.
4. Rental house was not an investment. It was our home and we could not sell it when the market crashed. Purchase price was $255k. We owe $249k. Rent is $1900 (HOA is $150 per month).  Does not look like we get 1%.
5. We live pretty frugally as it is. My dd is 17 years old. Hers is 10 years old. We have the airvoice $10 a month cel plan. We don't spend much on anything else...
6. I agree $270k in student loans is crazy. (My $50k is at 2.75% or thereabouts) Hers are all over the place. I'm trying to brainstorm some sort of plan to stop the bleeding because $1300 a month in interest is just stupid. 

I considered flipping some of the debt into low interest rate credit cards to reduce the interest but I don't have THAT much credit. Short of throwing everything we have at the debt I'm not sure which way to proceed.


So, If I were able to secure $100k out of the sales would it be best to:

1. pay the student debt and have less debt but no cash?
2. pay my house down and have a smaller debt load on the house? (Interest rate is locked at 3.375%)
3. Invest the cash and just attack the debt with our regular income?
4. pay some on the debt and invest some?

« Last Edit: December 23, 2014, 09:53:15 AM by thurston howell iv »

waltworks

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Re: debt, debt, and more debt- and investment?
« Reply #7 on: December 23, 2014, 09:51:35 AM »
Sell the house, use 100% of proceeds to pay off your SO's student debt, starting with highest rate loan and working your way down. Ignore/pay minimum on your loans, 2.75% is free money.

-W

Jack

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Re: debt, debt, and more debt- and investment?
« Reply #8 on: December 23, 2014, 09:53:31 AM »
4. Rental house was not an investment. It was our home and we could not sell it when the market crashed. Purchase price was $255k. We owe $249k. Rent is $1900 (HOA is $150 per month).  Does not look like we get 1%.

So let me get this straight: you only have the rental house to begin with because you couldn't sell it before and you're renting it out at a loss (at least it will be, once you consider maintenance over time), and you could sell it now for a profit?

WTF are you waiting for?! Sell the damn thing ASAP!

Short of throwing everything we have at the debt I'm not sure which way to proceed.

If you knew the answer already, why'd you need to ask us? ; )

thurston howell iv

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Re: debt, debt, and more debt- and investment?
« Reply #9 on: December 23, 2014, 09:57:38 AM »
Sounds easy to do in theory...

Up until recently we were upside down in the house. Lately the market has crept up and it looks like it may be a good time to sell... I figured the only answer was total shock and awe attack on something this crazy. It's a tough pill to swallow and I'm way more on board with mustachian values than DW... She see's $100k going right through her fingers with nothing to show but a smaller number on the spreadsheet... I'm still trying to beat it into her head that we need to get hot on this asap.  She wants to hold out for the loan forgiveness option... (While I like the idea, it seems to have more ways to not work than to actually work)

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Re: debt, debt, and more debt- and investment?
« Reply #10 on: December 23, 2014, 10:05:49 AM »
You took out the loans and got a great salary out of them. Now you hold up your end of the bargain and pay them back! Waiting is not going to help.

Get on those 7.9% loans. Stop looking at them as some ominous thing that will never go away. The longer you do that the more they will grow from accumulated interest. Take one and start tackling it with everything you have. Throw every spare $5 or $10. Look into refinancing to get a lower rate.

I'm only being harsh because I paid minimums and effectively ignored our loans out of college for 2 years. I wasted some good earning years where I could have made significant dents in the debt. We had probably 100k in student loans at 8.6%. It will go away eventually but not if you're spreading yourself all over the place between houses, investments, retirement, and loan payment.

Aggie1994

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Re: debt, debt, and more debt- and investment?
« Reply #11 on: December 23, 2014, 11:11:54 AM »
Sounds easy to do in theory...

Up until recently we were upside down in the house. Lately the market has crept up and it looks like it may be a good time to sell... I figured the only answer was total shock and awe attack on something this crazy. It's a tough pill to swallow and I'm way more on board with mustachian values than DW... She see's $100k going right through her fingers with nothing to show but a smaller number on the spreadsheet... I'm still trying to beat it into her head that we need to get hot on this asap.  She wants to hold out for the loan forgiveness option... (While I like the idea, it seems to have more ways to not work than to actually work)

She should see her $90k year a job as the blessing of taking out the $200k loans! Start paying them back and if she gets some forgiven then great. Otherwise she needs to change her mindset on why she took out so much?? Did she really need that much in student loans?

thurston howell iv

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Re: debt, debt, and more debt- and investment?
« Reply #12 on: December 23, 2014, 12:02:47 PM »
The program was expensive. Could we have done it a little cheaper? I think so but I don't think much cheaper. Besides tuition, there were lots of add-on expenses here and there. It's mostly my fault as I wanted the process to be smooth and stress free for her so that she would only have to focus on the studies. I did not want her to have to worry if we could afford this study course, or that program that made things easier. If she needed it, she go it.

While we did dig a little deeper into debt, the results were that she passed all her tests, licensing and so forth and landed a job within a month or so of graduation. Most of her peers cannot say the same. So, for me it was worth it. 

My plan all along has been the 10 year plan: Pay down all the debt as quickly as possible and keep that same level of intensity with the savings once we're debt free and we could probably be really close to FI in that time.
« Last Edit: December 23, 2014, 12:05:15 PM by thurston howell iv »

gatorNic

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Re: debt, debt, and more debt- and investment?
« Reply #13 on: December 23, 2014, 02:56:25 PM »
With interest rates so low I would consolidate those high interest student loans immediately if you can.  7.9% on loans when interest rates are historically low is crazy.  If there are any federal loans those should be consolidated separately (federal consolidation you can usually get a locked interest rate, where as private will most likely be variable with a cap). 

At the end of college I locked in my federal student loans at 1.75% (2.50-.25 for autopay - .5% for 2 years payments) down from 4-6%.  Private loans would be variable but have a cap.  It usually takes two years minimum for the Fed to raise rates from 0 to something more normal, so even though the variable interest rate might go up you would have some breathing room to pay off those originally 7.9% loans as fast as possible before the fed increases get too high (don't get me started on whether they will raise it at all).  If you have decent credit you should be able to manage about half the interest rate you are paying now.





SwordGuy

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Re: debt, debt, and more debt- and investment?
« Reply #14 on: December 23, 2014, 04:59:58 PM »
I really recommend this book - which I learned about on this forum:

http://www.amazon.com/Every-Estate-Investor-Financial-Measures/dp/0071603271/ref=sr_1_15?s=books&ie=UTF8&qid=1419379052&sr=1-15&keywords=real+estate


It's a pretty easy read, interesting, and you'll really understand how to run the numbers.

And if ARebelSpy is recommending paying down debt instead of investing in real estate, you should take note...

CashFlowTurtle

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Re: debt, debt, and more debt- and investment?
« Reply #15 on: December 23, 2014, 08:31:02 PM »
First - refinance that debt!

I refinanced mine with Darian rowayton bank earlier this year and got 2.75% interest rate and 15 year amortization.

Next, save what money you can in cash in case a good investment comes up - 2.75% is next to free, you can always pay down the loan with the cash later should you choose to

The 1% rule on real estate is a rough rule of them for when you don't have time to do cashflow modeling.

 If your investment property is cashflow positive (don't forget the benefit of depreciation!) Then keep it.  Also see if its net income positive (like  15 year mortgage might make it cash flow negative, but be bet income positive through building equity) - if that's the case, keep it.

babysnowbyrd

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Re: debt, debt, and more debt- and investment?
« Reply #16 on: December 23, 2014, 09:29:15 PM »
As much as you can manage. I bet you can pay it all off in 2 years, because you would never go into that much student loan debt to get an anthropology degree right?

I got my degree in anthropology for less than $20,000!

thurston howell iv

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Re: debt, debt, and more debt- and investment?
« Reply #17 on: December 24, 2014, 05:47:14 AM »
When I spoke to the loan servicer. They explained that consolidation would not yield me a much better rate as it was weighted. Still not really sure what they meant. There are no private loans. Only subsidized and unsubsidized. Interest rates vary from 5.4% to 7.9%. The bulk of the loan $153k is at 7.9%.

Additionally, I was advised that we have a possible 36 months of forbearance (in the event that we need it- like now so I can figure things out). Additionally, there will be an extra 36 months should I consolidate. Again, it's not a plan to use it to avoid a payment and let interest accrue but, rather to have available to me should I need some breathing room.

I'm going to see if there are other refinancing options. We both have great credit so if it's available, I want to try and secure a lower rate.

Radagast

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Re: debt, debt, and more debt- and investment?
« Reply #18 on: December 24, 2014, 10:11:04 AM »
The bulk of the loan $153k is at 7.9%.
Quote
$1300 a month in interest

$90k per year is not enough compensation for this obscenity. That's like begging somebody on your knees "please, take 5 years of my life away."

Edit: and if you don't have all loans consolidated to less than 4% in the near future, there is definitely no point to spending money on anything other than paying them off. At 7.9% I'd be selling both houses.
« Last Edit: December 24, 2014, 10:21:31 AM by raven15 »

ScroogeMcDutch

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Re: debt, debt, and more debt- and investment?
« Reply #19 on: December 24, 2014, 03:50:39 PM »
Sounds easy to do in theory...

Up until recently we were upside down in the house. Lately the market has crept up and it looks like it may be a good time to sell... I figured the only answer was total shock and awe attack on something this crazy. It's a tough pill to swallow and I'm way more on board with mustachian values than DW... She see's $100k going right through her fingers with nothing to show but a smaller number on the spreadsheet... I'm still trying to beat it into her head that we need to get hot on this asap.  She wants to hold out for the loan forgiveness option... (While I like the idea, it seems to have more ways to not work than to actually work)

Picking it up a little back in the thread, as there is an important remark here. I agree with all the other remarks regarding sell the house, refinance the student loans, and so forth, but if she would see 100k (which you'd have liquid) as what you could spend/do fun things with, while the 270k on the loan side doesn't feel like something you'd have to repay, then definitely you need to work on her mindset.

If I understand your first post correctly, you have close to $620k in debt? ($50k your SL, $220k her SL, $250k 2nd rental, $100k your house) And you list $330k as the value of the 2nd house, so I would be curious how much equity you have left on the house you live in. By selling the 2nd house, and paying off her debt with it, you'd be reducing your total debt from $620k to $290k as the mortgage from the house also can be scrapped off the list.

Is it a possibility to refinance some part of the student loans by increasing the mortgage on your house, so you reduce the overall interest? Basically, if you could get that $290k to $50k yours, $150k your mortgage, and $90k her SL, then you are maybe already in a decent place from overall interest % point of view? Then, devise a plan to pay off that remaining debt to the point where you only have 3% loans remaining, and work on a growth path?

Then compare that to the current as-is situation, and how long you will be repaying that debt, and what it means to your family from a cash flow / equity point of view. Maybe once there are improvements on the cash flow front, reserve a little for fun money so she can feel a tangible improvement already.


gimp

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Re: debt, debt, and more debt- and investment?
« Reply #20 on: December 24, 2014, 04:58:28 PM »
At 7.9%, you need to invest all your money into paying this off. You might get a better return on the market for some time but it's not worth the stress from having this massive debt, nor the lost opportunity from being in so much debt.

I know, easier said than done, but that's my opinion.

Jack

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Re: debt, debt, and more debt- and investment?
« Reply #21 on: December 24, 2014, 09:27:23 PM »
When I spoke to the loan servicer. They explained that consolidation would not yield me a much better rate as it was weighted. Still not really sure what they meant.

Normal "consolidation" just means taking all your little loans and rolling them up into one big loan whose interest rate is the weighted average of the constituent loans' interest rates. For example, if you started with $5000 @ 5%, $10000 @ 6% and $5000 @ 7%, you'd end up with a $20000 @ 6% loan. (And then they might give you an 0.25% discount, maybe.) I don't see the point in it, especially since you lose the ability to preferentially pay off the higher-interest parts first.

A "refinance" is different: in that, you're exchanging your government-regulated loans for private ones, giving up the ability to do deferment/forbearance/income-based-repayment in exchange for a lower interest rate. For "normal" people losing that flexibility is a pretty big gotcha; for mustachians who are sure they'll never have trouble making the payments it's less of a problem.

ltt

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Re: debt, debt, and more debt- and investment?
« Reply #22 on: December 25, 2014, 06:14:20 AM »
What exactly does PRN (as needed) mean?  Not only is there a debt problem, but if this is a part-time, on-call situation, then could she pick up additional hours elsewhere, another job, to supplement to help pay down this loan?

thurston howell iv

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Re: debt, debt, and more debt- and investment?
« Reply #23 on: December 26, 2014, 04:46:35 PM »
raven15: I agree. It is an obscenity.

As for the consolidation "gotcha"- That's sort of the issue...

If I refi with Darian Rowayton they offer as low as 2.7% variable and 3.5% on a fixed rate. Issue is that the lowest rate has the highest/shortest repayment term  $4k per month for 5 years!

If I bump it to a 15 year repayment the rate jumps to 5.5%

If I go with SoFi, they offer an option to miss a payment should there be some job loss. I have not been able to speak with them to get the details.

My concern is that being a PRN worker- (technically part time but accruing 40-60 hours a week), the hours may not be there. There's some politics in the hospital and they're complaining about paying on so many hours even though it's necessary to have the coverage.  We don't want to engineer a $4k obligation and then run into some issue where we can't cover it.  We're hoping a full time designation is in the near future...


AS for the housing situation, it's a little complicated... We have the rental in another state. It's a hassle to own but it pays for itself and up until just recently it was under water. I'm working on a plan to get it sold asap.

When DW was accepted into her graduate program, we lived far away and it was costing a ton of money in fuel and too any hours commuting. So, we moved down the road from the school. We took a huge hit on the rent because we were over a barrel. I did this because I planned to leave the area as soon as she finished. As it would happen, she landed a good job right down the road. So, I finished out my lease and purchased a house. Currently, there is no equity but I have a significantly lower payment, a very low interest rate and more flexibility than with the rental.

Total debt is around $670k... Sale of some cars and rental should net around $100K-$130k.

I've run through the numbers and the scenario's with her and she understands that this is what needs to be done. I keep trying to impress upon her that we can do this in a few years if we stay focused...

Thanks to all of you who posted... I know what needs to be done, it's just super-daunting as it always seems the mountain keeps growing while I'm climbing.




TomTX

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Re: debt, debt, and more debt- and investment?
« Reply #24 on: January 01, 2015, 11:13:18 AM »
Sell the house, use 100% of proceeds to pay off your SO's student debt, starting with highest rate loan and working your way down. Ignore/pay minimum on your loans, 2.75% is free money.

-W

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CashFlowTurtle

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Re: debt, debt, and more debt- and investment?
« Reply #25 on: January 30, 2015, 07:23:55 AM »
@thurston howell iv

Check out DRBank, please, don't listen to your loan officers, listen to us.  If you can borrow at 2.75% as I did (your credit profile may be different) then it changes everything.

You would not be 'consolidating' as that's a specific term for something you used to be able to do with good terms - you'd be taking out a new private loan to pay off the old one.

I refinanced about 86k of student loans here, it saved me roughly $1100/month (about $150 in interest, the rest in principal to reinvest elsewhere).
http://www.drbank.com/

2.75% interest!

DragonSlayer

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Re: debt, debt, and more debt- and investment?
« Reply #26 on: January 30, 2015, 07:46:07 AM »
You've got to get out from under those loans! Given that you've got a 17 and 10 year old, I'm guessing you're not *that* young (no offense, but I'm betting you're not 22 and just out of college). You've got to start saving for retirement and you can't do that until some of this other mess is cleaned up. I'm not an expert in real estate or car, but I would be selling everything not nailed down and taking on some part time/extra work if I had to and throwing every bit of money at that debt. Having that much debt would make me lose my mind.