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On 4/9/2018 at 0:49 PM, gbrothers98 said:

2. Pay off the student loan or invest the money?

What can be lost when all the $ is directed to the student loan is the COMPOUNDING opportunity and tax benefits of maximizing the pretax contributions for retirement savings. 

Scenario: Can max out 401k/403b savings at $18500 this year. Average PA graduate walks out with $125k in loans at age 28 (from end of program survey results, PAEA, http://paeaonline.org/wp-content/uploads/2017/07/Student-Report-2017.pdf). Instead of saving that $ pretax, throw the $1542 at the loans....but the $1542 is AFTER TAX, so is run through federal and state taxes first, likely at least 28% or more depending on status. Likely won't be able to muster that amount but if so and done EVERY MONTH, will lower time to payoff to 4 years (125k, at 4% for 10 years, https://www.bankrate.com/calculators/college-planning/loan-calculator.aspx) dropping interest paid from 26k to 10k. BUT, a 28 year old grad has a potential 39 year accumulation period leading to retirement age (67 yrs minus 28). Not participating in the full pretax retirement potential for 4 years results in a $300k difference at age 67 (https://www.bankrate.com/calculators/savings/simple-savings-calculator.aspx, $1542 saved per month at 4% annual return for 39 years vs 35 years). Increase your annual return to 8% and the difference grows to over 1.2 million dollars!! This is also only considering the accumulation phase of your life and not taking into consideration the distribution phase that will likely last for another 30 years, still compounding.......

Compound interest over time always wins. 

Not taken into account in the above argument is the free $ in the form of an employer contribution by not contributing (average is about 3% of gross pay yearly, approximately $3k based upon a $90-100k salary, which can be viewed as a 16% return upon the full $18500 contributed). Instead of $18500 a year compounding, now have $21500 working for you yearly (and you just bumped your total savings from just over 3 million to nearly 5 and 1/2 million!

Also, if on an income contingent repayment plan for student loans, contributing that 18500 will lower your adjusted gross income, thereby potentially lowering your loan payment.

Alternatively....that $1265 monthly student loan payment (125k at 4% for 10 years) could be redirected to a mortgage or after tax savings or some other project you desire sooner when paid off in 4 years rather than 10. That is over 15k in financial flexibility every year in the short term, where most of us live, rather than 40 years in the future.

Best of luck

George Brothers

 

On the flip side... it's also a tough pill to swallow forking over $1200 in loans each month for 10 years or more, and then trying to max out a retirement fund. Im sure not many people can do that comfortably. Add in a mortgage which can be a lot or little depending on location. Add kids in the mix and good luck. Im sure there are some out there that can/are doing this but I'm sure its not common.. maybe I'm wrong. Now take that $14,400 that you dump into loans each year for just minimum payment, add the $12,500 for the remainder of the 401k (employer match of 3% at 100k salary plus your match minus 18,500) which would equal roughly 27k. Put that towards student loans and your paid off in 4 years if loan amount is 100-110k. 

Then you can fund the retirement AND put 14,400/year into a personal investment account for the rest of your life (something you couldn't do if you were trying to max out retirement AND pay your loans of for the standard/max term AND mortgage etc). I don't know the numbers but I would imagine the compound interest of 14,400/year for the 6+ years you don't have to pay off those pesky loans is not far off your projected numbers if you were to just max out retirement. OR don't invest in a personal account and you have 14,400/year for anything you want to spend it towards. THAT to me sounds less stressful, but that's my opinion. (EDIT... OOPS.. I didn't read your last paragraph until I wrote this and you basically said just that.. good point!)

Speaking from experience, I am doing what I stated above.. but have managed to pay off my loans in about 2.5 years (~120k.. have 20k left that we are about to finish off). That's just from me and my wife.. no help from anyone. I make above average for location/speciality.. wife makes decent money (about 1/2 my salary). 

Edited by Walkoffshot
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Can definitely titrate into retirement if choose. 

What is not considered is the ever present tax burden and contributing to pre tax savings will likely be the only tax break available.

For example, let's say new grad has a salary of 90k (average salary according to NCCPA 2016). In 2018, they will fall in the 24% tax bracket. If they reduce gross salary using pre tax savings, could get into the 22% bracket.

Got to https://www.paycheckcity.com/calculator/salary/

Plugging in 90k, bimonthly, choosing TX as state so takes state income tax out of mix, single filing status, $770 for 401k contribution, end up with gross semimonthly salary of $2299. No 401k contribution provides semimonthly salary of $2838. Putting 3% in 401k to get employer match results in semimonthly salary of $2761. 

If you max out and subtract student loan payment on 125k, 10 years, 4%, $1265, will have $3333 left for expenses for the month.

Just always remember that when pre tax savings is not fully taken advantage of, will end up with more $ in pocket as compared to full participation but means will have to pay tax on it. But if only save 3% of a 90k salary, will end up in 24% tax bracket vs 22% if contribute more, say 10%, which is a more realistic goal.

George

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On 10/25/2017 at 8:24 AM, JMPAC said:

You guys have definitely talked me out of Sofi, for now. Maybe at some point I can try it with a smaller loan to see how it goes, but in the meantime will just try to stay on top of Navient and watch out for any shenanigans.

I refi'ed my oldest and largest percentage loans with them (which accounted for about two-thirds of my total loan amount) to a more reasonable percentage at a fixed rate and kept my smaller ones as is (which were still at high percentages). I paid off my highest ones as quickly as I could and then turned my attention to the others. I'll have my over-six-figure loans paid off in hopefully less than a year, which would total 4 years of payments, and I make less than you. I was still able to buy a vehicle, pay for a wedding, and go on some nice vacations. I refi'ed more than I wanted to but my SO makes decent money as well so we had a backup plan if the student loan safety blanket wasn't there.

Edited by SedRate
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On 4/12/2018 at 8:49 PM, Walkoffshot said:

On the flip side... it's also a tough pill to swallow forking over $1200 in loans each month for 10 years or more, and then trying to max out a retirement fund. Im sure not many people can do that comfortably. Add in a mortgage which can be a lot or little depending on location. Add kids in the mix and good luck. Im sure there are some out there that can/are doing this but I'm sure its not common.. maybe I'm wrong. Now take that $14,400 that you dump into loans each year for just minimum payment, add the $12,500 for the remainder of the 401k (employer match of 3% at 100k salary plus your match minus 18,500) which would equal roughly 27k. Put that towards student loans and your paid off in 4 years if loan amount is 100-110k. 

Then you can fund the retirement AND put 14,400/year into a personal investment account for the rest of your life (something you couldn't do if you were trying to max out retirement AND pay your loans of for the standard/max term AND mortgage etc). I don't know the numbers but I would imagine the compound interest of 14,400/year for the 6+ years you don't have to pay off those pesky loans is not far off your projected numbers if you were to just max out retirement. OR don't invest in a personal account and you have 14,400/year for anything you want to spend it towards. THAT to me sounds less stressful, but that's my opinion. (EDIT... OOPS.. I didn't read your last paragraph until I wrote this and you basically said just that.. good point!)

Speaking from experience, I am doing what I stated above.. but have managed to pay off my loans in about 2.5 years (~120k.. have 20k left that we are about to finish off). That's just from me and my wife.. no help from anyone. I make above average for location/speciality.. wife makes decent money (about 1/2 my salary). 

Good job! I do not know how people do it, but am happy for you guys. With kiddos alone our money is sucked out plus with tithe we have crappy cars, no vacation, no date for my wife and I, we don't we out, but I am applying for loan repayment! :) I just stated putting 3% into my simple IRA this year, haven't done that for at least 5 years as we could not afford to make our payments on our students loans (we have the average stated above), but we put my wife through her FNP program by paying cash so we could not put a dime extra toward our already $2,500/month payments. We do have a fairly nice house, but we live in a very low COL and we do eat healthy (which does cost us ~$800-1,000/month for my wife and I + 1 1/2 kiddos). 

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  • 4 months later...
On 10/26/2017 at 2:26 PM, MCHAD said:

I may have missed it if someone else already mentioned it, but another huge reason NOT to refinance federally backed student loans into private loans is because of what happens if you die.  If you die or become permanently disabled federally backed student loans are forgiven, with private loans, this isn’t so...

What happens with your loans if you die? You mentioned they wont be forgiven? who will have to pay for them?

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Private loans are same as unsecured loans, such as a credit card.  If you owe $20,000 on a credit card when you die, your "estate" will be responsible for paying that debt which will happen when your estate goes through probate.  That means whoever cleans up your finances after you die will take some of your wealth (selling your house, etc) to pay the debt.  

Same thing with any other kind of debt (except for federal student loan debt), including mortgages, car debt, etc.  

If you die bankrupt (ie: you owe more than you are worth), and you are married, then usually (although not always) your spouse is also listed as a debtor, so will be responsible for the debt (again, except for federal student loan debt).

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3 minutes ago, Boatswain2PA said:

Private loans are same as unsecured loans, such as a credit card.  If you owe $20,000 on a credit card when you die, your "estate" will be responsible for paying that debt which will happen when your estate goes through probate.  That means whoever cleans up your finances after you die will take some of your wealth (selling your house, etc) to pay the debt.  

Same thing with any other kind of debt (except for federal student loan debt), including mortgages, car debt, etc.  

If you die bankrupt (ie: you owe more than you are worth), and you are married, then usually (although not always) your spouse is also listed as a debtor, so will be responsible for the debt (again, except for federal student loan debt).

One caveat here is the note was obtained after marriage, and you reside in a “community property” state such as Texas.  Certainly if you co-signed then you’re on the hook.  This is the principle reason for probate and the two week window (in Tx at least) for public posting of death notification for debtors to file their claim.

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  • 1 year later...
On 10/24/2017 at 5:40 PM, Boatswain2PA said:

Few years ago my wife and I closely evaluated how we were doing things.  I remember building the spreadsheet (that I still use) and listing out all of our debts and assets.  We owned multiple houses, cars, boats, etc....yet we were worth about $100K total.  If I remember right we were paying almost $30K a year in interest!  The only people getting rich was the banks (and the insurance companies).   We drastically changed how we did things, stopped leveraging debt and just started building wealth.  Funny thing is, once we did this, our actual wealth started moving upward quickly.  That spreadsheet now says we are worth >$500K just a few years later.  Projections are to hit $1M in 3-4 years (not counting market gains).

We close Friday on a 75 acres of beautiful land that we are taking out a small mortgage on.  We plan on having it paid off in 2 years (hopefully less), then building our dream house.  If we mortgaged the land for 30 years we would pay $107K in interest.  Instead I expect we will pay a whopping $450 in interest over 2 years.  In my experience, that's how you build wealth instead of giving it to the bank.

I posted this in October of 2017, and wanted to give an update.

Today we are worth right at $1M, and we have zero debt.  We haven't built our dream house yet (saving up the money), but we have made about $150K worth of improvements on the land..

We killed our student loans, car loan, mortgage on our modest primary home, cash flowing improvements on the land, then paid off the mortgage on the land.

Then COVID hit.  I had just changed jobs (moving away from a high-pay but extremely poorly run rural hospital), and COVID forced us to take reduction in pay and hours.  Few other things happened as well and our income will be WAY down this year compared to last.  But no big deal, we are out of debt, we have multiple income streams, so we are still able to save to build our dream house (just not as fast as we had hoped for.)

I was listening to Dave Ramsey podcasts this week where a caller said they were  "economically immune" to the recent downturn because they they had no debt.  I couldn't have agreed more.

While the math makes sense to keep that 4% student loan debt or mortgage, or 0% car loan, in exchange for investing in your retirement plan that will probably average 7-10% a year, there is nothing like the peace of mind one gets when "life" happens to you and you don't sweat it because you are economically immune.
 

Debt sucks.  When you are NOT making debt payments on stuff you have already purchased then you can save money like crazy for retirement, investments, and stuff that you WILL by.

Edited by Boatswain2PA
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8 hours ago, Boatswain2PA said:

I posted this in October of 2017, and wanted to give an update.

Today we are worth right at $1M, and we have zero debt.  We haven't built our dream house yet (saving up the money), but we have made about $150K worth of improvements on the land..

We killed our student loans, car loan, mortgage on our modest primary home, cash flowing improvements on the land, then paid off the mortgage on the land.

Then COVID hit.  I had just changed jobs (moving away from a high-pay but extremely poorly run rural hospital), and COVID forced us to take reduction in pay and hours.  Few other things happened as well and our income will be WAY down this year compared to last.  But no big deal, we are out of debt, we have multiple income streams, so we are still able to save to build our dream house (just not as fast as we had hoped for.)

I was listening to Dave Ramsey podcasts this week where a caller said they were  "economically immune" to the recent downturn because they they had no debt.  I couldn't have agreed more.

While the math makes sense to keep that 4% student loan debt or mortgage, or 0% car loan, in exchange for investing in your retirement plan that will probably average 7-10% a year, there is nothing like the peace of mind one gets when "life" happens to you and you don't sweat it because you are economically immune.
 

Debt sucks.  When you are NOT making debt payments on stuff you have already purchased then you can save money like crazy for retirement, investments, and stuff that you WILL by.

In a perfect world the question of quick debt payoff vs. investment is a simple mathematical vs. psychological question.  But what so many forget is that our world is not perfect, and while over the long haul history says you will win long term if you put excess toward investments, it doesn't take into account the risk of timing.

For me, I've taken a balanced approach.  I thankfully earn a salary and have developed a budget that allows my family to fill our Roth IRAs, my 403B, and my HSA; while also being on a 5 year timeline for student loan debt payoff.  I could have paid off my student loans a few years ago, but I wasn't comfortable neglecting my retirement completely.  On top of this, hopefully my student loans will be gone by the end of this month or early August (thank you Michigan loan repayment program!!!! - I've been accepted into the program, but it is pending funding from government).

Once student loans are gone then the question is what we will do with our mortgage.  Do we pay the minimum over the rest of the 30 years and allow for some lifestyle creep or start putting some college savings together for my daughter, direct full student loan payments to our mortgage, or again somewhere in between...?  Likely we will just pay the minimum on the mortgage and split college savings and lifestyle creep...which I would be more than good with.

Edited by mgriffiths
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On 4/16/2018 at 8:03 AM, SedRate said:

I refi'ed my oldest and largest percentage loans with them (which accounted for about two-thirds of my total loan amount) to a more reasonable percentage at a fixed rate and kept my smaller ones as is (which were still at high percentages). I paid off my highest ones as quickly as I could and then turned my attention to the others. I'll have my over-six-figure loans paid off in hopefully less than a year, which would total 4 years of payments, and I make less than you. I was still able to buy a vehicle, pay for a wedding, and go on some nice vacations. I refi'ed more than I wanted to but my SO makes decent money as well so we had a backup plan if the student loan safety blanket wasn't there.

Update: paid off loans end of 2018 and car fall 2019. All that's left is the mortgage and we got a great deal on refi earlier this year, just in time for covid and three months without income.

 

16 hours ago, Boatswain2PA said:

I posted this in October of 2017, and wanted to give an update.

Today we are worth right at $1M, and we have zero debt.  We haven't built our dream house yet (saving up the money), but we have made about $150K worth of improvements on the land..

We killed our student loans, car loan, mortgage on our modest primary home, cash flowing improvements on the land, then paid off the mortgage on the land.

Then COVID hit.  I had just changed jobs (moving away from a high-pay but extremely poorly run rural hospital), and COVID forced us to take reduction in pay and hours.  Few other things happened as well and our income will be WAY down this year compared to last.  But no big deal, we are out of debt, we have multiple income streams, so we are still able to save to build our dream house (just not as fast as we had hoped for.)

I was listening to Dave Ramsey podcasts this week where a caller said they were  "economically immune" to the recent downturn because they they had no debt.  I couldn't have agreed more.

While the math makes sense to keep that 4% student loan debt or mortgage, or 0% car loan, in exchange for investing in your retirement plan that will probably average 7-10% a year, there is nothing like the peace of mind one gets when "life" happens to you and you don't sweat it because you are economically immune.
 

Debt sucks.  When you are NOT making debt payments on stuff you have already purchased then you can save money like crazy for retirement, investments, and stuff that you WILL by.

Nice work. Thanks for the update. I enjoy reading your posts and hearing what you are doing with your money. I am trying to follow a similar path, so it's great to be able to refer to what you've done. Keep em coming!

Although I'm no millionaire and we still have a mortgage, our current situation has given us a similar sort of quasi immunity when life happened. I recently switched jobs during covid resulting in three months of no income thanks to a negative job situation and prolonged hospital credentialing. Despite that, I've been able to cover monthly expenses, fun, and a few grand owed in taxes just with my last couple of paychecks, savings spared. If I can ask, how old are you? 

Edited by SedRate
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12 hours ago, Boatswain2PA said:

I posted this in October of 2017, and wanted to give an update.

Today we are worth right at $1M, and we have zero debt.  We haven't built our dream house yet (saving up the money), but we have made about $150K worth of improvements on the land..

We killed our student loans, car loan, mortgage on our modest primary home, cash flowing improvements on the land, then paid off the mortgage on the land.

Then COVID hit.  I had just changed jobs (moving away from a high-pay but extremely poorly run rural hospital), and COVID forced us to take reduction in pay and hours.  Few other things happened as well and our income will be WAY down this year compared to last.  But no big deal, we are out of debt, we have multiple income streams, so we are still able to save to build our dream house (just not as fast as we had hoped for.)

I was listening to Dave Ramsey podcasts this week where a caller said they were  "economically immune" to the recent downturn because they they had no debt.  I couldn't have agreed more.

While the math makes sense to keep that 4% student loan debt or mortgage, or 0% car loan, in exchange for investing in your retirement plan that will probably average 7-10% a year, there is nothing like the peace of mind one gets when "life" happens to you and you don't sweat it because you are economically immune.
 

Debt sucks.  When you are NOT making debt payments on stuff you have already purchased then you can save money like crazy for retirement, investments, and stuff that you WILL by.

Same boat.  Hard to quantify value since once I hit 65 and wife is 63 we'll start drawing SSI and hit our pensions (three total).  If I factor 20 year life expectancy then we're at $2.286M in today's dollars.  If trends follow (she survives me) then my wife will still be good with 50% of my pensions, my SSI since it will not be impacted by WEP like hers will be, her pension, and whatever is left over in our personal retirement accounts.  Most importantly, we have LT health coverage in place if needed (need to lose 3 ADLs to qualify).  Being debt free is a fantastic feeling.  House is in good shape (finally getting rid of popcorn ceilings shortly along with interior painting) and most of us 'Boomers are staying put in our houses. Now, if I could find that lakefront/oceanfront condo...., then we'd be talking.

Edited by GetMeOuttaThisMess
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Slightly different approach: age 62, planning to work FT at a minimum until spouse is 65, ~ 4 years.  Have options for health insurance until medicare, but they're costly.  Plus I really like my job.  How long and how much I work after that depends on how my retirement accounts do, my health, and what I feel like doing.  Based on the current market trends, should be able to hit my retirement savings goal by age 66.

Refinanced our dream/retirement house & property to a 15 year fixed mortgage @ 3.0%  Increased mortgage payment by ~ 50%, but cut 13 years off the time until it's paid off.   Able to max out 401K, Roth, HSA, and 529 plan for grandson.  Have 6 month's expenses in a rolling CD ladder in case something unexpected happens.  

Fortunately, left my last FT job before cuts happened.  At current job, I'm the only provider in the ED (or the hospital) on my shift, so fairly immune from cuts.  The hospital could close or my company could lose the contract - but from all I can tell, neither is likely.

For right now, it seems like the right risk/reward approach.

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