SurvivingInfidelity.com Forum Archives

Return to Forum List

Paying off student loans early? Thoughts?

You are not logged in. Login here or register.

Amazonia posted 2/20/2014 11:24 AM

I am finally (finally!) back up to 3 months savings in the bank, and have 25% of my take home pay deposited straight into a savings account, as well as a comfortable 20% (including employer matching) going into a 401K. I'm feeling a bit more stable financially. Even just bought a used but very nice car in cash.

However, I still have student loans. A small remainder of a loan leftover from undergrad 8 years ago, currently doing the minimum payments on that (10 year repayment plan), plus a larger loan that hasn't come into repayment yet from the program I finished this past summer.

I crunched the numbers, and if I were to stop traveling, stop buying clothes, and stop drinking for about a year, I could pay them off without otherwise affecting my lifestyle (or the 25% that goes into savings). Of course, that's a pretty big imposition to begin with (particularly the travel, since I'm in a long distance relationship).

The interest rates are reasonable, around 3% on the smaller loan and 5 or 6% on the larger one. Both are subsidized federal loans. But, my savings account doesn't earn that much interest... last I checked... it keeps going down.

How aggressively should I be trying to pay these student loans off? Cut my losses and do it in a year? Middle of the road for 2-3 years? Use the 25% of my income that I'm directing to the bank instead for a year to get rid of them? Or is it better to just ride them out on the minimum payments?

I know that regular payments are good for building credit, and I don't have a lot of other payments right now - rare use of credit cards (and never carry a balance), no mortgage, no car payment. My credit is good, but I want to keep it that way.

I anticipate wanting to buy an investment property in an expensive market in five years or so, if that makes a difference.

ISPIFFD posted 2/20/2014 11:55 AM

Just my 2 cents but I wouldn't give up everything you enjoy doing to smash the debt in a year. That 1-yr concept is an admirable goal, but since you don't also have all the other common debt problems like massive credit card balances or a huge mortgage, I would think a compromise would be better - maybe pay the student loans off in a 2-3 years and still have some money for enjoying yourself (like that LDR travel thing )

Curious to read other thoughts on this.

Williesmom posted 2/20/2014 12:10 PM

If I were you, I would accelerate the Student Loan payments for a 2 year repayment - a girl has to have a little fun, right?

If you happen to come across any extra cash, apply that to the balance at that time.

I'm so jealous. My wxh left me with a lot of marital debt. I got all of the stuff, but I also got all of the debt for stuff that I didn't really want, but didn't trust him to actually pay for.

Crescita posted 2/20/2014 12:21 PM

The interest rates are reasonable, around 3% on the smaller loan and 5 or 6% on the larger one. Both are subsidized federal loans. But, my savings account doesn't earn that much interest... last I checked... it keeps going down

Maybe look into some other investment options. Is the 25% savings for a long term goal or short term? If you don't have plans for the money for a few years, a mutual fund in a taxable account could average an 11% return.

3-6% on the loans isn't terrible, especially considering you get some of that back at tax time Depending on your marginal tax rate, you will get 10-33% of that interest back so 3-6% isn't entirely accurate. Maybe throw extra at the 6% and let the smaller one ride.

Oh and you sound pretty on track. I don't think halting your social life for a year will change your financial picture enough to be worthwhile.

Lucky2HaveMe posted 2/20/2014 12:44 PM

You could probably send in extra $ towards the principle every month? That will shorten the term without having to stop doing everything else

GabyBaby posted 2/20/2014 12:50 PM

While I like the appeal of being debt free within the year, being a relative hermit for a year would be very difficult to follow through on.
Add me to the bunch that also like the idea of doing a 2-3 year payoff.

Dreamboat posted 2/20/2014 13:19 PM

I would not aggressively try to pay them off early because you have a good interest rate. You may want to pay a little extra on your principal every month so you can pay off early, but there is no compelling reasons to push to pay them off in a year. If the interest rate was higher then yes, but it is reasonable.

Keep saving until you have at least a 8-10 month savings, and then consider backing off that some to pay more on the loans. If plan to buy property in about 5 years, then make a 5 year plan where you 1) maintain your emergency fund; 2) have a down payment; and 3) have your loans paid off.

StillGoing posted 2/20/2014 14:45 PM

Well, if you're just planning to put that extra cash back into booze and clothes after it's paid off then there's not really a point to giving up the booze and clothes. I mean, you go for a year without booze and clothes and then suddenly you go on this binge like that one girl in that movie where she was chipping a credit card out of a giant block of ice.

purplejacket4 posted 2/20/2014 15:10 PM

With that low of an interest rate any extra money would be better in some kind of mutual funds/investment with a better rate of return.

BUT

If the fact they exist are driving you crazy pay them off early. I wouldn't deprive yourself though to do it in a year. Maybe a more reasonable 2 year plan.

I borrowed 85K from 1990-1995 for college/med school; I had ten years to pay them off after my deferment ended (1998). I paid off the high interest accruing by the nanosecond loan as soon as possible. The others I paid off more gradually; every time I finished paying off one loan I used the money the next month to start paying off another loan. In doing this I managed to pay them all off in 6 year instead of 10. I ended up paying back 101K on the 85K that I borrowed so I thought that was pretty great.

I'm one of those people who COULD NOT STAND having debt although I realized my money would have been better off going into a mutual funds plan. Oh well....

sisoon posted 2/20/2014 16:06 PM

Well, you're better off paying off the debts than keeping your 25% in a savings account. And 20% into a 401K is a goodly amount, too. Still, you'd probably be better off investing in a good mutual fund than paying off the loans.

What are your goals?

Rebreather posted 2/20/2014 16:32 PM

I'm very Dave Ramsey when it comes to debt, so I would apply extra $$ to the small loan, and then when it is done, roll that $$ into paying off the big loan. Get out of debt first, get out of the habit of being in debt, and then you can really bankroll your money.

fireproof posted 2/20/2014 17:40 PM

Congrats! If it were me I would:

1. Put the max in a Roth IRA and continue on your savings plan

2. Stock up on an emergency fund 6 months or start a mutual fund

3. Enjoy yourself and put any extra after the above towards extra payments.

There is bad debt and good debt and school loans with a low interest rate is not considered one if the truly bad debts. Save and shore up your retirement then the loans.

Congrats!

Simple posted 2/20/2014 17:55 PM

What I did was just pay more every month. Unless there's cost to paying more or early which they usually don't. That way if something happens you can quickly and easily just pay minimum balance.

Hope that helps.

Amazonia posted 2/20/2014 21:55 PM

Yeah... Investing.... Need to learn more about that. I was at this point three years ago, stable enough finally as a recent college grad/newlywed to start thinking about where the excess money should go, and then the divorce happened and my savings was wiped out and it's been uphill since then again. The job change has significantly improved my financial situation and my goal is to keep my lifestyle the same and use the extra wisely to set myself up for a good future in case anything happens again.

The 25% is roughly to keep building the accessible savings, the kind I can grab when I have emergency surgery or get divorced or something like that. How much is enough there? The traditional wisdom I grew up hearing was 3mos, but in a recent financial planning seminar I attended they said in our current economy 12mos is better. Does that all need to be in the same account though? If I have 3 or 6 months easy to grab, that gives me 3 to 6 mos to free up more if needed... Right?

Is there a free online college class I can take about investment options? Where do I learn this stuff?

phmh posted 2/21/2014 06:31 AM

I'd probably pay off the 6% interest rate one at an accelerated rate, but not enough to severely impact your lifestyle. Especially since it sounds like you haven't gotten used to that extra money yet so you won't really miss it.

When I was aggressively paying off XWH's med school student loans, I kept a spreadsheet that showed how many months I'd cut off the repayment plan with extra payments, how much money I was saving overall, etc.

Is 20% enough to max out your 401k? Are the investment options in your 401k decent? (If not, you may want to do an IRA instead, with enough in your 401k for the match.)

Best books I've found for investing are "Random Walk Down Wall Street" and "Bogleheads Guide to Investing" Granted the latter is biased toward low-cost index funds, but so am I! It's very hard to consistently beat the market, and fees eat up so much of most people's investments.

Dreamboat posted 2/21/2014 08:25 AM

Does that all need to be in the same account though?

No, as long as it is quick and easy to liquidate without any tax or penalties. You might try a Roth IRA. With a Roth you can take out the principal (the money you put in) at any time without tax or penalty, but you if take out the interest before you retire then you do have to pay tax and penalty. If you do this, pick a low fee, medium risk mutual fund or index fund until you get a better feel for investing.

I have generally heard that you should have a 8-10 month (equal to expenses, not income) emergency fund so that you can survive if you got laid off.

fireproof posted 2/22/2014 08:09 AM

Most of the major companies have what is called a Target find or something similar for a mutual fund. You pick what year you think you will retiree.

It will be more aggressive and as long as the money is in the account then as you get older automatically over time become more conservative.

I would put at least 3-6 months of savings then put 3 months into a mutual fund. You want to try to keep that money in st least 5 years if not longer to grow.

You can go to the websites and look at their historical return although it isn't a guarentee.

More importantly if you haven't put anything in your Roth I would do that and your contribution before April 15th this year will go towards 2013.

Good luck and you can do it. The Target retirement funds are nice because you don't have to really know in depth the different funds and classes etc.

sad12008 posted 2/22/2014 19:07 PM

Are you able to itemize your taxes, or do you take the standard deduction? That's one way in which student loan debt isn't bad debt: you can deduct up to $2K of student loan interest.

Man, your interest rates.... holy cow, I couldn't have dreamed of interest rates that low with my student loans!

Congratulations on getting to a more secure spot financially...I know it's a big relief when life feels a little less risky.

Amazonia posted 2/23/2014 08:36 AM

I calculate my taxes both ways and do whichever gets me a better return. Honestly, I've been overpaying the student loans a bit, and I think my tax statement for the small one was only for about $15 this year. They aren't all that big - part of the reason I'm tempted to just pay them off.

The 6% one is 3-4x the size of the 3% one though, so it makes sense to put extra funds toward that (and since it hasn't come due yet, it hasn't actually accrued any interest yet).

If I want to buy a condo in DC, and expect the downpayment to be roughly 2 years of my salary, what's the best way to invest/save toward that?

Return to Forum List

© 2002-2018 SurvivingInfidelity.com ®. All Rights Reserved.