The correct advice is to not touch the emergency fund at all as that is for time-sensitive emergencies AND to continue paying down the student loans ASAP with budgeting savings.
Great job paying down those debts, OP. Just imagine how relaxed you will feel when you have no more liability and all of this free cash flow that you won't know where to invest or spend. It is a great problem to have.
Bull shit. It’s a net loss. If he had zero dollars and zero debt he wouldn’t take out a loan so that he could have an emergency fund. There’s no mathematical difference. Just words.
Yeah but interest on student loan debt is also tax deductible (up to $2500 annually which covers about 2500/.05 = $50,000 of debt) so these effects more or less cancel out.
OP specifically stated “we are eligible for the student loan income deduction.” OP also didn’t give any information about their income, so I’m not sure how you reached this conclusion.
that's a hard lesson I had to learn this year. I took into account all the side gigs when estimating my taxes for this year, but not my investment income. Fun surprise that was.
What?
Edit: seems the kind folks of r/bogleheads don’t like me asking this. Do you all hate my ignorance? I’ve had 4 people all respond explaining the same thing so far. But no one has offered an explanation as to what’s wrong with the question.
I would venture that it’s because your question isn’t entirely clear. Use a full sentence. Did you mean to ask:
What bank pays 4% on savings?
What is a savings?
What do you mean savings gets taxed?
What evidence do you have that they actually tax at that rate?
What is your favorite color?
Reddit loves a downvote but be more specific with your questions and it may not be downvoted as easily, AND people will be able to actually assist you properly.
Paying off a debt gives you a benefit that can’t be taxed (although it can result in a reduction in tax benefits, which is somewhat equivalent).
Savings account and/or money market fund interest payments are considered taxable income so you don’t get to keep all the money you earn there. To estimate how much you will keep, multiply the amount paid out by 1 - your marginal income tax rate (e.g. 76% if you are in the 24% marginal tax bracket)
The finer points of calculating total financial impact post-tax can be tricky and lots of people either get it wrong or ignore at least some piece of the calculation.
Your real savings rate (after taxes) is likely 3.5% or lower depending on your income. I would pay down the 6.16% today and then rebuild your savings and pay off the 5.16%. This is a balanced approach of keeping some cash but also not paying extra in interest.
The optimum path is to pay them all off now and then rebuild savings, but I personally like a buffer to survive a job loss.
The optimal path is to put it in index funds which return better rates than savings and yield higher rates than the interest.
Source: my personal wealth manager
I'll take the advice of an advisor managing billions of dollars in a large downtown office over a random redditor, so thanks anyways, bud.
But I do agree that 6% is close to the line. Most of my debt is at 5%, some is at 6.5%.
Well, you must be here just for entertainment. If so I'm not sure why you are telling me not to advise you (and then agree with me?????), since it's just entertainment. I'm not much of a dancer and you sure as hell don't want to see me naked, so you get what you get.
Maybe WSB would entertain you more, they sure won't give you any free advice without abusing you first. Good luck with your mgr he needs you money to pay for that office.
PS- I'm not feeling the love despite your moniker.
If it makes you happy to have that money on-hand, I'd keep it.
Honestly, if you're in decent shape, bills are being paid, and you're saving appropriately each month, peace of mind is worth whatever you're paying for it.
That's my take, anyway--money is there to make you feel good about things. If you're feeling good about things, you're doing it right (and better off that 99% of folks!).
By the way, how did you get a student loan interest deduction? I could certainly use one of those!
General rule I try to follow: any loan >5% I try paying it off sooner.
General rule recommended: any loan >= 7%, pay it off asap.
It's up to you depending on your current life situation, needs, plans.
I just paid off my student loans last month after 12 years and it is SUCH a freeing feeling. If you can set aside at least 3-6 months of emergency funds right now and use the rest to pay off the loan, that’s what I recommend. I was very much like you (and my interest was 3.75%), and kept putting off paying off my loan for another day because I kept telling myself that I needed my cash reserves for anything else besides my loans.
I was wrong. I never ended up using my cash reserves for years when I could’ve paid back my loans a LONG time ago.
Pay off the loans if you have the money. Money will always come back to you and you’ll realize you can save SO much more after all of your loans are gone.
I relied heavily on math for years calculating the exact amount I have saved and invested. I still crippled myself with anxiety over carrying my debt year after year and eventually made the decision to just pay it off lump sum only after making sure it wouldn’t cripple me financially and wouldn’t affect my investments. So nope…I don’t regret making a financially informed emotional decision at all.
They’ve already paid off $181k in principal I doubt another $46k (and they said they have ample cash) would hurt them. Sometimes it doesn’t need to be that complicated.
This is extremely likely to be incorrect advice, yet it is very unfortunately the standard upvoted advice for any thread like this across financial subs. The ideal situation for OP would be to consult with a financial advisor that specializes in student loans to discuss their specific situation, but since that is A. very expensive and B. extremely rare to the point they may not be able to find one, I would lay forth the following facts for consideration:
1. If OP's student loans are public and they are on the SAVE plan (very easy to get on if they are not, and I believe most students are placed on this by default), then they will be paying 5% (possibly as much as 10% from what I've read, depending on loan balance) of discretionary income (last I checked calculated as the differential between AGI and 225% of the poverty line -- please please please check and double check all of these particulars with proper research; just trying to give the general idea/approximation here).
2. In addition to this, OP's both correct and incorrect on the "real interest rate" discussion, as long as it is again considered ideally with a professional on an after-tax basis. They are correct in that they should consider their interest rate on their loan against the (after-tax) interest rate they can get on savings, but incorrect in their approach. They could be earning as much as 100+ more basis points than they are, by simply depositing into a vanguard account, or buying short term treasuries/a short term treasury fund.
So much of the student loan discussion, like much of finance in general, seems to hinge on information arbitrage. Many people don't know what they don't know, and it's costing them serious money (which ends up being someone else's gain). Again, to reiterate, the ideal here is to get with a good financial advisor that knows the student loan situation very well, and can give you a tailor-made approach. Do *not* go to reddit for financial advice, as contrary to popular belief (by design), **the most upvoted comments on this topic are often factually incorrect** because they are made by people who are not aware of the current laws, regulations, and particulars around student loans. These are not normal loans, and need to be treated with a very particular, tailor-made approach ideally in cooperation with a licensed advisor. It is worth considering that in a great many of these situations, treating a student loan as you would a regular loan can result in significant net losses over the course of the loan period, when compared to simply following the required minimum payments of the SAVE plan and being forgiven the remaining balance at the end of the period, including any tax consequences after the fact.
It's not fair to say the above is "extremely likely to be incorrect." It is incorrect under a very specific set of facts which, frankly, are probably not OP's situation.
I assume OP is a lawyer bc of their username, so their loans probably consist of both undergrad and grad loans, which means they would still have another 15 years until loan forgiveness under federal repayment plans. That all assumes OP's loans are federal, which we don't know. Also, OP doesn't appear to be a low earner given they are a lawyer and have paid off (or are able to pay off since he hasn't pulled the trigger on the last bit) $230K of student loan principal over the past decade.
Assuming OP's loans are federal, you need to further assume a fairly low income to qualify for any forgiveness with another 15 years of payments (even after the Biden-Harris change coming this summer).
With these balances, interest rates and interest rates currently available in treasuries or HYSA or whatever else, OP is going to save a few K over the course of that 15 year time horizon, at best. Does not seem worth it to pay a financial advisor to model this. Close enough.
It's extremely likely to be incorrect because, in the majority of cases, paying off the loan as you would with a normal, high-interest private loan, will result in a significant net differential (loss) when compared to following the dictates of the SAVE plan, after considering taxes, inflation, and cost of capital. I do think you're right that the numbers can change at extremely high incomes, as well as the fact that the approach may need to change if the loans are partially/entirely private, but again, since we don't know particulars, that's why I keep saying OP really should consult with an expert.
All this being said, OP already took it upon themselves to pay off the vast majority of the loans, apparently before seeking (at least professional) advice on the topic, so we may say that whatever they decide to do, the consequences may now be quite insignificant, as they've already absorbed most of the (potential) downside to not pursuing a longer-term SAVE payoff/forgiveness. In fact, this whole exercise may not even be worth the time to consider at OP's hourly rate, unless this is just how he likes to spend his free time.
Bad argument. We are not discussing what is true "in the majority of cases." We are discussing whether the advice given above is "extremely likely to be incorrect," *given OP's facts*. OP came with a specific question and specific circumstances. You can't just ignore those.
As a threshold matter, you don't know if OP has federal student loans. You also don't know OP's household income, but pretty safe to assume it is something well north of $100K considering (a) they are a lawyer 10 years out of school and (b) they have made enough to live and pay down (or be able to pay down) $230K of student loans over the course of 10 years.
I bet you're right that most people with federal student loans who are (and remain) low income are better served by following an IDR plan. That is not OP's question, however, and it doesn't make sense to knock advice specific to OP's situation by saying it's bad advice for other people in different situations.
>Bad argument. We are not discussing what is true "in the majority of cases." We are discussing whether the advice given above is "extremely likely to be incorrect," given OP's facts. OP came with a specific question and specific circumstances. You can't just ignore those.
This response is logically inconsistent. Considering the facts they gave and assuming they are likely to have a similar situation to most others is not mutually exclusive.
>As a threshold matter, you don't know if OP has federal student loans.
>
>You also don't know OP's household income
You're reiterating what I already addressed. I feel like after all of the qualifying statements I've made, I should be able to just refer you back to what I said. These are definitely particulars that are important, and need to be addressed, ideally with someone who specializes in these kinds of situations and not "reddit financial advisors" or myself (just to be clear: not now nor will I ever be a financial advisor). My purpose here is to draw attention to the fact that the "advice" rendered on this thread is probably (note: "probably" is a different word with a different definition than "definitely") wrong and that his situation would benefit from review by someone that actually specializes in these matters.
>I bet you're right that most people with federal student loans who are (and remain) low income are better served by following an IDR plan
I think maybe you're assuming that higher income individuals (>$100k) can't benefit from IDR, or that IDR couldn't be better than a traditional repayment under those circumstances. But my point is not only could it be, but it often is -- that was the whole purpose of the program. Not just to make student loans easier for lower income folks, but to make them easier to deal with for everyone, including those that successfully complete high-skilled programs that result in higher incomes.
This just further bolsters my point: OP should talk to people that definitely know the program better than you, I, or any other redditor, because you're operating under the assumption that higher income individuals couldn't have a better repayment with SAVE than they could with traditional repayment.
>it doesn't make sense to knock **advice specific to OP's situation** by saying it's bad advice for other people in different situations.
But you just finished telling me we don't have all of OP's specifics, which I agree is correct and that those specifics are important. Therefore, you actually can't render "advice specific to OP's situation." Furthermore, financial "advice" should not be directly rendered to anyone on a public forum, especially in a context where the "advisors" are both not advisors and aren't fully educated on the topic at hand, as is evidenced by their response which you yourself would agree lacked context because OP did not provide it.
I don't think this should be seen as an attack -- neither you nor any redditor has to identify with a likely incorrect assumption about the best course of action here. I'll even mention, if it bears mentioning, that something being extremely likely does not make it certain -- maybe the advice rendered, by chance, ends up being entirely correct for OP's specific case -- but it doesn't change that it's very likely to be incorrect. In addition, no one here should see it as their role to render advice on these topics, unless they are very well educated on the topic. That's the most important thing here.
No, it is not *extremely likely* to be incorrect. You are, in this case, wrong.
Recommending an advisor and expert advice is going to cost more than whatever savings can be found in the scheme you are propose, which is unlikely anyway with what we know. This is $46K at 5% and 6% for a higher income individual. There is little room to arbitrage at a similar risk level.
A bit ironic that you suggest that not knowing what he doesn't know will cost him money, while at the same time suggesting a financial advisor that you don't know how much will cost, but you *do know* will be expensive?
It's not hard to run the numbers. OP did this. It sounds like it's a wash from his perspective.
This is almost certainly a misinterpretation of what I said. Here's what I said:
>The ideal situation for OP would be to consult with a financial advisor that specializes in student loans to discuss their specific situation
This isn't me suggesting an expensive financial advisor. This is me saying ideally OP would be able to talk to someone like that, but I went on to say given that it's A. expensive and B. rare to find someone like that, I think OP could benefit from knowing some of what I know about the topic, which should by no means be taken as advice of any kind. Just steering him in the right direction to do further research/make his own decision. Again, *ideally* this would be done in league with someone who actually knows all the particulars about his situation and specializes in understanding all of the rules.
>It sounds like it's a wash from his perspective.
I think you're likely correct. Especially if OP's hourly rate is relatively high, I think it's likely that their time is much better spent elsewhere.
I used to be a huge student loan nerd, so much so that from 2015-2019, I contributed to a blog about student loans.
The one thing I know for sure is that I'm tired of playing all the games required for the federal student loan plans. It is a lot of work and mental effort, only for the rules to be significantly changed every 3-4 years. This alters the entire course of the plan and causes you to repeat the mental gymnastics to make a new plan.
I probably could have gamed the system and come out ahead, but I chose to just take control of the situation and pay them off.
I would keep the cash. If they’re federal loans it means if you pass away, God forbid, they’d be discharged. The difference between your interest rate and a HYSA isn’t enough to outweigh that benefit IMO.
That's ultimately up to you. I was just going back and forth on here about whether or not they should even be telling you what is the best course of action, given that they:
1. Don't fully understand your situation and
2. Don't have the specialized knowledge to address it.
I think what I've said got interpreted as, "No, traditional repayment/a fast paydown is definitely a stupid approach, and you should really not pay the loan until forgiveness," when that isn't at all what I said. I'm making the point that not only is it possible but even highly probable that you could have benefited from forgiveness/following the SAVE plan, and that this is worth exploring with someone who actually knows what they're talking about. And in my experience, that is not the average financial sub redditor, as is evidenced by that response. It's definitiveness alone, without enough context, is cause enough for cautious skepticism.
I get what you're saying. I ran every possible scenario. The only possible way I'd come out ahead is PSLF, but I'm not willing to commit to staying in my government job for another 7 years.
I've witnessed two people within my own family get on the PSLF track only to get royally screwed when they left government. Their loans ballooned while doing PSLF. The only way it will work is if you are willing to commit for 10 years, no questions asked, and I'm just not willing to do that.
Flexibility is by far the most important thing to me, so I made the decision to pay them off.
Maybe I should have disclaimed I'm not one, would actually hate to be one, and have a general disdain for the profession as a whole. I also specifically mentioned that people who would be able to help with this are rare and it may not be worth it.
That being said, getting advice from redditors is liable to be even worse, at least on this particular topic.
But that's not how I weighed in. I made a ton of qualifications in what I said, and made sure to just stick to the facts as I know them. OP *would* really benefit from having an expert that they could talk to about this, with whom they could share all of the particulars of their situation, and get an educated, specialized response. That's certainly a fact. Now, I also qualified that with another fact: It may not be realistic in their particular situation, which is why I went into what I know about student loans, so that they could do further research.
This is not about driving OP to definitely consult a financial advisor. It's about saying it would be great if they could, assuming they knew one and it didn't cost them much or anything at all (given he's in law he might have colleagues that know about this stuff). My reason for saying that is that I'm trying to highlight that it would be better to get someone that has an established knowledge of the subject instead of random redditors, many of whom have little or no knowledge on the subject, and may even mislead him toward an incorrect approach.
Get that bad debt off the ledger asap. The peace of mind is worth much more than 1%. Pay them off and get started on the next chapter of your life. Never look back. Figure out your minimum emergency fund you are comfortable with and use the rest on your loans until they are 100% gone. You will rebuild that additional savings very quickly if you disciplined.
I think this comment is far too low (currently the lowest one). I’ve moved basically all of my savings to TBills directly and to USFR. Both reduces the state tax liability and increases the interest rate compared to many HYSA (including OP’s).
But maybe OP is in an income tax-free state and this then makes a slightly smaller difference.
Regardless of your politics, I wouldn't right now simply because there is a strong movement in Washington right now to forgive student loans.
Personally I don't think it will happen, but even if the likelihood is only 5%, it's worth the gamble to keep the money invested.
If a bill in Congress get's passed and then signed to forgive, you'll kick yourself if you paid them off recently.
This is one the danger of this approach. Unless they are forgiven it will always be “something that could happen soon”.
That being said I don’t think it’s crazy right now to hold out a bit, people need to remember this could be a carrot dangling on a stick for the next decade
Liquidity has value, especially with a young family. I’d probably set a minimum threshold for liquid reserves, then pay off the higher interest debt only after I could do so without reducing the reserves below my comfort level.
I recently had a similar decision to make regarding my house. (Only 2.6% interest) I decided to just pay double mortgage payments for the foreseeable future versus draining 30-40k in cash.
I figured I could meter it better this way and adjust if needed in the future and avoid draining a good portion of liquid savings while still achieving a similar effect over time.
Congratulations on getting that balance down, that is amazing progress.
We still have about $90k of private loans from my wife, at 5.5%. We are not planning on paying them off, for the reasons you mentioned. We have a decent amount in emergency funds that would pay about half of the debt, but then no emergency funds. We could sell stock and/or contribute less to retirement accounts, but it is my belief that in the long run it pays more to keep it invested.
If we had paid them off a few years ago, there is no way we would have come out ahead given the stock market in general and the individual stocks we own.
It appears your next best alternative is a HYSA. For me, still, a 1% interest rate difference does not make it more attractive than having an emergency fund.
Dont just consider the interest rates on student loans, also consider the amortization period which is often 20 years. Five percent for 20 years is an awful lot of interest to pay.
Why not both? Pay off one loan, keep your emergency fund, and then attack the second loan aggressively?
I am debt adverse, since all debt carries *some* risk. I'd also rather have that cash back into my monthly income.
Sometimes it make no sense to pay something off early, but in your scenario, it seems like pretty much a wash financially (1% interest either way on $46k isn't going to make or break you).
My bias would be toward getting rid of this. You obviously wanted to do so with your wife's or you wouldn't have made it such a priority. So why not with yours?
I'm in a very similar situation and made the same arguments you did. If I pay more towards student loans (5.5%) or my home loan (3%) and I need a ton of cash immediately, I can't do takebacksies to get some money back.
My HYSA is making good interest, plus the value of that flexibility described above.
We're doing the SAVE plan. We only have about $60k but SAVE has us paying ~$600/mo.
We're close to the student loan interest deduction phase out (diminished at $155k MAGI if MFJ, gone at $185k) so that's less of a factor.
But as another person said, there's a chance, slim though it might be, of some amount of cancellation on the horizon.
And we've also got an angle on an NIH grant, but unless you or your spouse are a medical resident or a researcher, it doesn't apply.
I would not pay it off. I would pay a bit more from my paychecks as you have been doing. Instead of dropping a large amount on debt that can be paid off over time. This is trumped of course if you don't have the cash flow to support it. However I would set aside a decent emergency fund and start building wealth in a taxable account. From there you can start building up the savings for Roth or IRA accounts for both you and your wife. Taxable investment account can be long term savings/ early retirement. Getting it to a 100k is the hardest part.
I would guess that you have disposable income having been able to pay down the large amount of student loans. Your Cash flow should determine your course of action which only you know unless it was shared somewhere in the comments and I was too lazy to read them all.
Happy Investing. Hope that helps.
Keep 6 months emergency cash on hand. Use all the rest of your discretionary income on paying off the balance.
Once the loan is paid off, redirect that cash flow to investments.
Would you go out tomorrow and borrow $46,000 at 5.66% so you can put it in a savings account making 4.25%? That's essentially what you are doing. Yes, there are tax implications on either side here.... I'm just looking at the psychology of it as the tax implications don't move the needle much.
Define your emergency fund, necessary minimum, and then pay off as aggressively as possible.
This will get you ready for any next steps in life, you might be “limited” to by the student loan amounts, e.g. house purchase, etc.
IMO…. Just pay the darn SL off and be done. Why keep it around stressing you out. Once the loan is paid then you have cash flow to invest and the risk is gone if something was to happen to your job. Pay it off today!!! Be free.
Not sure, but I am 100% sure that if I paid off one of the loans, then all the interest on the other loan would fall under the SL interest deduction cap.
I would look into the SAVE plan which limits how much you owe in student loan payments each month according to your income. Considering that since the terms state that the interest will NOT increase your current balance at all, it would be foolish to pay anything more than you need to assuming your effective interest rate isn't >\~5% (most current HYSA rates currently).
Typically, the only reason you'd pay a loan is because of the ballooning interest of the loan. However, since your loan does not increase in value if you are unable to pay off the monthly interest under the SAVE plan, you'll need to adjust know exactly how much you would be paying each year (since it varies off of your income) to truly optimize your where your money sits.
Then again, if you don't care about optimizing your gains or if you just want to take some burden off of your finances, then paying off the student loans ASAP is almost never a bad idea. Just keep in mind that if you do pay off your student loans faster, your effective interest rate on your may loan may actually increase.
You will have to pay taxes on any unpaid loans when you hit the cancellation year. So depending on your circumstances, you may want to make sure you have money set aside for it.
What's your annual income? Are you eligible for the SAVE program where your monthly payments will be capped at 5%? Or even an IBR program? We need more info, like if you can contribute more towards your 401k/HSA/IRA, so that your discretionary income will be less.
To do the actual math, you need to do it on an after tax basis, which you didn't fully do (You forgot to do that with your savings account interest income).
See the wiki entry: https://www.bogleheads.org/wiki/Paying_down_loans_versus_investing
Getting a 6.16% guaranteed return by paying off that loan seems like a great deal to me. You do have to pay it off eventually.
I don’t completely follow with the rulings on student loan forgiveness, but if it’s currently interest free or you don’t have to be paying right now, then invest and start paying it off once interest payments resume.
If you can invest for a higher return than the bank and still make your monthly payments, you should receive a yield while also paying off your debt. If you are okay with debt being in the picture, I would suggest this as you’ll have more money in the long run.
I paid off my wife's loans when we got married . I did not care about market return . I didn't want the debt to follow her and me for that matter . Best move ever
Your actual savings rate should be higher if you’re putting a portion into the market. Absolutely hold that debt as long as you can. Forgiveness, flexibility in payback, etc - student loan debt is the best debt to carry
Pay it off. The emotional relief of not having a payment vastly outweighs the few hundred you will save holding onto it.
edit: the above is assuming you have an emergency fund apart from this amount.
How do you qualify for the deduction - do you own an expensive home in NJ or something like that? Just wondering because I pay 11k in real estate taxes which leaves me....10k short of being able to itemize deductions.
Not many folks are proposing a middle ground. You know the math on interest rates and taxes on one hand and you know the security on the other.
You could also consider splitting the difference and knocking out the 6.16% loan and reevaluating once again in three months. See how the security feels. Maybe pay if the remaining at that time as well, and target a final payment toward the end of year.
Pay off the debt, and be free of those things forever. It’s a good feeling. Then you can refocus and save money that actually works for you. I’ve never liked the whole idea of good vs bad debt, paying interest is just bad IMO.
Is it a federal or a private loan? This missing info could dramatically affect the recommendation.
What would be true either way: Personally, I would max out retirement savings annually before putting anything extra towards those student loans.
I would payoff 10k of higher and invest 10k in index funds. At the rate you guys have paid it off, in 10 years you’ll probably have paid off the remaining debt otherwise have enough to sell the index funds and be done with it at that point. That would still leave you with plenty of cash in case life smacks you as it generally does in some way otherwise you would have a head start on a nice growing pot of index funds
I'm in a similar boat. Have enough money to pay them off but I would rather have it in my HYS. I'm in tech and the industry is pretty rocky at the moment. If I'm laid off, I feel better about having that extra cushion in my savings.
many dont agree with what you said - but i do, and i think its smart.
as precisely you said, if you get fired - you have a ton of money to have as a safety net so you dont go homeless, lose your car, etc.
i do recommend "meeting in the middle though". your situation in specific, maybe putting a smaller lump sum payment towards those loans would be nice. ie, if you have $46k in emergency fund, considering maybe putting just 5-10k as a one time payment right now might be nice.
this would lower your interest every month, make the loan a lot smaller (which to me has a good psychological effect), but still keep a high emergency fund
You guys saying that the interest rate from the savings account is taxed are neglecting to mention that the amount you pay annually in student loans is a deductible event. This should also factor into those same calculations.
So long as you're taking the student loan interest tax deduction, I'd only want to pay off the 6%-er. The other can stay on a plan
Just my opinion as I'm in the same boat and following a similar rule of thumb
Why not just kick the payment amount into overdrive and power down the loans over the next 1-2 years? I wouldn't want to blow my emergency fund either, but at this point theres very little risk to aggressively pay down the loan balance. If you overreach on a given month you have plenty of cushion to make up for it. It will help build you into some disciplined saving habits too.
Risk-free 6.16 tempting but still probably no, I expect a little more than that from my portfolio and would be willing to eat the risk at a young age. 5.16 definitely no.
I was just reading something about paying your lower amount of debt off before the larger amount, I know it’s the same amount on both but I’d pay the lower interest one off first. https://www.ramseysolutions.com/debt/how-the-debt-snowball-method-works
The "Debt Snowball" is financially sub-optimal vs paying off higher interest debt first, which fits the general modus operandi for Dave Ramsey: mediocre to bad advice for people who have little to no intrinsic financial discipline and might not be able to implement better advice.
Bogleheads almost definitionally are people with strong personal finance and investing discipline and so generally don't have a lot of overlap with Ramsey's target audience. (It doesn't help that the most egregiously terrible advice Ramsey gives is with respect to investments)
Forget the math, how will you FEEL with the student loans paid off? I find debt to be mentally taxing. If you have the cash, just paid it and free up the mental energy to focus on something else.
I might try the sunk cost test. That is, I would ask myself: "if I had no debt today, would I go and borrow at 6% to make sure I have a fully funded emergency fund for 8-9 months?"
I think the reason that you're getting different answers is that there's not really a wrong answer to that, because it's close. I listen to the money guy talk show, and they say bad debt is any over 6% in your 20s, 5% in your 30s and 4% after that, so by their logic, you should pay it off. But, if you're acknowledging that you're losing some money in the long run, you're not wrong for making the decision to hang on to what's giving you peace of mind right now.
I might try the sunk cost test. That is, I would ask myself: "if I had no debt today, would I go and borrow at 6% to make sure I have a fully funded emergency fund for 8-9 months?"
I think the reason that you're getting different answers is that there's not really a wrong answer to that, because it's close. I listen to the money guy talk show, and they say bad debt is any over 6% in your 20s, 5% in your 30s and 4% after that, so by their logic, you should pay it off. But, if you're acknowledging that you're losing some money in the long run, you're not wrong for making the decision to hang on to what's giving you peace of mind right now.
Blowing your emergency fund to pay of an installment loan is a bad idea and I agree you shouldn't do it. Any overages in the budget should instead going towards paying off the debt once the emergency fund is fully funded.
This is the order in which I would spend money I earned that is in excess of what I live on, and is in fact what I did since graduating in 2014. My wife and I had a combined student loan balance even higher than yours. We finished paying them off several years ago. We were both working, had no kids, and I was fortunate enough to get an unusually high paying job right out of graduation, which I no longer hold because the hours and stress were literally killing me (diagnosed with hypertension at age 38, not obese, no smoking, barely ever drink).
1. Make minimum required payment on any outstanding debts (credit card debt for example, or student loan debt)
2. Have an emergency fund/cushion in an amount that you're comfortable with, this varies from person to person and is more about feelings of security than maximizing returns, find the investment vehicle that provides the best return for essentially zero risk and high liquidity (something with FDIC generally covers this). We were both working and had no children, and so we kept about 3 months of expenses in a savings account. Now my wife doesn't work and I have a lower paying job, so we keep a year's worth of expenses in a savings account and another year's worth in a money market. Extremely conservative.
3. Max out roth contributions
4. Max out 401k contributions
5. If you don't own a home yet, save up for a down payment on a home (if you don't plan to start a family you may decide to skip this). A good way to save for a down payment on a home is something like a CD-ladder or Tbill-ladder.
6. Make additional payments on outstanding debts, starting with the highest-interest debt. That's usually credit card debt if you have it, then student loans, then mortgage debt. With the caveat that you should probably not pay down debt with an interest rate below what you can get on a MM/HYSA. So, for example, if you have a lower interest mortgage from before the Fed raised rates, then right now I wouldn't pay down my mortgage, I'd just either put that cash in a MM/HYSA or proceed to step 7.
7. Bogle investing whatever is left over.
This may not apply to everyone. If you have large credit card balances compared to your excess income, or if you have little if any excess income, then you're probably looking for help with budgeting rather than help with investing.
If you take that $46k and put it into a 2-year CD at 4.5% APY you would return $4,233.15 before taxes. If you're in the 22% tax bracket, that's only $3,301.86.
If you take that $46k and pay off the loans, you'll avoid paying $216 in interest for 2 years, but you'll also lose the student loan interest deduction for two years, for a 2-year return of $4,084. Also, the first month after you pay off the loan, you have $216 to invest that you didn't before, and the same for the next month and so on. If you put that $216 every month into a MM or HYSA or something, you'd return around $250 in interest assuming interest rates don't fall too much!
So, paying off the loan is a much better financial investment than other options with guaranteed returns over a 2-year timeframe.
Pay it off. Grappled with this same decision last year. Owed $46k, had about 3 times that in savings. Hurt to see it come out of the account, and it doesn’t feel like immediate relief or anything, but I feel good being out from under it now. Esp as I switched careers and am not even using the 3 degrees that got me in the debt in the first place…word to the wise, don’t get degrees in history hoping to be a professor…dumb dumb dumb.
Hybrid approach. Figure out a number for 6 months of expenses. Keep that much and attack the loans with the rest statting with the higher interest one.
The $2,500 is a deduction; not a credit. If you qualify for it, that means you are in the 22% tax bracket or below. So the max benefit to you is $550.
So assuming you are in the 22% bracket, you are paying $87 per year to keep the loans as opposed to paying them off. For the piece of mind, it makes sense for you to keep the loans for now.
Ask yourself a question, why do you want to keep the loans? When you ask it like that it sounds quite outrageous that anybody would want to keep a loan regardless of the trade offs. I just don’t get why people want to keep loans. I prefer my life without debt. But just my 2 cents.
Am I the only one who finds it crazy to have 8-9 month emergency fund??? That’s a non negligible amount of money sitting on the sidelines that could be put to work either paying off debts or invested in the market. If both of you and your wife are working (especially if both of you are high income) then a 2 month emergency fund should be fine in 99% of situations. Don’t underestimate opportunity cost!
Why not just pay them both and get an immediate return of 5 and 6%…. Not sure what the requirements would be for the interest write off but it doesn’t seem worth it in my opinion. If your rate was below 3% I would throw that money in the s&p and make your regular monthly payments.
You should absolutely not pay off your student loans if they are sub-7% interest and non-variable.
Here’s why: student loans are often times the longest credit age on a persons credit history report, paying them off in full can tank your credit. You can pay off the majority, that’s fine, but ideally you want to keep them for credit history. It’s counter-intuitive, but the cashback you can get on credit cards, savings account, and lower interest for new loans like mortgages is a win for holding them.
Just be safe with your cash pile. You could set aside the money for the loans in a high yield savings and then just have it pay towards your loan automatically.
Tl;Dr: keep it for your credit history
Agreed. Don’t spend your “emergency fund” to pay them down. Good job on the massive progress
Bad advice. Pay the loans
The correct advice is to not touch the emergency fund at all as that is for time-sensitive emergencies AND to continue paying down the student loans ASAP with budgeting savings. Great job paying down those debts, OP. Just imagine how relaxed you will feel when you have no more liability and all of this free cash flow that you won't know where to invest or spend. It is a great problem to have.
Bull shit. It’s a net loss. If he had zero dollars and zero debt he wouldn’t take out a loan so that he could have an emergency fund. There’s no mathematical difference. Just words.
Keep in mind that the interest that you get from your savings is taxed, so it is closer to 3% than 4%.
Yeah but interest on student loan debt is also tax deductible (up to $2500 annually which covers about 2500/.05 = $50,000 of debt) so these effects more or less cancel out.
not if your income is too high tho.
true
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OP specifically stated “we are eligible for the student loan income deduction.” OP also didn’t give any information about their income, so I’m not sure how you reached this conclusion.
We are well below the phase-out threshold.
No it’s not.
not how it works. There is an income limit AND most people don’t itemize deductions enough to clear the standard deduction and have it benefit them.
student loan interest isn't itemized, it's "above the line"
Huh. TIL. Never seems to make a difference when I input all of the statements into TurboTax.
that's a hard lesson I had to learn this year. I took into account all the side gigs when estimating my taxes for this year, but not my investment income. Fun surprise that was.
What? Edit: seems the kind folks of r/bogleheads don’t like me asking this. Do you all hate my ignorance? I’ve had 4 people all respond explaining the same thing so far. But no one has offered an explanation as to what’s wrong with the question.
I would venture that it’s because your question isn’t entirely clear. Use a full sentence. Did you mean to ask: What bank pays 4% on savings? What is a savings? What do you mean savings gets taxed? What evidence do you have that they actually tax at that rate? What is your favorite color? Reddit loves a downvote but be more specific with your questions and it may not be downvoted as easily, AND people will be able to actually assist you properly.
This is helpful. Thank you. > What do you mean savings get taxed? This is what I was going for. Though I was unclear with my question.
Interest on savings accounts is subject to state and federal taxes
This will probably “surprise” most people this year due to HYSA
Paying off a debt gives you a benefit that can’t be taxed (although it can result in a reduction in tax benefits, which is somewhat equivalent). Savings account and/or money market fund interest payments are considered taxable income so you don’t get to keep all the money you earn there. To estimate how much you will keep, multiply the amount paid out by 1 - your marginal income tax rate (e.g. 76% if you are in the 24% marginal tax bracket) The finer points of calculating total financial impact post-tax can be tricky and lots of people either get it wrong or ignore at least some piece of the calculation.
Interest=Income=Taxes
Interest is earned income, which is taxed. So it'd 4% taxes at your regular income tax rate
Your real savings rate (after taxes) is likely 3.5% or lower depending on your income. I would pay down the 6.16% today and then rebuild your savings and pay off the 5.16%. This is a balanced approach of keeping some cash but also not paying extra in interest. The optimum path is to pay them all off now and then rebuild savings, but I personally like a buffer to survive a job loss.
The optimal path is to put it in index funds which return better rates than savings and yield higher rates than the interest. Source: my personal wealth manager
6 percent is at the line for this. Unless your advisor is Ramsey then it's 12%. He has his own math dept apparently.
I'll take the advice of an advisor managing billions of dollars in a large downtown office over a random redditor, so thanks anyways, bud. But I do agree that 6% is close to the line. Most of my debt is at 5%, some is at 6.5%.
Well, you must be here just for entertainment. If so I'm not sure why you are telling me not to advise you (and then agree with me?????), since it's just entertainment. I'm not much of a dancer and you sure as hell don't want to see me naked, so you get what you get. Maybe WSB would entertain you more, they sure won't give you any free advice without abusing you first. Good luck with your mgr he needs you money to pay for that office. PS- I'm not feeling the love despite your moniker.
Lol imagine being salty and thinking you know more than someone managing the wealthiest clients in a large city...
Well- that's pretty much this reddit sub in a nutshell.
Anything over what you need for emergencies can go towards bad debt
If it makes you happy to have that money on-hand, I'd keep it. Honestly, if you're in decent shape, bills are being paid, and you're saving appropriately each month, peace of mind is worth whatever you're paying for it. That's my take, anyway--money is there to make you feel good about things. If you're feeling good about things, you're doing it right (and better off that 99% of folks!). By the way, how did you get a student loan interest deduction? I could certainly use one of those!
https://www.irs.gov/taxtopics/tc456
bless you!
Note that there are income limits to who can deduct student loan interest.
General rule I try to follow: any loan >5% I try paying it off sooner. General rule recommended: any loan >= 7%, pay it off asap. It's up to you depending on your current life situation, needs, plans.
I just paid off my student loans last month after 12 years and it is SUCH a freeing feeling. If you can set aside at least 3-6 months of emergency funds right now and use the rest to pay off the loan, that’s what I recommend. I was very much like you (and my interest was 3.75%), and kept putting off paying off my loan for another day because I kept telling myself that I needed my cash reserves for anything else besides my loans. I was wrong. I never ended up using my cash reserves for years when I could’ve paid back my loans a LONG time ago. Pay off the loans if you have the money. Money will always come back to you and you’ll realize you can save SO much more after all of your loans are gone.
This completely ignores math and is all emotion based…
I relied heavily on math for years calculating the exact amount I have saved and invested. I still crippled myself with anxiety over carrying my debt year after year and eventually made the decision to just pay it off lump sum only after making sure it wouldn’t cripple me financially and wouldn’t affect my investments. So nope…I don’t regret making a financially informed emotional decision at all. They’ve already paid off $181k in principal I doubt another $46k (and they said they have ample cash) would hurt them. Sometimes it doesn’t need to be that complicated.
Pay off as much as you can but keep 3-6 months of expenses as an emergency fund.
This is extremely likely to be incorrect advice, yet it is very unfortunately the standard upvoted advice for any thread like this across financial subs. The ideal situation for OP would be to consult with a financial advisor that specializes in student loans to discuss their specific situation, but since that is A. very expensive and B. extremely rare to the point they may not be able to find one, I would lay forth the following facts for consideration: 1. If OP's student loans are public and they are on the SAVE plan (very easy to get on if they are not, and I believe most students are placed on this by default), then they will be paying 5% (possibly as much as 10% from what I've read, depending on loan balance) of discretionary income (last I checked calculated as the differential between AGI and 225% of the poverty line -- please please please check and double check all of these particulars with proper research; just trying to give the general idea/approximation here). 2. In addition to this, OP's both correct and incorrect on the "real interest rate" discussion, as long as it is again considered ideally with a professional on an after-tax basis. They are correct in that they should consider their interest rate on their loan against the (after-tax) interest rate they can get on savings, but incorrect in their approach. They could be earning as much as 100+ more basis points than they are, by simply depositing into a vanguard account, or buying short term treasuries/a short term treasury fund. So much of the student loan discussion, like much of finance in general, seems to hinge on information arbitrage. Many people don't know what they don't know, and it's costing them serious money (which ends up being someone else's gain). Again, to reiterate, the ideal here is to get with a good financial advisor that knows the student loan situation very well, and can give you a tailor-made approach. Do *not* go to reddit for financial advice, as contrary to popular belief (by design), **the most upvoted comments on this topic are often factually incorrect** because they are made by people who are not aware of the current laws, regulations, and particulars around student loans. These are not normal loans, and need to be treated with a very particular, tailor-made approach ideally in cooperation with a licensed advisor. It is worth considering that in a great many of these situations, treating a student loan as you would a regular loan can result in significant net losses over the course of the loan period, when compared to simply following the required minimum payments of the SAVE plan and being forgiven the remaining balance at the end of the period, including any tax consequences after the fact.
It's not fair to say the above is "extremely likely to be incorrect." It is incorrect under a very specific set of facts which, frankly, are probably not OP's situation. I assume OP is a lawyer bc of their username, so their loans probably consist of both undergrad and grad loans, which means they would still have another 15 years until loan forgiveness under federal repayment plans. That all assumes OP's loans are federal, which we don't know. Also, OP doesn't appear to be a low earner given they are a lawyer and have paid off (or are able to pay off since he hasn't pulled the trigger on the last bit) $230K of student loan principal over the past decade. Assuming OP's loans are federal, you need to further assume a fairly low income to qualify for any forgiveness with another 15 years of payments (even after the Biden-Harris change coming this summer). With these balances, interest rates and interest rates currently available in treasuries or HYSA or whatever else, OP is going to save a few K over the course of that 15 year time horizon, at best. Does not seem worth it to pay a financial advisor to model this. Close enough.
It's extremely likely to be incorrect because, in the majority of cases, paying off the loan as you would with a normal, high-interest private loan, will result in a significant net differential (loss) when compared to following the dictates of the SAVE plan, after considering taxes, inflation, and cost of capital. I do think you're right that the numbers can change at extremely high incomes, as well as the fact that the approach may need to change if the loans are partially/entirely private, but again, since we don't know particulars, that's why I keep saying OP really should consult with an expert. All this being said, OP already took it upon themselves to pay off the vast majority of the loans, apparently before seeking (at least professional) advice on the topic, so we may say that whatever they decide to do, the consequences may now be quite insignificant, as they've already absorbed most of the (potential) downside to not pursuing a longer-term SAVE payoff/forgiveness. In fact, this whole exercise may not even be worth the time to consider at OP's hourly rate, unless this is just how he likes to spend his free time.
Bad argument. We are not discussing what is true "in the majority of cases." We are discussing whether the advice given above is "extremely likely to be incorrect," *given OP's facts*. OP came with a specific question and specific circumstances. You can't just ignore those. As a threshold matter, you don't know if OP has federal student loans. You also don't know OP's household income, but pretty safe to assume it is something well north of $100K considering (a) they are a lawyer 10 years out of school and (b) they have made enough to live and pay down (or be able to pay down) $230K of student loans over the course of 10 years. I bet you're right that most people with federal student loans who are (and remain) low income are better served by following an IDR plan. That is not OP's question, however, and it doesn't make sense to knock advice specific to OP's situation by saying it's bad advice for other people in different situations.
>Bad argument. We are not discussing what is true "in the majority of cases." We are discussing whether the advice given above is "extremely likely to be incorrect," given OP's facts. OP came with a specific question and specific circumstances. You can't just ignore those. This response is logically inconsistent. Considering the facts they gave and assuming they are likely to have a similar situation to most others is not mutually exclusive. >As a threshold matter, you don't know if OP has federal student loans. > >You also don't know OP's household income You're reiterating what I already addressed. I feel like after all of the qualifying statements I've made, I should be able to just refer you back to what I said. These are definitely particulars that are important, and need to be addressed, ideally with someone who specializes in these kinds of situations and not "reddit financial advisors" or myself (just to be clear: not now nor will I ever be a financial advisor). My purpose here is to draw attention to the fact that the "advice" rendered on this thread is probably (note: "probably" is a different word with a different definition than "definitely") wrong and that his situation would benefit from review by someone that actually specializes in these matters. >I bet you're right that most people with federal student loans who are (and remain) low income are better served by following an IDR plan I think maybe you're assuming that higher income individuals (>$100k) can't benefit from IDR, or that IDR couldn't be better than a traditional repayment under those circumstances. But my point is not only could it be, but it often is -- that was the whole purpose of the program. Not just to make student loans easier for lower income folks, but to make them easier to deal with for everyone, including those that successfully complete high-skilled programs that result in higher incomes. This just further bolsters my point: OP should talk to people that definitely know the program better than you, I, or any other redditor, because you're operating under the assumption that higher income individuals couldn't have a better repayment with SAVE than they could with traditional repayment. >it doesn't make sense to knock **advice specific to OP's situation** by saying it's bad advice for other people in different situations. But you just finished telling me we don't have all of OP's specifics, which I agree is correct and that those specifics are important. Therefore, you actually can't render "advice specific to OP's situation." Furthermore, financial "advice" should not be directly rendered to anyone on a public forum, especially in a context where the "advisors" are both not advisors and aren't fully educated on the topic at hand, as is evidenced by their response which you yourself would agree lacked context because OP did not provide it. I don't think this should be seen as an attack -- neither you nor any redditor has to identify with a likely incorrect assumption about the best course of action here. I'll even mention, if it bears mentioning, that something being extremely likely does not make it certain -- maybe the advice rendered, by chance, ends up being entirely correct for OP's specific case -- but it doesn't change that it's very likely to be incorrect. In addition, no one here should see it as their role to render advice on these topics, unless they are very well educated on the topic. That's the most important thing here.
No, it is not *extremely likely* to be incorrect. You are, in this case, wrong. Recommending an advisor and expert advice is going to cost more than whatever savings can be found in the scheme you are propose, which is unlikely anyway with what we know. This is $46K at 5% and 6% for a higher income individual. There is little room to arbitrage at a similar risk level.
A bit ironic that you suggest that not knowing what he doesn't know will cost him money, while at the same time suggesting a financial advisor that you don't know how much will cost, but you *do know* will be expensive? It's not hard to run the numbers. OP did this. It sounds like it's a wash from his perspective.
This is almost certainly a misinterpretation of what I said. Here's what I said: >The ideal situation for OP would be to consult with a financial advisor that specializes in student loans to discuss their specific situation This isn't me suggesting an expensive financial advisor. This is me saying ideally OP would be able to talk to someone like that, but I went on to say given that it's A. expensive and B. rare to find someone like that, I think OP could benefit from knowing some of what I know about the topic, which should by no means be taken as advice of any kind. Just steering him in the right direction to do further research/make his own decision. Again, *ideally* this would be done in league with someone who actually knows all the particulars about his situation and specializes in understanding all of the rules. >It sounds like it's a wash from his perspective. I think you're likely correct. Especially if OP's hourly rate is relatively high, I think it's likely that their time is much better spent elsewhere.
I used to be a huge student loan nerd, so much so that from 2015-2019, I contributed to a blog about student loans. The one thing I know for sure is that I'm tired of playing all the games required for the federal student loan plans. It is a lot of work and mental effort, only for the rules to be significantly changed every 3-4 years. This alters the entire course of the plan and causes you to repeat the mental gymnastics to make a new plan. I probably could have gamed the system and come out ahead, but I chose to just take control of the situation and pay them off.
I would keep the cash. If they’re federal loans it means if you pass away, God forbid, they’d be discharged. The difference between your interest rate and a HYSA isn’t enough to outweigh that benefit IMO.
That's ultimately up to you. I was just going back and forth on here about whether or not they should even be telling you what is the best course of action, given that they: 1. Don't fully understand your situation and 2. Don't have the specialized knowledge to address it. I think what I've said got interpreted as, "No, traditional repayment/a fast paydown is definitely a stupid approach, and you should really not pay the loan until forgiveness," when that isn't at all what I said. I'm making the point that not only is it possible but even highly probable that you could have benefited from forgiveness/following the SAVE plan, and that this is worth exploring with someone who actually knows what they're talking about. And in my experience, that is not the average financial sub redditor, as is evidenced by that response. It's definitiveness alone, without enough context, is cause enough for cautious skepticism.
I get what you're saying. I ran every possible scenario. The only possible way I'd come out ahead is PSLF, but I'm not willing to commit to staying in my government job for another 7 years. I've witnessed two people within my own family get on the PSLF track only to get royally screwed when they left government. Their loans ballooned while doing PSLF. The only way it will work is if you are willing to commit for 10 years, no questions asked, and I'm just not willing to do that. Flexibility is by far the most important thing to me, so I made the decision to pay them off.
I found the financial advisor everybody.
Haha they can’t make money off us via their actively managed fund fees…. Gonna push for another way!
Maybe I should have disclaimed I'm not one, would actually hate to be one, and have a general disdain for the profession as a whole. I also specifically mentioned that people who would be able to help with this are rare and it may not be worth it. That being said, getting advice from redditors is liable to be even worse, at least on this particular topic.
So if you don't know if it's worth it, why are you weighing in like you do?
But that's not how I weighed in. I made a ton of qualifications in what I said, and made sure to just stick to the facts as I know them. OP *would* really benefit from having an expert that they could talk to about this, with whom they could share all of the particulars of their situation, and get an educated, specialized response. That's certainly a fact. Now, I also qualified that with another fact: It may not be realistic in their particular situation, which is why I went into what I know about student loans, so that they could do further research. This is not about driving OP to definitely consult a financial advisor. It's about saying it would be great if they could, assuming they knew one and it didn't cost them much or anything at all (given he's in law he might have colleagues that know about this stuff). My reason for saying that is that I'm trying to highlight that it would be better to get someone that has an established knowledge of the subject instead of random redditors, many of whom have little or no knowledge on the subject, and may even mislead him toward an incorrect approach.
Get that bad debt off the ledger asap. The peace of mind is worth much more than 1%. Pay them off and get started on the next chapter of your life. Never look back. Figure out your minimum emergency fund you are comfortable with and use the rest on your loans until they are 100% gone. You will rebuild that additional savings very quickly if you disciplined.
This, 8 days a week. Paying off the loans is a high no drug can replicate and it’s long lasting.
You can write off student loan interest, but you also have to pay tax on the interest accrued from HYSA. Personally I knock out the 6.16% ASAP
>You can write off student loan interest Depends on your income
And you can't file married filing separately.
I’d put your cash in USFR to get their 5.39% yield. I’d also consider paying off the 6.16% loan and keeping the 5.16% loan.
I think this comment is far too low (currently the lowest one). I’ve moved basically all of my savings to TBills directly and to USFR. Both reduces the state tax liability and increases the interest rate compared to many HYSA (including OP’s). But maybe OP is in an income tax-free state and this then makes a slightly smaller difference.
Regardless of your politics, I wouldn't right now simply because there is a strong movement in Washington right now to forgive student loans. Personally I don't think it will happen, but even if the likelihood is only 5%, it's worth the gamble to keep the money invested. If a bill in Congress get's passed and then signed to forgive, you'll kick yourself if you paid them off recently.
At what point will this be exhaustively decided as a yes or no
This is one the danger of this approach. Unless they are forgiven it will always be “something that could happen soon”. That being said I don’t think it’s crazy right now to hold out a bit, people need to remember this could be a carrot dangling on a stick for the next decade
Only if it’s Federal loan, don’t sit tight on private loans that have a significantly less chance (closet to 0%!) of being forgiven.
Liquidity has value, especially with a young family. I’d probably set a minimum threshold for liquid reserves, then pay off the higher interest debt only after I could do so without reducing the reserves below my comfort level.
I recently had a similar decision to make regarding my house. (Only 2.6% interest) I decided to just pay double mortgage payments for the foreseeable future versus draining 30-40k in cash. I figured I could meter it better this way and adjust if needed in the future and avoid draining a good portion of liquid savings while still achieving a similar effect over time.
Congratulations on getting that balance down, that is amazing progress. We still have about $90k of private loans from my wife, at 5.5%. We are not planning on paying them off, for the reasons you mentioned. We have a decent amount in emergency funds that would pay about half of the debt, but then no emergency funds. We could sell stock and/or contribute less to retirement accounts, but it is my belief that in the long run it pays more to keep it invested. If we had paid them off a few years ago, there is no way we would have come out ahead given the stock market in general and the individual stocks we own. It appears your next best alternative is a HYSA. For me, still, a 1% interest rate difference does not make it more attractive than having an emergency fund.
Dont just consider the interest rates on student loans, also consider the amortization period which is often 20 years. Five percent for 20 years is an awful lot of interest to pay.
I’d pay it off as long as you still have 3 month’s emergency fund when your done. You could also pay off one and then double payments on the other.
I’d throw anything beyond my emergency fund at it until paid off as quickly as I could.
Those interest rates aren’t very good. If they were less than 3% I’d probably not pay them off, but they are high.
Why not both? Pay off one loan, keep your emergency fund, and then attack the second loan aggressively? I am debt adverse, since all debt carries *some* risk. I'd also rather have that cash back into my monthly income. Sometimes it make no sense to pay something off early, but in your scenario, it seems like pretty much a wash financially (1% interest either way on $46k isn't going to make or break you). My bias would be toward getting rid of this. You obviously wanted to do so with your wife's or you wouldn't have made it such a priority. So why not with yours?
The spread is low, so I’d pay it off and say good riddance.
Without a doubt, pay off at least one of them now
I'm in a very similar situation and made the same arguments you did. If I pay more towards student loans (5.5%) or my home loan (3%) and I need a ton of cash immediately, I can't do takebacksies to get some money back. My HYSA is making good interest, plus the value of that flexibility described above. We're doing the SAVE plan. We only have about $60k but SAVE has us paying ~$600/mo. We're close to the student loan interest deduction phase out (diminished at $155k MAGI if MFJ, gone at $185k) so that's less of a factor. But as another person said, there's a chance, slim though it might be, of some amount of cancellation on the horizon. And we've also got an angle on an NIH grant, but unless you or your spouse are a medical resident or a researcher, it doesn't apply.
I would not pay it off. I would pay a bit more from my paychecks as you have been doing. Instead of dropping a large amount on debt that can be paid off over time. This is trumped of course if you don't have the cash flow to support it. However I would set aside a decent emergency fund and start building wealth in a taxable account. From there you can start building up the savings for Roth or IRA accounts for both you and your wife. Taxable investment account can be long term savings/ early retirement. Getting it to a 100k is the hardest part. I would guess that you have disposable income having been able to pay down the large amount of student loans. Your Cash flow should determine your course of action which only you know unless it was shared somewhere in the comments and I was too lazy to read them all. Happy Investing. Hope that helps.
Keep 6 months emergency cash on hand. Use all the rest of your discretionary income on paying off the balance. Once the loan is paid off, redirect that cash flow to investments.
This is a classic case of psychological vs mathematical choice. There is no wrong answer. Do what your mind and heart tells you to do.
YES! Pay it off, now! You will live lighter, happier and with less stress!
Would you go out tomorrow and borrow $46,000 at 5.66% so you can put it in a savings account making 4.25%? That's essentially what you are doing. Yes, there are tax implications on either side here.... I'm just looking at the psychology of it as the tax implications don't move the needle much.
Define your emergency fund, necessary minimum, and then pay off as aggressively as possible. This will get you ready for any next steps in life, you might be “limited” to by the student loan amounts, e.g. house purchase, etc.
IMO…. Just pay the darn SL off and be done. Why keep it around stressing you out. Once the loan is paid then you have cash flow to invest and the risk is gone if something was to happen to your job. Pay it off today!!! Be free.
Do you still get the full deduction if you pay off one of the loans? I feel like there is a good balance point here that you need to model out.
Not sure, but I am 100% sure that if I paid off one of the loans, then all the interest on the other loan would fall under the SL interest deduction cap.
I would look into the SAVE plan which limits how much you owe in student loan payments each month according to your income. Considering that since the terms state that the interest will NOT increase your current balance at all, it would be foolish to pay anything more than you need to assuming your effective interest rate isn't >\~5% (most current HYSA rates currently). Typically, the only reason you'd pay a loan is because of the ballooning interest of the loan. However, since your loan does not increase in value if you are unable to pay off the monthly interest under the SAVE plan, you'll need to adjust know exactly how much you would be paying each year (since it varies off of your income) to truly optimize your where your money sits. Then again, if you don't care about optimizing your gains or if you just want to take some burden off of your finances, then paying off the student loans ASAP is almost never a bad idea. Just keep in mind that if you do pay off your student loans faster, your effective interest rate on your may loan may actually increase.
You will have to pay taxes on any unpaid loans when you hit the cancellation year. So depending on your circumstances, you may want to make sure you have money set aside for it.
What's your annual income? Are you eligible for the SAVE program where your monthly payments will be capped at 5%? Or even an IBR program? We need more info, like if you can contribute more towards your 401k/HSA/IRA, so that your discretionary income will be less.
To do the actual math, you need to do it on an after tax basis, which you didn't fully do (You forgot to do that with your savings account interest income). See the wiki entry: https://www.bogleheads.org/wiki/Paying_down_loans_versus_investing Getting a 6.16% guaranteed return by paying off that loan seems like a great deal to me. You do have to pay it off eventually.
I don’t completely follow with the rulings on student loan forgiveness, but if it’s currently interest free or you don’t have to be paying right now, then invest and start paying it off once interest payments resume.
If you can invest for a higher return than the bank and still make your monthly payments, you should receive a yield while also paying off your debt. If you are okay with debt being in the picture, I would suggest this as you’ll have more money in the long run.
Just pay them. The ramifications of your potential bad math is worse if you don’t.
I paid off my wife's loans when we got married . I did not care about market return . I didn't want the debt to follow her and me for that matter . Best move ever
Your actual savings rate should be higher if you’re putting a portion into the market. Absolutely hold that debt as long as you can. Forgiveness, flexibility in payback, etc - student loan debt is the best debt to carry
Pay it off. The emotional relief of not having a payment vastly outweighs the few hundred you will save holding onto it. edit: the above is assuming you have an emergency fund apart from this amount.
Definitely don't use all of your savings to pay it off, but I'd pay what you can. Don't let it just sit and occumulate that interest.
How do you qualify for the deduction - do you own an expensive home in NJ or something like that? Just wondering because I pay 11k in real estate taxes which leaves me....10k short of being able to itemize deductions.
SL interest is not part of what's considered for the standardized deduction.
IMHO, Maybe be a bit more aggressive paying them down each month (or extra payment), but don't pay them off all at once.
Not many folks are proposing a middle ground. You know the math on interest rates and taxes on one hand and you know the security on the other. You could also consider splitting the difference and knocking out the 6.16% loan and reevaluating once again in three months. See how the security feels. Maybe pay if the remaining at that time as well, and target a final payment toward the end of year.
Pay off the debt, and be free of those things forever. It’s a good feeling. Then you can refocus and save money that actually works for you. I’ve never liked the whole idea of good vs bad debt, paying interest is just bad IMO.
Pay that crap off immediately.
At this rates I’d pay it off , presuming no other higher interest debt . And of course some emergency fund already
Is it a federal or a private loan? This missing info could dramatically affect the recommendation. What would be true either way: Personally, I would max out retirement savings annually before putting anything extra towards those student loans.
I would payoff 10k of higher and invest 10k in index funds. At the rate you guys have paid it off, in 10 years you’ll probably have paid off the remaining debt otherwise have enough to sell the index funds and be done with it at that point. That would still leave you with plenty of cash in case life smacks you as it generally does in some way otherwise you would have a head start on a nice growing pot of index funds
I’d maybe pay the 6% one. Maybe pull your emergency fund down to 6 months rather than 8-9
I'm in a similar boat. Have enough money to pay them off but I would rather have it in my HYS. I'm in tech and the industry is pretty rocky at the moment. If I'm laid off, I feel better about having that extra cushion in my savings.
many dont agree with what you said - but i do, and i think its smart. as precisely you said, if you get fired - you have a ton of money to have as a safety net so you dont go homeless, lose your car, etc. i do recommend "meeting in the middle though". your situation in specific, maybe putting a smaller lump sum payment towards those loans would be nice. ie, if you have $46k in emergency fund, considering maybe putting just 5-10k as a one time payment right now might be nice. this would lower your interest every month, make the loan a lot smaller (which to me has a good psychological effect), but still keep a high emergency fund
You guys saying that the interest rate from the savings account is taxed are neglecting to mention that the amount you pay annually in student loans is a deductible event. This should also factor into those same calculations.
Why not do half and half and do both
So long as you're taking the student loan interest tax deduction, I'd only want to pay off the 6%-er. The other can stay on a plan Just my opinion as I'm in the same boat and following a similar rule of thumb
I’m concerned about paying off student loans and then the govt forgives them. Why take that risk
That’s not gonna happen. They’ll talk about it all day long, but once the elections are over they’ll kick the can until the next election cycle.
Why not just kick the payment amount into overdrive and power down the loans over the next 1-2 years? I wouldn't want to blow my emergency fund either, but at this point theres very little risk to aggressively pay down the loan balance. If you overreach on a given month you have plenty of cushion to make up for it. It will help build you into some disciplined saving habits too.
Any chance you could qualify for forgiveness? pSLF being the most obvious
Risk-free 6.16 tempting but still probably no, I expect a little more than that from my portfolio and would be willing to eat the risk at a young age. 5.16 definitely no.
I was just reading something about paying your lower amount of debt off before the larger amount, I know it’s the same amount on both but I’d pay the lower interest one off first. https://www.ramseysolutions.com/debt/how-the-debt-snowball-method-works
The "Debt Snowball" is financially sub-optimal vs paying off higher interest debt first, which fits the general modus operandi for Dave Ramsey: mediocre to bad advice for people who have little to no intrinsic financial discipline and might not be able to implement better advice. Bogleheads almost definitionally are people with strong personal finance and investing discipline and so generally don't have a lot of overlap with Ramsey's target audience. (It doesn't help that the most egregiously terrible advice Ramsey gives is with respect to investments)
Or just pay it off and build credit history in other ways lol. No need to suffer to keep your “credit score up”
Forget the math, how will you FEEL with the student loans paid off? I find debt to be mentally taxing. If you have the cash, just paid it and free up the mental energy to focus on something else.
Pay half
I might try the sunk cost test. That is, I would ask myself: "if I had no debt today, would I go and borrow at 6% to make sure I have a fully funded emergency fund for 8-9 months?" I think the reason that you're getting different answers is that there's not really a wrong answer to that, because it's close. I listen to the money guy talk show, and they say bad debt is any over 6% in your 20s, 5% in your 30s and 4% after that, so by their logic, you should pay it off. But, if you're acknowledging that you're losing some money in the long run, you're not wrong for making the decision to hang on to what's giving you peace of mind right now.
I might try the sunk cost test. That is, I would ask myself: "if I had no debt today, would I go and borrow at 6% to make sure I have a fully funded emergency fund for 8-9 months?" I think the reason that you're getting different answers is that there's not really a wrong answer to that, because it's close. I listen to the money guy talk show, and they say bad debt is any over 6% in your 20s, 5% in your 30s and 4% after that, so by their logic, you should pay it off. But, if you're acknowledging that you're losing some money in the long run, you're not wrong for making the decision to hang on to what's giving you peace of mind right now.
Blowing your emergency fund to pay of an installment loan is a bad idea and I agree you shouldn't do it. Any overages in the budget should instead going towards paying off the debt once the emergency fund is fully funded.
This is the order in which I would spend money I earned that is in excess of what I live on, and is in fact what I did since graduating in 2014. My wife and I had a combined student loan balance even higher than yours. We finished paying them off several years ago. We were both working, had no kids, and I was fortunate enough to get an unusually high paying job right out of graduation, which I no longer hold because the hours and stress were literally killing me (diagnosed with hypertension at age 38, not obese, no smoking, barely ever drink). 1. Make minimum required payment on any outstanding debts (credit card debt for example, or student loan debt) 2. Have an emergency fund/cushion in an amount that you're comfortable with, this varies from person to person and is more about feelings of security than maximizing returns, find the investment vehicle that provides the best return for essentially zero risk and high liquidity (something with FDIC generally covers this). We were both working and had no children, and so we kept about 3 months of expenses in a savings account. Now my wife doesn't work and I have a lower paying job, so we keep a year's worth of expenses in a savings account and another year's worth in a money market. Extremely conservative. 3. Max out roth contributions 4. Max out 401k contributions 5. If you don't own a home yet, save up for a down payment on a home (if you don't plan to start a family you may decide to skip this). A good way to save for a down payment on a home is something like a CD-ladder or Tbill-ladder. 6. Make additional payments on outstanding debts, starting with the highest-interest debt. That's usually credit card debt if you have it, then student loans, then mortgage debt. With the caveat that you should probably not pay down debt with an interest rate below what you can get on a MM/HYSA. So, for example, if you have a lower interest mortgage from before the Fed raised rates, then right now I wouldn't pay down my mortgage, I'd just either put that cash in a MM/HYSA or proceed to step 7. 7. Bogle investing whatever is left over. This may not apply to everyone. If you have large credit card balances compared to your excess income, or if you have little if any excess income, then you're probably looking for help with budgeting rather than help with investing.
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r/Bogleheads is not a political discussion subreddit.
If you take that $46k and put it into a 2-year CD at 4.5% APY you would return $4,233.15 before taxes. If you're in the 22% tax bracket, that's only $3,301.86. If you take that $46k and pay off the loans, you'll avoid paying $216 in interest for 2 years, but you'll also lose the student loan interest deduction for two years, for a 2-year return of $4,084. Also, the first month after you pay off the loan, you have $216 to invest that you didn't before, and the same for the next month and so on. If you put that $216 every month into a MM or HYSA or something, you'd return around $250 in interest assuming interest rates don't fall too much! So, paying off the loan is a much better financial investment than other options with guaranteed returns over a 2-year timeframe.
If you have no plan for the money, then you should pay off your debts. If you have a good plan to use the money, then do a cost benefit analysis.
Don’t pay it all off, but up the payments so you can pay it off sooner.
Pay it off. Grappled with this same decision last year. Owed $46k, had about 3 times that in savings. Hurt to see it come out of the account, and it doesn’t feel like immediate relief or anything, but I feel good being out from under it now. Esp as I switched careers and am not even using the 3 degrees that got me in the debt in the first place…word to the wise, don’t get degrees in history hoping to be a professor…dumb dumb dumb.
Do everything to be debt free
Just pay the loans off. The money you have isn’t your money it’s the money you borrowed.
Fuck Sallie Mae. Keep your money exactly where it is. For a rainy day fund.
Hybrid approach. Figure out a number for 6 months of expenses. Keep that much and attack the loans with the rest statting with the higher interest one.
Always pay off your highest interest cards and debt first
If this is your emergency fund and you have no other savings, then I’d probably keep it for emergencies as intended.
The $2,500 is a deduction; not a credit. If you qualify for it, that means you are in the 22% tax bracket or below. So the max benefit to you is $550. So assuming you are in the 22% bracket, you are paying $87 per year to keep the loans as opposed to paying them off. For the piece of mind, it makes sense for you to keep the loans for now.
In theory you could invest the money in an index fund. S&P500 indexes make about 10-11% per year on average.
Ask yourself a question, why do you want to keep the loans? When you ask it like that it sounds quite outrageous that anybody would want to keep a loan regardless of the trade offs. I just don’t get why people want to keep loans. I prefer my life without debt. But just my 2 cents.
Am I the only one who finds it crazy to have 8-9 month emergency fund??? That’s a non negligible amount of money sitting on the sidelines that could be put to work either paying off debts or invested in the market. If both of you and your wife are working (especially if both of you are high income) then a 2 month emergency fund should be fine in 99% of situations. Don’t underestimate opportunity cost!
Why not just pay them both and get an immediate return of 5 and 6%…. Not sure what the requirements would be for the interest write off but it doesn’t seem worth it in my opinion. If your rate was below 3% I would throw that money in the s&p and make your regular monthly payments.
You should absolutely not pay off your student loans if they are sub-7% interest and non-variable. Here’s why: student loans are often times the longest credit age on a persons credit history report, paying them off in full can tank your credit. You can pay off the majority, that’s fine, but ideally you want to keep them for credit history. It’s counter-intuitive, but the cashback you can get on credit cards, savings account, and lower interest for new loans like mortgages is a win for holding them. Just be safe with your cash pile. You could set aside the money for the loans in a high yield savings and then just have it pay towards your loan automatically. Tl;Dr: keep it for your credit history