Student Loans or Investing?


#8

We decided to invest via a 401k/Traditional IRA before accelerating our student loan payments. My view was the “guaranteed return,” from saving money on taxes was ~30% compared with the loan interest rates of ~5%. I know tax savings today aren’t permanent, but we plan on retiring early and taking advantage of an IRA conversion ladder - which should lock in the vast majority of our tax savings.

Either way, as others have said. Do what works best for you. We wanted to develop the habit of investing early so we developed that habit first, with small amounts of money. Now we’re not as scared when we throw more money into the market.


#9

@tonymarchese I’m glad :slight_smile:


#10

I know everybody is different and there’s not really a right or wrong answer. That being said, I will share my thoughts on the subject, as my wife and I just finished paying off her student loans (over $90K) in August of this past year and did so in 15 months.

I feel like paying off a student loan is a guaranteed return on your money. I viewed it as one of the very few investments that would 100% without a doubt improve our net worth risk free. We had 5 different groups of loans, ranging from 5.3%-7.9%. The way we stayed inspired was to calculate how much interest accrued per day for each loan group. I would then calculate how much my extra payments reduced the interest in that loan per day, which made me feel better and see more progress that way. We went with the Avalanche method and started with the 7.9% loan and worked down from there to the next highest one, as this method will ultimately save you the most money. You don’t get the early “wins” for motivation, but math was my motivation knowing this method would save the most $$$ (that and living with in-laws during the majority of this time was quite a source of motivation too…)

One other way to think about it was to just think about not having that bill every month. The thought of the standard payment plan payment (for us, roughly $1200/month for 10 years or graduated extended plan @ roughly $500/yr for 30 years) sounded pretty miserable. I didn’t feel like we would ever have a chance to get ahead as long as this debt anchor followed us around. The way I see it now, is that we will now have an extra $1200/month in our pockets for the next 8.5+ years. $1200 x 105 months = $126,000. Yes Please!!!

We did have help from family which did aid us in making our decision to choose the route to throw almost everything we had to pay down her loan. That being said, going this route is not for the faint of heart. We were pretty extreme and threw the majority of what we made towards her loan. There is probably a happy medium that is better for most folks than the route I chose to take, but I honestly just wanted it gone so we could start living and making money for us and our future family. I already had an emergency fund, and work remotely so our costs were very low while we did this. To go this route is not for the faint of heart, but keeping your eye on the prize is well worth it.

Best of luck to you. Just having a plan and sticking to it is probably the most valuable thing.


#11

we do a hybrid approach - but invest a lot more vs accelerated debt payoff. Weigh the long term benefits of investing vs a relatively low interest rate and decided to not skip investing. With a kid on the way I am looking at my $1,000 month SL payment as more of a problem though. Can’t wait to have that cash staying in our pockets.

Not really a wrong answer - like the people above me say, whatever keeps you motivated is the right way to go

With a rate over 5% you might be able to knock a percent off that with a refinance - I went from 6.38 down to under 4% (it was variable and has come back up to about 4.25%)


#12

My general advice to people was always to pay the loan if it’s above about 4% interest, but oddly, I don’t follow it.

I have student loans on a 12 year term (about 1 year in, with many extra payments made already, so ~10 years left, max) at about the same interest rate - 5.4%. My balance is not similar, though - about $184,000.00 today!

But Mrs. Vigilante and I choose to max out as many pre-tax investments as we possibly can and still cover our expenses, anyway. Extra money, if we accidentally have some, goes to my student loans.

My reasoning could basically be summarized as this: We know that we are close but not quite able to max out all of our accounts. We know we will be able to do so in a couple of years, and we can’t go back in time to make extra contributions to our IRAs and such. We know that if we save like a mutha right now, we can manage to reach a coast-FI stage within about 4-5 years, even though we intend to have a baby somewhere in that time frame.

If we don’t do that, and instead bring home more money, pay more in taxes, and make early student loan payments, then about 4-5 years out my loan balance is small, but I’m definitely still working full-time and playing catch-up on savings!

I desperately want to reach our coast-FI stage to be able to leave full-time work and focus instead on various side-hustles, including the blog. And maybe do a little part-time lawyering just to cover my portion of the yearly expenses, saving any extra pennies beyond that. Our choice to save now gets us to that level of freedom several years faster than if I make max payments to my student loans, even though maxing my payments on student loans might make us truly FI a tiny bit sooner (it’s a close call with an interest rate of 5.4% - sort of depends on market conditions in the next decade, which I’d rather not predict.)


#13

@tonymarchese, great question to be pondering! I can see you going either way, but personally, I’d probably go the pay off the debt first and then start investing. It’s good to see that you have some savings set aside as well. $1,000 a month can make you some great progress either way.

Personally, we had over $27,000 in student loans. We ended up paying them off over a two year period by throwing everything we had at them. We knew they had to go. We were so focused on getting out of debt that building wealth wasn’t on our todo list yet. That accelerated the payoff. Also, the one thing that has helped my family succeed more financially than anything else was the fact that we focused on one thing at a time. We used to put some into retirement, some into savings, some into college funds for our children (then unborn), some towards debt, etc. But we never got the traction to move forward until we decided to focus on doing one thing at a time with ALL of our effort. By putting all of our money towards one loan at a time, we knocked it out much faster than we expected because we got excited and wanted to see it gone. We worked harder to make more money to throw at it because we were motivated. When you are intensely focused on something, you WILL make it happen!

If you invest the money, you’d be able to reap some possibly compound interest earlier, but would be leaving some risk on the table as you work through the debt. If you lose your job or something happens, you might leave yourself in a bad position if your income were to drop.

However, if you focus on paying off the student loans first, your investing slows for a little while. But, at the end of the debt, you free up even more cash each month to put towards the debt.

Plus, remember that even when you are paying off debt, you are still building wealth because you are getting rid of liabilities and freeing up cash flow.

In the end, it’s obviously going to be up to you and you have to do what you feel is right, but I think so many people overlook risk in return for reward. The more free you are from debt, the bigger your shovel becomes to build wealth!

Would love to know which way you end up going in the process!


#14

I am in a similar situation and I am taking the hybrid approach.

In August, I had 49K left on my student loans when I discovered the FI community. I get a 2% match from my employer so I contribute to my 403B to get the match. I am also attacking my student loans with every left over penny to pay off my student loan in the next 7 months or so. I pay anywhere from 3500-4000/month!

I am excited about maxing out my 403B and ROTH IRA in 2017, so that excites me and keeps me motivated.


#15

I feel a lot of this myself. Ridding myself of the stress and the burden is quite the temptation.


#16

I’ve considered refinancing, but I haven’t done enough research. Do you have any suggestions where I might start looking?


#17

This right here is why I’m so torn between the two; I’d definitely need to fully utilize pretax investing if I chose to prolong my student loan payments.


#18

I definitely agree that hyperintense focus is certainly the most effective method, but at the same time, I’m just concerned I will lose momentum in the 2-3 years it will take me to get rid of it.

Picturing the end goal is extremely motivating, so maybe I just need to find a way to keep that at the front of my mind.


#19

I refinanced with Purefy early this year, and I nearly used SoFi (<the second is a referral link) because they were offering comparable rates. Purefy just beat them out by a hair.

But right this minute I am waiting on a response from Earnest (<another referral link) about refinancing. I’ll let you know how it goes, but it was recommended by Mint and has a very interesting application process. They ask for all kinds of details - a full financial disclosure, really - rather than focusing entirely on debt-to-income ratio and credit score like most lenders. For a lot of people, that would present a problem, but I’m hoping that for a person who has a terrible debt to income, like me, and yet manages a 50% savings rate (80%+ if you cont my student loan payments as savings!), it’s an advantage. We’ll see soon!


#20

I’ll check it out, thanks!


#21

I used SoFi personally- great company to work with


#22

I tried SoFi, but didn’t get very good rates. Most, if not all were upwards of 6-7%.


#23

Dang, rates have went up since my refi last year, but I thought they would still be competitive and under 5.


#24

I paid the minimum over many years on my student loans. But my rate was just over 2%. At 5%, I like the idea of paying half towards debt and investing the other half. I don’t think there’s a wrong answer here.


#25

It’s horrifying!


#26

I literally just finished a post in the “What’s one personal finance truth you believe that everyone else thinks is crazy?” thread about how I don’t think it’s necessary to pay off your student loans before you start saving/investing for FIRE. I have about $23,000 in student loans at 5.2%, but I’m focusing on saving in tax-advantaged accounts rather than paying off my student loans. I put about $1,200 - $1,500 per month into these accounts, which could theoretically go towards my student loans and have them repaid in just over a year, but the fact is that they aren’t costing me nearly as much in interest as I save in taxes by utilizing these tax advantaged vehicles. I ran the numbers and came out ahead even if my return is lower than my interest rate on my loans, thanks to the tax savings. I also prefer the idea of building up cash resources that I could tap into if necessary, rather than just reducing a liability.


#27

That’s definitely something I’m considering, too.