Student Loan: To Pay or Not to Pay: That is the Question

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Phish
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Student Loan: To Pay or Not to Pay: That is the Question

Post by Phish » Mon Oct 23, 2017 5:03 pm

First Time. Long Time.

Advice requested...here's the situation:

27K in Student Loan Debt...Private Loan with some bank (which has changed hands a few times).
Currently have a Variable 3.830% rate.
Monthly min payment: $166.03/month
I've been paying: $216.03/month

I have ESPP (Employee Stock) I plan to sell to diversify from having so much tied up in one Dow 100 stock (a recent former employer). We have about 160K in employee stock at the moment. We plan to put it into a diversified brokerage account with Index Funds & Bonds, BUT...I could pay off the entire loan if I wanted.

My SO is 'paralysed' by the 27K saying it is an albatross around our neck. I managed the payments each month. I am unfazed by this debt honestly...been paying student loan debt since 2000. It'll get paid off, but I'm in no hurry, b/c the interest rate is so low and the monthly payment is so low and I like having the 'cash' in form of stock on hand in case of earthquake or who knows.

Wife is employed and makes $100K-ish. I am unemployed at the moment (but was making 65K) from said recent RIF. I mean... 'self-employed' :P ...but will get a new gig soon.

QUESTION:

Should we pay off the student loan debt in full or chip away at it? Is there any advantage to paying off the loan in full vs. leveraging the cheap rate and putting our money back into the market to work for us?

IMHO:

We should sell the ESPP put it into a diversified index fund. Then perhaps...spend some of the money on home improvements (or perhaps a home equity line of credit?) and keep chipping away at the 27K student loan as long as the rate is so low. If the rate creeps up...sell some of the new brokerage account funds to pay it down. That's what I think...but you tell me...

And...DISCUSS...

Thanks.

Nate79
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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by Nate79 » Mon Oct 23, 2017 8:53 pm

Would you borrow money at 3.83% variable rate to invest?

hightower
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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by hightower » Mon Oct 23, 2017 8:56 pm

If it’s bothering your SO, just get rid of it. It’s not that much and wont make much of a difference either way in the long run.

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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by sailaway » Mon Oct 23, 2017 9:00 pm

I think one person being uncomfortable with it hanging there tips the balance.

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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by grabiner » Mon Oct 23, 2017 10:32 pm

I would recommend paying off this loan in preference to any investing, except for a matched contribution to a 401(k).

The reason is that the loan is at a variable rate; it is costing you 3.8% now, but will cost you more later if rates rise. Effectively, paying off the loan this year rather than next year is equivalent to buying a one-year CD or short-term bond, since you will have to borrow at next year's rate. And 3.8% is a good deal on a one-year CD or short-term bond.
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Watty
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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by Watty » Mon Oct 23, 2017 11:20 pm

Student Loan: To Pay or Not to Pay: That is the Question


Unless you have some sort of loan forgiveness option the question is only when to pay it off not "if" you should.

Realistically if you invest the 27K in moderate risk investments you would be doing great to clear 5% AFTER taxes. That is only a bit more than 1% more than your student loan rate so you might clear all of $300 a year, $25 a month, if things go well.

I would just pay it off then invest your monthly "loan payment" each month.

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FiveK
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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by FiveK » Tue Oct 24, 2017 4:01 am

OTOH.... ;)

The SL interest deduction (that you get even at $165K gross income if putting $36K into 401ks) means you are paying ~2.9%. That low a rate makes not paying extra on the SL reasonable.

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Pajamas
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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by Pajamas » Tue Oct 24, 2017 9:13 am

If you are maxing out your retirement accounts, paying off the loan would make some sense despite the low interest rate and deductibility of interest. Decisions about finances are not always completely based on the numbers or even rational.

There is also uncertainty involved. Future investment returns are not known but future loan interest is known. It may be that paying off the loan rather than investing the funds turns out to be the better decision.

The fact that your spouse feels more strongly about it should be taken under consideration. Some people might think that it is relevant in this type of decision that one spouse contributes more income to the household. I disagree, but still think it is worth mentioning, because you or your wife or both of you might think that it is relevant. If so, consider that, too.

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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by student » Tue Oct 24, 2017 9:23 am

I would just pay it of based on that fact that your SO feels that it is constraining and the amount is relatively small in comparison to the finances of you and your SO.

Big Dog
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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by Big Dog » Tue Oct 24, 2017 9:27 am

is your ESSP pretax? Would you be subject to income taxes if you cash it out now?

Personally, since you are between jobs, I'd keep the loan balance until you find something. It make take 6 weeks or 6 months. I'd conserve cash now.

financeidiot
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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by financeidiot » Tue Oct 24, 2017 9:37 am

How much does the $160k in the ESPP represent of your total portfolio?

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Phish
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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by Phish » Tue Oct 24, 2017 10:48 am

Thanks for all the feedback. Couple of answers and comments.

1. ESPP is post-tax investment. Subject to capital gains taxes.
2. Unable to deduct the interest (I believe) at this point, b/c it is a private loan and I've been paying on it since 2007 (grad school loan).
3. The $160K represents a fair share of total retirement funds. She's got a 401K as do I (350K total-ish). We've got a Roth IRA as well (80K-ish). House debt (at low 3.8% rate-ish), SL debt as mentioned. No CC debt. Emergency fund saved. No car payments. Small 529 plan.

Few comments to responses...
1. I might borrow at 3.83% to invest it...depends on the terms and length of time. To answer your question.
2. Just b/c bothering my SO...that sounds like an 'emotional' response...just like pulling your money out of the market when your account dips. Making an emotional choice vs. rational fact based choice. I know there's some conflicting thoughts here on that.
3. We're not maxing out 401(k)...just b/c we don't have a lot left over month to month.
4. I did get a severance that we're living off as we as unemployment at the moment. As you said...it could take 6 weeks or 6 months.

Thanks for all the insights and help! :sharebeer

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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by TSR » Tue Oct 24, 2017 11:08 am

Phish wrote:
Tue Oct 24, 2017 10:48 am
Thanks for all the feedback. Couple of answers and comments.

1. ESPP is post-tax investment. Subject to capital gains taxes.
2. Unable to deduct the interest (I believe) at this point, b/c it is a private loan and I've been paying on it since 2007 (grad school loan).
3. The $160K represents a fair share of total retirement funds. She's got a 401K as do I (350K total-ish). We've got a Roth IRA as well (80K-ish). House debt (at low 3.8% rate-ish), SL debt as mentioned. No CC debt. Emergency fund saved. No car payments. Small 529 plan.

Few comments to responses...
1. I might borrow at 3.83% to invest it...depends on the terms and length of time. To answer your question.
2. Just b/c bothering my SO...that sounds like an 'emotional' response...just like pulling your money out of the market when your account dips. Making an emotional choice vs. rational fact based choice. I know there's some conflicting thoughts here on that.
3. We're not maxing out 401(k)...just b/c we don't have a lot left over month to month.
4. I did get a severance that we're living off as we as unemployment at the moment. As you said...it could take 6 weeks or 6 months.

Thanks for all the insights and help! :sharebeer
You're faced with a few good options: (1) pay off loans, (2) keep cash on hand. There's not a very good way to do the math there that will give you the truly "optimal" answer, or the "optimal" is based on too many assumptions that are contingent on other things. In such cases, people's emotions are helpful at tipping the scales. In this case, I'd agree that you should just retire that debt, if only to set your SO's mind at ease.

Good luck!

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Watty
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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by Watty » Tue Oct 24, 2017 11:27 am

Phish wrote:
Tue Oct 24, 2017 10:48 am
2. Just b/c bothering my SO...that sounds like an 'emotional' response...just like pulling your money out of the market when your account dips. Making an emotional choice vs. rational fact based choice. I know there's some conflicting thoughts here on that.
I don't think writing off her concerns as "emotional" is really fair since paying off debt seems to be a very rational response to changes in your ability to tolerate risk while you are unemployed.

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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by mortfree » Tue Oct 24, 2017 11:41 am

40 years old or so?

27k at 200/month puts you right around another 12 years for payoff (?).

27k out of 160k...

I'd pay it off. it's a drop in the bucket for you.

I am guessing a HCOL area, and a no-fear of debt, given your comment about the SL, potential Line of Credit, and saying there is not much left at the end of the month.

Treat the 160k like a windfall and read that section of the wiki, if you haven't already.

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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by Psyayeayeduck » Tue Oct 24, 2017 12:13 pm

Assuming other financial areas are taken care of and not a factor in your decision, I would lean towards paying it off. Your variable rate of 3.83% is at that gray area (3%-4%) where people will argue for days on paying it off now versus chipping it away over time. The reason I'm leaning towards paying it off is because it is variable. I personally don't like variable rates as it is a something that can't really be controlled. It takes one bad year like 2008-2009 and you could see monthly payments shoot up.

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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by Hoosens » Tue Oct 24, 2017 12:23 pm

I would pay it off, you are easily in position to. Don't discount the 'emotional' relief you will both feel with this gone. As is apparent from previous responses, it doesn't appear you will tilt the scales much in one direction or the other from a purely dollars and cents perspective, so why not get rid of it? Seems rational.

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FiveK
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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by FiveK » Tue Oct 24, 2017 12:33 pm

Phish wrote:
Tue Oct 24, 2017 10:48 am
2. Unable to deduct the interest (I believe) at this point, b/c it is a private loan and I've been paying on it since 2007 (grad school loan).
Depends on what is meant by "private." If from a relative (e.g., parents), then no it is not deductible. But if from a bank, etc., it may be - see Topic No. 456 Student Loan Interest Deduction | Internal Revenue Service for more.

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Phish
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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by Phish » Tue Oct 24, 2017 12:48 pm

Yes, cost of living is similar to Jersey City, NJ or Ashville, NC. 40. I'll check out the windfall section. Thx.

I've tapped out the Student Loan Interest Deduction for the IRS...don't think I qualify any more. I'll double check.

Sooo...the Variable Rate can change every quarter as it based on the Libor rate. +2.75%. It gets updated every Jan, April, July, Oct.

Never heard of the Libor before today...so, there's that. :confused

Sounds like the consensus is pay if off...I'll read that windfall wiki.

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Phish
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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by Phish » Tue Oct 24, 2017 1:55 pm

Last Question...is it better to wait till Jan 2018 to sell the ESPP vs. selling it at the end of 2017...so, I can defer the taxes owed to 2019?

thanks!

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FiveK
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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by FiveK » Tue Oct 24, 2017 2:08 pm

Phish wrote:
Tue Oct 24, 2017 1:55 pm
Last Question...is it better to wait till Jan 2018 to sell the ESPP vs. selling it at the end of 2017...so, I can defer the taxes owed to 2019?

thanks!
If your marginal tax rate for the sale is identical, then yes.

If your 2018 income will be sufficiently higher to increase your marginal rate over what you will pay for 2017, then no.

Answers above assume ESPP stock gains identical to funds in which you would reinvest the money. ESPP stock tanking or skyrocketing would change the answers.

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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by euroswiss » Tue Oct 24, 2017 2:26 pm

Phish wrote:
Tue Oct 24, 2017 1:55 pm
Last Question...is it better to wait till Jan 2018 to sell the ESPP vs. selling it at the end of 2017...so, I can defer the taxes owed to 2019?

thanks!
Sounds like you have reduced or no W2 income in 2017 (no job right now, right?) and you expect to get employed soon, so you may be better off selling this year in a lower tax bracket

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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by euroswiss » Tue Oct 24, 2017 2:26 pm

hightower wrote:
Mon Oct 23, 2017 8:56 pm
If it’s bothering your SO, just get rid of it. It’s not that much and wont make much of a difference either way in the long run.
Agreed - this is a BIG factor!

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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by grabiner » Tue Oct 24, 2017 9:25 pm

FiveK wrote:
Tue Oct 24, 2017 4:01 am
OTOH.... ;)

The SL interest deduction (that you get even at $165K gross income if putting $36K into 401ks) means you are paying ~2.9%. That low a rate makes not paying extra on the SL reasonable.
The interest on the loan is much more than the maximum deductible amount, so any additional payments will eliminate non-deductible interest.
David Grabiner

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FiveK
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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by FiveK » Tue Oct 24, 2017 9:38 pm

grabiner wrote:
Tue Oct 24, 2017 9:25 pm
FiveK wrote:
Tue Oct 24, 2017 4:01 am
OTOH.... ;)

The SL interest deduction (that you get even at $165K gross income if putting $36K into 401ks) means you are paying ~2.9%. That low a rate makes not paying extra on the SL reasonable.
The interest on the loan is much more than the maximum deductible amount, so any additional payments will eliminate non-deductible interest.
$27000 * 3.83% = $1034. The actual interest would be a little less, but even that is under the $2500 limit for Form 1040 line 33, so I'm not following...?

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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by JBTX » Tue Oct 24, 2017 9:52 pm

Factors leaning to pay off SL:

- it is variable rate. Rate could go up, and your stocks investments could go down when rates go up
- spouse wants it paid off
- you indicated not tax deductible (I don’t really understand why not )

Factors leaning to not paying off:

- you are not working and indicates things are tight even on severance.
- you are not fully maxing out 401k

I would probably wait until you are employed before considering paying off. After that I would consider maxing out 401k, then if you have enough left over start paying off SL. I would prioritize paying SL over opening or funding a taxable account.

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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by chicagoan23 » Tue Oct 24, 2017 10:24 pm

Don't pay it off. Goal #1 should be to take all available funds and max out tax favored accounts. If you're not doing that yet then I wouldn't even consider a student loan payoff. You need to cut your tax expense, especially if you're getting severance.

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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by Nearly A Moose » Wed Oct 25, 2017 10:25 am

I wouldn't pay it off while between jobs, even if confident of your prospects and living off a severance. It's a small price to have the liquidity just in case. But, after that, I would consider paying it off in full, if you're not getting the tax deduction. I paid off my wife's and my loans earlier this year. Blending them together, they were about a 4.0% rate. I pulled from a short-term (non emergency fund) savings goal. I did the math and realized that on net I'd reach my savings goal and zero out my student loan debt a few months quicker doing it that way. In your case, I'd use the money that would have been going to the loan to better fill up your tax advantaged account space - that way you'll never "see" the cash flow, but it will help your savings rate.

Also, I did the math between paying more per month on my loan and paying it off in a lump sum (with the alternative use for the lump sum or frees up cash flow going into a certain asset allocation), and for whatever reason the math said that if I was going to make any extra monthy payments at all, I would be better off just paying off the whole thing at once. Not sure if the math always works out that way, or if it was just my situation. But worth checking on since you're making extra payments right now.

Fwiw, we didn't "need" to pay off the loan, but i feel good having done so (and don't necessarily mind debt), and I really like that I've now effectively locked in for life a monthly savings contribution that is the same as the old loan payments.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by grabiner » Wed Oct 25, 2017 4:30 pm

FiveK wrote:
Tue Oct 24, 2017 9:38 pm
grabiner wrote:
Tue Oct 24, 2017 9:25 pm
FiveK wrote:
Tue Oct 24, 2017 4:01 am
OTOH.... ;)

The SL interest deduction (that you get even at $165K gross income if putting $36K into 401ks) means you are paying ~2.9%. That low a rate makes not paying extra on the SL reasonable.
The interest on the loan is much more than the maximum deductible amount, so any additional payments will eliminate non-deductible interest.
$27000 * 3.83% = $1034. The actual interest would be a little less, but even that is under the $2500 limit for Form 1040 line 33, so I'm not following...?
You are correct. I was thinking of a different thread where the poster had a much larger loan.
David Grabiner

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Phish
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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by Phish » Mon Oct 30, 2017 1:32 am

So many good options and sound ideas. Thank you. I’ll keep ya posted...need to think about this. :sharebeer

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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by heybro » Mon Oct 30, 2017 1:40 am

Student Loans cannot be wiped out in bankruptcy. They are evil sucking creatures that stay with you no matter what. GET RID OF IT!

I am not saying you would ever declare bankruptcy but it just shows the potency of them. One never knows what the future may bring. Why hold on to something that is completely immune to normal protections? The sooner they are out of your life, the better!

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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by Herekittykitty » Mon Oct 30, 2017 9:01 am

Assuming financially the decision is close, and just addressing the relationship issue:

You have had this student loan since 2007 (10 years). It bothers your wife. You and she can afford to pay it off.

It's her turn to have a say.

Pay it off.
I don't know anything.

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Phish
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Re: Student Loan: To Pay or Not to Pay: That is the Question

Post by Phish » Tue Oct 31, 2017 12:44 pm

Herekittykitty wrote:
Mon Oct 30, 2017 9:01 am
Assuming financially the decision is close, and just addressing the relationship issue:

You have had this student loan since 2007 (10 years). It bothers your wife. You and she can afford to pay it off.

It's her turn to have a say.

Pay it off.

Valid point. Same with the fact that it stays with you in bankruptcy.

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