Our current minimum payment for the loans monthly is: $2131. In terms of savings, we are able to set aside about $3k per month. My question is in regards to how to utilize this $3k. If we were to put it all towards the student loans, I calculate that we will be able to completely pay them off in roughly 3 years (total monthly SL payment of $5131).
Yes, 3 years it is (assuming the average interest on the 3.15-6.55% loans). For others interested, there is a spreadsheet you can download at
http://www.vertex42.com/Calculators/debt-reduction-calculator.html that gives results such as:
| Creditor | Balance | Rate | Payment | Custom |
| Student Loan #1 | 14,270.91 | 6.61% | $191.83 | |
| Student Loan #2 | 79,864.35 | 4.85% | $1,005.38 | |
| Student Loan #3 | 7,989.54 | 2.00% | $90.13 | |
| Student Loan #4 | 17,281.10 | 4.57% | $215.22 | |
| Student Loan #5 | 49,411.35 | 4.85% | $622.02 | |
| | | | | |
| | 168,817.25 | | 2,124.58 | |
| | | | | |
| Monthly Payment | 5,124.58 | . | | |
| Initial Snowball | 3,000.00 | | | |
| | | | | |
| Strategy: | 2 | | | |
| | | | | |
| Creditors in | Original | Total Interest | Months to | Month Paid |
| Chosen Order | Balance | Paid | Pay Off | Off |
| Student Loan #1 | 14,270.91 | 220.71 | 5 | Feb-16 |
| Student Loan #2 | 79,864.35 | 4,588.17 | 24 | Sep-17 |
| Student Loan #5 | 49,411.35 | 4,971.16 | 32 | May-18 |
| Student Loan #4 | 17,281.10 | 1,882.73 | 35 | Aug-18 |
| Student Loan #3 | 7,989.54 | 390.99 | 36 | Sep-18 |
The other option would be to completely invest the $3k (max out both of our 401k & max a backdoor roth for each). The latter option would put the student loan repayment out to 9 years. Obviously, if all the loans were paid off we would be able to devote a little over $5k per month towards 401k, roth, & taxable. Is it worth sacrificing the three years in order to be completely debt free? Or is it foolish to lose the three years of investing in order to maximize the debt repayment. Thanks for any input that can be offered.
You could follow these rules of thumb (and note the 10-year T note interest is currently ~2.2%):
In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct.
Also, differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).
WHAT
0. Establish an emergency fund to your satisfaction
1. Contribute to 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, swap #4 and #5)
6. Fund mega backdoor Roth if applicable
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
8. Invest in a taxable account with any extra.
WHY
0. Give yourself at least enough buffer to avoid worries about bouncing checks
1. Company match rates are likely the highest percent return you can get on your money
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see
http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/ if you want even more details on that topic.)
5. See #4 for choice of traditional or Roth for 401k
6. Applicability depends on the rules for the specific 401k
7. Again, take the risk-free return if high enough
8. Because earnings, even if taxed, are beneficial
