Student Loans, pay off now or later? Thoughts?

Wulfgar · May 2015

I would put the debt repayment of the student loans ahead of your lower interest loans unless the car loan is small enough to pay off quickly to debt snowball the student loans. MW is focused on her student loans since they are the same interest rate as yours and are her biggest debt besides our mortgage.

KAdams767 · May 2015

The S&P 500 is up over 200% since the market hit bottom in 2009. If you stopped contributing during that period to funnel all extra money toward student loans, even for just two years, you missed a huge opportunity to boost your retirement savings. All for what? To save an extra few thousand in SL interest? Retirement and investments are about the big picture. Taking time off from or not contributing early in your career is almost always cited as the biggest mistake people make when it comes to saving for their future. If you have enough to both fully fund adequate retirement and accelerate student loans, then by all means, go for it. But skipping out on retirement is a bad idea. You will never get that time back.

simplyelise · May 2015

Right, she asked what those of us with student loan debt are doing and I shared our plan. Others are not averse to debt, but we are for the reasons I listed.

21 months of delay is worth it to us to avoid the risk of having a high amount of debt. I'm 25 and DH is 27. We will start contributing to retirement (beyond what I did before we got married and the pension I'm working to vest in and beyond the 4% he's required to contribute) when I am 27 and DH is 28. And we'll be able to jump straight to 15% with fully funded ROTHs next year.

ETA: yes, not contributing to retirement early is a big mistake. but usually it's a mistake because people don't contribute in favor of buying houses and cars and just spending money on fun stuff. Waiting 1 more year to contribute so that we will be debt free is not the same as that because we are still improving our net worth by paying off debt.

KAdams767 · May 2015

OK, well here is what I am doing with my student loans. I started in 2007 with about $60k in loans after law school. Since I was already getting a slightly late start on working full time due to 4 years of grad school/law school, retirement came first. I started at 10% to my 401(k) and funding an IRA and DH did the same. In addition, we put money aside for our emergency fund of about $15k, and we started saving for a down payment for our house. AFTER all of those items were met, I backed into how much extra I felt I needed to pay on my SLs. I decided to pay the minimums on everything with an interest rate under 5%, and put extra towards those over 5%.

In the 8 years since, we have bought and paid off 2 cars, put a $50k down payment down on our home and paid cash for about $25k in renovations, and our combined retirement accounts are at just under 2x our annual gross income at ages 34/35, plus additional money in a traditional investment account. We have still gone on vacation every year except the year we bought the house. We went through a layoff and 6 months of unemployment for one of us and a 3 year wage freeze for the other, plus funding substantial support for a family member. I have about $25k in SLs left, with a monthly payment of $200. Because of my combined method of savings and debt payoff, there is absolutely no reason to pay them early. If I get a windfall or an unexpectedly large bonus, I might pay a lump sum just to be done with them, but I am comfortable that in the event of major crisis, like we both get laid off with no severance or unemployment, that $200 that I'd be saving by having paid off my loans isn't going to make much of a difference.

brij2006 · May 2015

Guess it's one of those things that money is 95% behavior, 5% math. Everyone has a different threshold on what they consider good debt or bad debt, too much debt, etc. But even though you may be able to make more money in the market than you are paying on the interest of a loan, that means you actually have to take that extra money and put it into the market in order for that theory to be true. I'm just using a hypothetical "you" here, but if you were to buckle down on everything and put every extra penny toward the debt you're going to have a lot more money to play with to make those debts go away. Most people don't work extra jobs, cut cable, and live on nothing so that they can put more into the market.

That's sort of where this theory comes from in Dave Ramseys' plan. Yes, we could be taking our extra $1,800/month and put it into our mutual fund and be making 18% right now (that's what it made last year too). Which mathematically would come out far ahead of the 6.8% interest we're paying on our student loans. But we wouldn't be putting $1,800 into that mutual fund. Instead we would be putting $500 into our efund, $300 toward vacation fund, and $500 toward new car fund. Now all of a sudden we're only investing $500 of that $1,800 surplus into the market at 18% gains, and we're still paying 6.8% in interest on our loans. With $45k in student loans, we wouldn't be ahead by doing it that way. That's his point of stopping the retirement. Yes, it's a great time to be investing, but taking that time to stop the investment and focus on paying off the debts is going to make it so investing later is much easier to do because you no longer have debt to pay on top of it.

Obviously I'm pro DR and TMM.

formerlyGDaisy09 · May 2015

I wouldn't take from your e-fund or stop retirement contributions. we're in a similar boat right now, between H and I we've got about $50K left of our student loans and our payments (minimum payments) cost us about $1K a month.

We delayed TTC a little until I got a raise and we felt like we had enough room in the budget to deal with baby expenses. We started a snowball in January, but got pregnant in March, so we stopped the snowball to save and cash-flow pregnancy/baby expenses. We will pick the snowball back up early in 2016 once the majority of medical bills are taken care of.

I'm not planning to dedicate any extra income to paying down those loans, while it would be nice to have them gone and have that $1K to work with, we're not debt averse, and we'd rather do other things with that cash; I love to garden, we like to do things with our dog. I did the math and the money we could "make available" by cutting out a lot of the things we enjoy doing would only shorten our timeline from like 4.5 years to 3.5 years...we decided we're not willing to go 3.5 years without those things. We will probably delay TTC #2 until loans are gone, or the finish line is at least in sight, I would consider dipping into the e-fund to pay off the last few thousand dollars of the loans later.

We may change our thinking if one of us gets a significant promotion and our available funds increase, but the way things are now we're not interested in accelerating that timeline, we just don't have the reserves (especially once baby costs are accounted for) to make a significant impact.

hoffse · May 2015

To add to the conversation, I think cash flow and lifestyle play into it too.

Cashflow - if your student loan payment is pretty much an afterthought, then you might as well free up that money for extra things. H's undergrad loan is $180/month for a 9-year loan. It's such a small fraction of what we bring home, that I may not even add that into the snowball when we start the snowball. I don't even think about it. On the other hand, if your debt makes up such a significant portion of your take-home that it really does cripple what you are able to do, then sure. Paying it off faster makes all sorts of sense from a lifestyle perspective.

And speaking of lifestyle - I can't believe I'm going to say this, but at the end of the day money is there to be spent. We save it, we invest it, we borrow it.... all for the purposes or the intention of spending it at some point, even if it's in the very distant future. Figuring out the balance of what to spend now vs. what to spend later can be challenging, but that's really what it is there for. I really don't think it's a MM sin to spend some of your money in your 20's and 30's, especially if your cash flow is not being crippled by the debt you have to pay back. Personally, H and I have taken the approach that we would like to spend some of our money on ourselves in home remodels and travel before having kids. We work very hard for it, our retirement is funded, our emergency fund is at a comfortable level, and we can survive on a single income if that ever happened. So yeah, we're going to spend some of our extra money on us while we have the luxury of time and energy. For us personally, that is more valuable than being debt free sooner.

On the retirement front, I'm always going to be in favor of funding retirement before extra debt payments. It's not just about market performance, it's about lost time. A $5,000 contribution at age 30 is worth $38,000 at age 60, assuming a very safe 7% annual return. If you can swing that $5,000 contribution at age 25 instead, suddenly you're looking at $53,000. It's a huge difference in money for a pretty small difference in years. And with respect to the notion that money is 95% behavior.... yeah, that's pretty true. I think that getting in the habit of funding retirement before anything else is pretty important. There will always be things that give you something now that you would rather spend your money on. I include debt in that category because it does feel good to get rid of it.

At least, that's how I've always seen it.

vlagrl29 · May 2015

It's really all about your priorities in life. Sure we could live on nothing and cut all the "fun" out of our life, but with my student loan of 2.85% interest it's just not worth it to me. I'm making more interest in the market than I would paying it off. Right now it's important for us to keep putting $$ in savings with TTC #2 next year and put $$ in retirement. We also want to start saving money for hardwood floors and a finished off basement in our house. The only debt we have are my SL's and soon DH's commercial loan on his studio that he will be breaking ground on next month. To me both of those are not bad debt as we are using them for our careers. We don't make as much as I would like to so we don't have extra to put on a 529 and things like that, but we are happy and life experiences like vacations mean a lot to us so we aren't willing to cut those out.

bmo88 · May 2015

hoffse: I agree about the spending money and that's what it is for. We are not super debt averse (especially DH), but I personally want it gone sooner or later.

Fortunately, I just heard back about a promotion I was up for and that should be increasing my annual income by about 26%. We plan to increase our debt payoff amount by a little and also increase our retirement savings up to 18% overall (a 3% increase). So the remaining funds can go into savings for fun activities and vacations. Once we adjust our new budget, I think the debt fatigue feeling will wear off.

hoffse · May 2015

bmo88 said:
hoffse: I agree about the spending money and that's what it is for. We are not super debt averse (especially DH), but I personally want it gone sooner or later.

Fortunately, I just heard back about a promotion I was up for and that should be increasing my annual income by about 26%. We plan to increase our debt payoff amount by a little and also increase our retirement savings up to 18% overall (a 3% increase). So the remaining funds can go into savings for fun activities and vacations. Once we adjust our new budget, I think the debt fatigue feeling will wear off.

Congrats on the promotion! That's a massive increase, and it will be great to have that extra money in your cash flow

formerlyGDaisy09 · May 2015

bmo88 said:
hoffse: I agree about the spending money and that's what it is for. We are not super debt averse (especially DH), but I personally want it gone sooner or later.

Fortunately, I just heard back about a promotion I was up for and that should be increasing my annual income by about 26%. We plan to increase our debt payoff amount by a little and also increase our retirement savings up to 18% overall (a 3% increase). So the remaining funds can go into savings for fun activities and vacations. Once we adjust our new budget, I think the debt fatigue feeling will wear off.

congrats on the promotion! that is huge! I saw 11% earlier this year, that was enough to push us from we're not ready to TTC to TTC. Sounds like you'll be able to make some welcome changes.

bmo88 · May 2015

hoffse formerlyGDaisy09: Thanks!

While the income will be great, I don't think we will move up our TTC timeline. The income increase comes with a massive shift/increase in responsibilities. I want to settle into the new job for a year or so before even considering throwing pregnancy/a baby into the mix.

formerlyGDaisy09 · May 2015

bmo88 said:
hoffse formerlyGDaisy09: Thanks!

While the income will be great, I don't think we will move up our TTC timeline. The income increase comes with a massive shift/increase in responsibilities. I want to settle into the new job for a year or so before even considering throwing pregnancy/a baby into the mix.

That's a great plan too! my promotion was bumping my title and pay up to meet the job I was already doing, so this wasn't something we felt like we had to consider

Student Loans, pay off now or later? Thoughts?

Re: Student Loans, pay off now or later? Thoughts?

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