Author Topic: pay extra on student loans or invest?  (Read 2735 times)

bronxchickenman

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pay extra on student loans or invest?
« on: June 17, 2016, 08:22:37 AM »
I have $130K in student loans, $2000 a month minimum payment, 5.18% interest.  Paying the minimum, I should be done in a little under 7 years.  I can afford to throw an extra thousand at the loans some months, and I can also throw a lump sum of around 10K once a year.  The loans have always been the big thing that I want gone... so naturally I always thought that I should put every dime towards getting rid of them.  The MMM philosophy also teaches to get rid of debts like an emergency.  I did this with all of my high interest credit card debt, so the next natural step is to hit the loans.  But I keep coming across articles like this:

http://money.cnn.com/2014/12/11/investing/dont-pay-off-your-student-loans/

What is the more valid option?  Should I do a little bit of both? 

DrF

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Re: pay extra on student loans or invest?
« Reply #1 on: June 17, 2016, 08:32:48 AM »
Do you itemize your taxes or take the standard deduction? Student loan interest is tax deductible, bringing down the % you're really paying on them each year. I'm actually for not paying off your student loans, as long as you really are putting money to work for you in stocks. If you're holding cash or bonds, you're probably better off paying the student loans.

Just one opinion though.

signhere

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Re: pay extra on student loans or invest?
« Reply #2 on: June 17, 2016, 09:08:52 AM »
I'm in a similar boat - roughly $125,000 in federal (not private, which is an important distinction) student loans @ ~7.2% interest. My strategy has always been to pay the absolute minimum and I'm currently on the 30 year plan. This view on (not) repaying student loans will likely be an unpopular one, which is reasonable because it certainly isn't the safest approach.


I understand taking the guaranteed 7% return and quickly repaying my loans down is the safest approach and I can very comfortably cut a check for the entire balance today, but I'm very confident there will be some kind of student loan bailout in the near future and I'm putting my money where my mouth is. If you have private loans I assume this strategy would not apply.

If you're investing your idle cash you're really only losing out on the difference between your investment returns and loan interest rate plus you're realizing your "student loan bailout equity"...

 



« Last Edit: June 17, 2016, 09:10:24 AM by signhere »

KCM5

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Re: pay extra on student loans or invest?
« Reply #3 on: June 17, 2016, 09:17:51 AM »
I'd do 401k to the match and then throw all extra at student loans. Personally, above 5% is high enough that I'd wouldn't want them sitting around.

I have a few thousand left of my student loans, but they're at 2%, so I'm not in a hurry to pay them off.

Have you looked at refinancing them? (sofi.com)

Greenpez

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Re: pay extra on student loans or invest?
« Reply #4 on: June 17, 2016, 09:19:27 AM »
I understand taking the guaranteed 7% return and quickly repaying my loans down is the safest approach and I can very comfortably cut a check for the entire balance today, but I'm very confident there will be some kind of student loan bailout in the near future and I'm putting my money where my mouth is.

 Just.... wow.

randymarsh

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Re: pay extra on student loans or invest?
« Reply #5 on: June 17, 2016, 09:36:41 AM »
I understand taking the guaranteed 7% return and quickly repaying my loans down is the safest approach and I can very comfortably cut a check for the entire balance today, but I'm very confident there will be some kind of student loan bailout in the near future and I'm putting my money where my mouth is.

 Just.... wow.
Yeah that's an interesting viewpoint given there's basically zero evidence of any such thing happening. It seems clear to me that income based plans and PSLF are the way the government is going to handle high borrowers. I could see congress making the non-PSLF forgiveness non-taxable when that bomb starts to go off in ~15 years.

JJsfr

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Re: pay extra on student loans or invest?
« Reply #6 on: June 17, 2016, 11:34:56 AM »
Do you itemize your taxes or take the standard deduction? Student loan interest is tax deductible, bringing down the % you're really paying on them each year. I'm actually for not paying off your student loans, as long as you really are putting money to work for you in stocks. If you're holding cash or bonds, you're probably better off paying the student loans.

Just one opinion though.

Going to guess that at his income it's not deductible. If cashflow is not a problem and job security is OK, I vote pay off anything >5% and invest the rest.

signhere

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Re: pay extra on student loans or invest?
« Reply #7 on: June 17, 2016, 11:43:56 AM »
I understand taking the guaranteed 7% return and quickly repaying my loans down is the safest approach and I can very comfortably cut a check for the entire balance today, but I'm very confident there will be some kind of student loan bailout in the near future and I'm putting my money where my mouth is.

 Just.... wow.
Yeah that's an interesting viewpoint given there's basically zero evidence of any such thing happening. It seems clear to me that income based plans and PSLF are the way the government is going to handle high borrowers. I could see congress making the non-PSLF forgiveness non-taxable when that bomb starts to go off in ~15 years.

I wouldn't say there's ZERO evidence. I don't follow politics very closely at all but my understanding is that if Bernie Sanders became president he would've likely implemented some sort of programs that are at least better than what's currently offered. In other words, it's been identified as a problem and we could be close to something being done about it.

Anyway, my situation is slightly different because I "retired" a few years ago and my income-based payments are based on my current AGI, which is not super high. I do fear the looming tax bomb though!

« Last Edit: June 17, 2016, 11:47:16 AM by signhere »

DrF

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Re: pay extra on student loans or invest?
« Reply #8 on: June 17, 2016, 03:44:36 PM »
you have student loans and are already retired? my head just exploded.

randymarsh

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Re: pay extra on student loans or invest?
« Reply #9 on: June 17, 2016, 05:16:05 PM »
you have student loans and are already retired? my head just exploded.

A low AGI coupled with a large SL balance will result in a comically low minimum payment. At the extreme end, a 30K income with 300K loan requires a payment of just $101.50.

johnny847

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Re: pay extra on student loans or invest?
« Reply #10 on: June 17, 2016, 07:42:18 PM »
Do you itemize your taxes or take the standard deduction? Student loan interest is tax deductible, bringing down the % you're really paying on them each year. I'm actually for not paying off your student loans, as long as you really are putting money to work for you in stocks. If you're holding cash or bonds, you're probably better off paying the student loans.

Just one opinion though.

Whether the OP itemizes deduction is irrelevant because the student loan interest deduction is an above the line deduction (meaning the deduction can be claimed even if the OP takes the standard deduction)

MustacheAndaHalf

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Re: pay extra on student loans or invest?
« Reply #11 on: June 18, 2016, 12:54:15 AM »
Back to OP's situation, you need to compare the certain interest rate of the student loans to other investments.  The median tax bracket is 25%, so a 5% student loan with tax deductible interest has you paying 3.75% and the IRS sharing the burden of the other 1.25%.  You have an after tax, guaranteed return of 3.75% by paying down your student loans.  That's pretty good, but it's still your call if that's better than what you can do elsewhere.  Bonds and CDs are running about 2%, so it beats those investments.  The question is stocks, where the return is uncertain.  For example, in 2015 the S&P 500 earned less than 1% according to Morningstar.  It's too late to use that information now, just know that stock returns are uncertain.

Note that the student interest deduction seems to cut out at higher incomes, at which point you're stuck with the full 5% interest and no help from the IRS.  For a guaranteed return, that's great.  At 5% I'd certainly pay down the student loans, and at 3.75% you should probably pay down the student loans, but it's your call.

One other thing to consider, you can go bankrupt and have all your stock assets taken to pay it off.  But your student loan will survive bankruptcy and even take away social security benefits if you ignore it that long.  So student loan debt, being so toxic, should be paid down if you feel it's a tie between stocks and the student loan.

Zaga

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Re: pay extra on student loans or invest?
« Reply #12 on: June 18, 2016, 09:07:56 AM »
Similar boat here, started out with $115K in student loans, all at 5%.  Conventional wisdom around here often says lower than 5% let them ride and above 5% pay them off.  Well, what about at 5%?

First off, the student loan deduction is only good for the first $2,500 in interest each year for a married couple, half that if you're single.  An important distinction.  Any loans you pay down above the amount of interest you can deduct you are saving 5.18%, that's a pretty good guaranteed rate of return!

On the other hand, you can't get back years of investing either. 

Our decision was to split it up.  We invest, and we pay down the loans.  It seems to have worked well for us.  2015 was the first year that we were able to deduct all of our student loan interest, we finally pay less than $2,500 in interest a year!  And our investments have grown nicely, much more so than they would have if we had decided to pay off the loans completely before investing more than the company match.

Was our decision the 100% best one mathematically?  Maybe not.  Since 2009 our investment returns have been way higher than 5%!  But I'm not one to let perfection get in the way of at least doing well, and paying down the student loans is good for my peace of mind.

So my advice is to do what lets you sleep at night the best. 

Debts_of_Despair

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Re: pay extra on student loans or invest?
« Reply #13 on: June 18, 2016, 10:02:34 AM »
Spouse had over 80k in student loans.  It was like a dark cloud hanging over my head.  Hated the feeling and I paid it off in about 3.5 years.  We are now 100% debt free and the positive feeling it brings pays non-monetary dividends everyday.  All our extra money now goes into various pre and post tax retirement savings.

MDM

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Re: pay extra on student loans or invest?
« Reply #14 on: June 18, 2016, 08:41:14 PM »
We are now 100% debt free and the positive feeling it brings pays non-monetary dividends everyday.
There are many with a mindset similar to this.

There are others who would say "we are investing at higher returns than we would get by paying the mortgage and the positive feeling it brings pays non-monetary dividends everyday.

Each group thinks the other is missing the point.... :)