Would you pay off these loans?

Apollo11235 · November 2013

Hey MM!

First off, I apologize in advance because I don't know how to write anything less than an essay when I'm asking for advice. Hopefully all the details will help you help me.

DH and I are contemplating paying off some of his student loans, and I'd like some outside input. Here's our situation:

$20k in savings
$200 CC debt at 0%, gone in January
Student loans are: $13.2k unsubsidized at 6.8%, $3.5k unsub at 1.75%, and ~$10k subsidized at 6.8% (still in school, won't accrue any interest until late 2017)
$2k average monthly expenses (not including debt or savings) - so $12k-13k is a pretty comfortable 6-month E-fund
$650 monthly cash savings
currently paying $600/mo plus any extra money to SL (sometimes up to $2k total, sometimes just the $600), but no payments are ever due until 2017
$250/mo Roth (not nearly enough, I know, but we're working hard at SLs at the moment and plan to save more aggressively for retirement once they're more manageable)

At the moment, we're working fairly hard at the student loans, but we're also saving somewhat aggressively (for our income, anyway). When we set up this savings/loan payment plan, the goal was to be ready to TTC in summer 2014 (we wanted $23k in savings - full E-fund, plus some for baby, plus some to take a nice trip before TTC).

However, the more we think about it, the more we think that TTC in '14 would be really bad timing for our careers - and I'm not so sure I'll be ready emotionally in 6-8 months. With that in mind, it seems crazy to me that we're paying $80/mo in SL interest just to keep money in the bank beyond what we really need.

So we're considering a few options. Would you:

1 (what we're thinking) - Take all but about $6.5k (a 3-month E-fund) out of savings to pay off the unsubsidized 6.8% loans? Then the question becomes, how aggressively do we pay off the 1.75% loan, vs savings? Interest on the 1.75% loan is only about $60/yr - more like $35 when you account for our interest in savings - so I don't think I mind letting that sit mostly untouched (I'm thinking $100-300/mo?) for several months until our E-fund is fully funded, then we can work on that and our other savings goals simultaneously.

2 - keep on chugging? The way we have it set up, we'll only pay a total of about $700 more in interest over the next 4 years and have it paid off before the loans capitalize anyway, so this isn't too bad of a plan.

3 - Take out all but ~$3k from savings to pay interest-bearing loans off completely, then save aggressively? Then we would just have to plan to pay the last $10k before subsidy expires. If we did this, we could save at least $1300/mo and be up to our $23k number by May 2015, when we plan to graduate and could more realistically think about TTC. I would be a little uncomfortable having only $3k in the bank at first, but we are in school with guaranteed basic graduate assistantship stipends totaling nearly $3k/mo as long as we don't drop out (which we don't plan to do - what's a year and a half after the 4.5 we've already put in, right?

) - so our E-fund is more for after school than it is for now.

If you've made it this far, I owe you a cookie. Thanks for reading, and TIA for your thoughts!

ETA - sorry, I wasn't clear. We are required to pay the 6.8% unsub off completely first, then the 1.75% unsub, then the subsidized loan. This doesn't change for 4 years, at which point we plan to have everything paid off anyway.

Wulfgar · November 2013

If you don't need to take out any more student loans, then I would focus on the smaller unsubsidized student loan that way you knock it out. Then you can focus on the larger unsubsidized loan. I would leave the amount you have in savings alone to help with any unplanned college expenses. Depending on how old you are, if you are in your 20's I would stop the Roth IRA until you have at least the unsubsidized student loans paid off. Once you get your unsubsidized student loans paid off then you can start funding your Roth IRA again.

I would also stop the $650 monthly savings unless this is to cover your future tuition and put it towards your student loans.

Xstatic3333 · November 2013

First off, I am totally impressed with your grad school budgeting. I wish we had planned half as well!

I think this is really a judgement call. Many people are uncomfortable with debt; it makes them antsy and nervous. Me, I feel very nervous when I don't have accessible cash savings. I'm terrified of getting into CC debt again. I also kept 20K in the bank through grad school, then used a bunch of it to pay off debt once I had a job.

I would consider your post-grad job prospects. A big reason I kept so much savings is that my field is rough; I was so lucky to get a job quickly. That said, assuming I were in your shoes, had decent job prospects, and didn't want to TTC for 2-3 years, I would pay off the 13.2 K unsubsidized loan. I'd then quickly bring my e-fund back to 10 K. At that point I'd drop the cash savings to 200-300 a month and use the rest on my 6.8% subsidized loan-get it as low as you can before it accrues. I would keep the Roth IRA level. The low-interest loan I'd take my time on.

So, you can probably tell I'm not a Dave Ramsey follower...but if you are, do the opposite of everything I just said. Student loans just don't stress me out as much as other debt, and I wouldn't want to lose these years of building my retirement. $250 a month now is worth more than the same contribution in ten years!

I'm sure you'll get lots of varying advice on this one, but it sounds like you're taking a thoughtful approach and will get the debt paid off quickly one way or another. Just do what feels right for you and your H.

Apollo11235 · November 2013

Wulfgar said:

If you don't need to take out any more student loans, then I would focus on the smaller unsubsidized student loan that way you knock it out. Then you can focus on the larger unsubsidized loan. I would leave the amount you have in savings alone to help with any unplanned college expenses. Depending on how old you are, if you are in your 20's I would stop the Roth IRA until you have at least the unsubsidized student loans paid off. Once you get your unsubsidized student loans paid off then you can start funding your Roth IRA again.

I would also stop the $650 monthly savings unless this is to cover your future tuition and put it towards your student loans.

This is a good point. With $1500/mo, we could pay off the full unsubsidized portion in 12 payments and still have $20k in the bank the whole time. We'll think about that.

We won't need to take out any more loans, and with our assistantships, tuition + books costs are only about $100-200/mo, included in our monthly expenses of $2k. We really shouldn't ever have any large school expenses. Unexpected life expenses, on the other hand, who knows? We do also try to keep about $500-1k for minor car emergencies at all times, separate from the $20k listed. This is why I'm thinking the $6.5k is probably enough, especially if we built it back up by summer (which shouldn't be a problem, as our current stipends and fee schedules are set at least until then).

The loans are all with the same servicer, and they automatically put any payments towards the highest interest unsubsidized loan first, so paying the smaller loan is not an option (nor would we do it if it were an option, since it is the cheaper one to keep around and all payments happen in the same place anyway).

We are both 26, so we can definitely talk about quitting Roth for a year or so. However, don't we have a fair chance to beat 6.8% in the markets long-term? Between that and the power of habit, I'm tempted to stick with the Roth and plan on raising our contribution once the unsubsidized loans are paid off.

tlc35 · November 2013

I hate paying interest but I also like to keep a generous emergency fund because you never know what can happen. If I were in your shoes I would put 8K into the higher interest rate unsubsidized loan so you can keep the 6 mo emergency fund. Then I would pay the minimum on the other loans and concentrate on paying off that loan. Once that is payed off you can start working on the 6.8% subsidized loan. You are doing a great job. Keep it up!

Apollo11235 · November 2013

Xstatic3333 said:

First off, I am totally impressed with your grad school budgeting. I wish we had planned half as well! I think this is really a judgement call. Many people are uncomfortable with debt; it makes them antsy and nervous. Me, I feel very nervous when I don't have accessible cash savings. I'm terrified of getting into CC debt again. I also kept 20K in the bank through grad school, then used a bunch of it to pay off debt once I had a job. I would consider your post-grad job prospects. A big reason I kept so much savings is that my field is rough; I was so lucky to get a job quickly. That said, assuming I were in your shoes, had decent job prospects, and didn't want to TTC for 2-3 years, I would pay off the 13.2 K unsubsidized loan. I'd then quickly bring my e-fund back to 10 K. At that point I'd drop the cash savings to 200-300 a month and use the rest on my 6.8% subsidized loan-get it as low as you can before it accrues. I would keep the Roth IRA level. The low-interest loan I'd take my time on. So, you can probably tell I'm not a Dave Ramsey follower...but if you are, do the opposite of everything I just said. Student loans just don't stress me out as much as other debt, and I wouldn't want to lose these years of building my retirement. $250 a month now is worth more than the same contribution in ten years! I'm sure you'll get lots of varying advice on this one, but it sounds like you're taking a thoughtful approach and will get the debt paid off quickly one way or another. Just do what feels right for you and your H.

Thanks!

Debt makes me pretty antsy, which is why I've thought about this so much. You make a good point with job prospects. We are both pretty confident that we'll be able to get something that will pay better than our stipends right out of school, and if not, our department is really good about keeping students around to teach and do some more research for another year when they can't find jobs right away. Our ideal jobs are definitely less of a sure thing, but at the very least we shouldn't be left out in the cold.

As for what to pay after the 6.8% unsub - as I said above, we don't actually have a choice. The servicer will automatically credit any payment towards the highest-rate unsubsidized loan. However, we do intend to have the 6.8% subsidized loan completely paid off before it accrues any interest, whatever plan we go with. We'll probably set up a savings account for it, actually, so that we can at least earn some interest while we're waiting for the subsidy period to end.

Apollo11235 · November 2013

tlc35 said:

I hate paying interest but I also like to keep a generous emergency fund because you never know what can happen. If I were in your shoes I would put 8K into the higher interest rate unsubsidized loan so you can keep the 6 mo emergency fund. Then I would pay the minimum on the other loans and concentrate on paying off that loan. Once that is payed off you can start working on the 6.8% subsidized loan. You are doing a great job. Keep it up!

Thanks! This is a great idea too.

Fortunately, we're in school, so there is no minimum payment on any of the loans. If we paid $8k on the 6.8% unsub, we would be free to put all of our available funds towards that last $5k until it's gone - but then we have to move to the 1.75% unsub.

maple2 · November 2013

The only thing I would add is that you might want to re-prioritize retirement savings over paying off the loans. If historical averages hold, you would be earning more in interest on those investments than you would be paying in interest on your loans, which would be a net gain for you. This won't help your antsy feelings about debt, but if you were to base the decisions on pure logic (which is really hard for most people when it comes to money) it would be the better choice. That said, I'm not sure how much extra money it would come out to, so if your debt aversion is really strong it might be worth it to you to lose that money in favor of being debt free sooner.

Sisugal · November 2013

Increase the ROTH contribution to 500 - then focus on one 6.8% unsub loan. When you aftergrad jobs in hand - then go bananas and pay off the SL, but meanwhile add extra each month to one loan , but keep that E-fund and increase ROTH

Sisugal · November 2013

Increase the ROTH contribution to 500 - then focus on one 6.8% unsub loan. When you aftergrad jobs in hand - then go bananas and pay off the SL, but meanwhile add extra each month to one loan , but keep that E-fund and increase ROTH

hoffse · November 2013

maple2 said:

The only thing I would add is that you might want to re-prioritize retirement savings over paying off the loans. If historical averages hold, you would be earning more in interest on those investments than you would be paying in interest on your loans, which would be a net gain for you. This won't help your antsy feelings about debt, but if you were to base the decisions on pure logic (which is really hard for most people when it comes to money) it would be the better choice. That said, I'm not sure how much extra money it would come out to, so if your debt aversion is really strong it might be worth it to you to lose that money in favor of being debt free sooner.

Yeah this x1000.

At 26 you should be putting away 15% into retirement if you can afford to do it (and it looks like you can). If you do that now, you'll never have to increase that amount through your career. You will likely retire a millionaire. No promises, but it's likely.

I would absolutely not pay off the smaller interest loans until you have gotten your retirement up. 1.75% is stupid cheap. That's just over the rate of inflation, actually, so it's almost free money.

Even 6.8% is pretty cheap. The market beats that on a routine basis. I posted in a recent thread that my average mutual funds have had a 20% return in the last couple of years, and I have one fund that has had a 50% return. They are in Roth accounts, so all those earnings are tax-free.

I do think it's fine to pay off low-interest debt early, but only after your other obligations are met. I feel like retirement is an obligation.

Frankly, I approach this differently because debt doesn't bother me as much as it bothers a lot of people. I made no payments in law school. H hasn't either, though we are minimizing how much he has to borrow outright by living off of my income as much as possible. We still ought to be able to pay it all off within 7 years of his graduation - and that's after we fund our retirement first. Combined, he and I are going to have around $200K in student loan debt, and our lowest interest rate is 4.5%. You have less than $30K and your lowest interest rate is 1.75%.

I'm not trying to minimize your debt - I also feel antsy about debt, which is why we will pay ours off early as well. But retirement is so important, and in your situation I don't see any reason to reduce your retirement contributions to pay off those loans before they capitalize.

hoffse · November 2013

I should add:

For 2013, I would take $8,000 from your savings and send it to your Roths. That should have you and your H max them out for the year. The limits for 2013 are $5500/person and with $250/month you will have already contributed $3,000 this year.

Starting in January I would actually increase your Roth contributions to about $915/month. That way you and your H will both be fully funding your Roths each month starting in 2014. The 2014 limits are also $5,500/person.

**As long as you and your H make at least $5,500 in income (and by income I mean money that gets reported to the IRS on your tax return), you can contribute the maximum amount any given year. If you make less than $5500 - and you might, because I'm not sure if stipends are characterized as income - then you can only contribute as much as you have earned for that year.

So that leaves you with a 6-month e-fund in place and an extra $585/month that you can send to your student loans starting in January.

Frankly, that seems like the best of all worlds to me.

EDIT: math.

Apollo11235 · November 2013

Thanks for your input, everyone! I think we're going to go with sort of a hybrid of some of these suggestions and our own inclination.

We're thinking we'll put $10k to the loan now, so we'll still have about a 5-month E-fund. We'll up our retirement savings to $500/mo starting next month, and that will leave us with $1k/mo for SL/cash savings (actually, $1.1k starting in February when that 0% CC is gone). We can throw that at the last $3k of the 6.8% loan until February, then in March we can go back to concentrating on cash savings, with smaller payments of $300-350 to the loans (I don't want to go lower than $300 if we don't have to since it will take that much to pay them off before the subsidized loan capitalizes). Our E-fund will be fully funded again by June, we'll have both interest-bearing loans paid off in January 2015, and we should be back to $20k cash by March 2015 ($23k or more by the time we graduate and move over the summer). Along the way, we'll look for ways to increase that $500 Roth contribution some more.

Would you pay off these loans?

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