Extra money this year...pay off low interest school loan or invest?

[brent311]

I fortunately will have about 50k left over after taxes this year and not sure what to do with it. I have followed other advice on WCI for the last 2 years and I have set up a solo 401(k) with Fidelity and maxed out what I can put in it (53k/yr). I have set up a backdoor Roth for both myself and wife this year (about 11k/yr). I also refinanced my student loans using one of the recommendations from WCI with a 5 year repayment plan based on LIBOR interest rate that has been ranging between 2.5-2.7%. I have 100k of school loans left.  I also just refinanced my home with a 15yr loan for 2.5%.

I wound not mind paying off school loans early, but at a 2.5-2.7% interest rate I am curious if I could find something else to invest in that would give me a much better return.  I'm just not sure which direction to go?

I talked to an advisor about a year ago, and got a shady vibe since all he wanted to do was sell me a whole life insurance policy. So my trust level is low with anyone that will benefit from their own advice.  Hopefully I will get some good unbiased recommendations from WCI.

Thanks!

[Peds]

congrats.

i would pay off the loans. hate loans. a huge anchor. you (prob) make too much to deduct them anyways.

then i would argue about mortgage vs taxable account. that's a funner problem to have.

 

and yes, stay away from the financial industry and anything that's not TERM-life.

 

good luck.

[jfoxcpacfp]

brent311 wrote:

I fortunately will have about 50k left over after taxes this year and not sure what to do with it. I have followed other advice on WCI for the last 2 years and I have set up a solo 401(k) with Fidelity and maxed out what I can put in it (53k/yr). I have set up a backdoor Roth for both myself and wife this year (about 11k/yr). I also refinanced my student loans using one of the recommendations from WCI with a 5 year repayment plan based on LIBOR interest rate that has been ranging between 2.5-2.7%. I have 100k of school loans left.  I also just refinanced my home with a 15yr loan for 2.5%.

I wound not mind paying off school loans early, but at a 2.5-2.7% interest rate I am curious if I could find something else to invest in that would give me a much better return.  I’m just not sure which direction to go?

I talked to an advisor about a year ago, and got a shady vibe since all he wanted to do was sell me a whole life insurance policy. So my trust level is low with anyone that will benefit from their own advice.  Hopefully I will get some good unbiased recommendations from WCI.

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Your vibes were correct. However, I don't agree with paying off those low-interest loans unless they are keeping you up at night. A good, well-diversified taxable portfolio would be a better choice in the long run. Do you have an emergency fund? If not, I would set aside part or all of your savings in a MMA, depending upon your financial plan.

[Shamwow]

I think its a personal decision...

While a taxable account in the long run may work out slightly or even significantly better, I would take a bigger piece of mind from getting rid of the loans.  That piece of mind is worth something significant to me.   The loans aren't keeping me up at night, but they are keeping me focused on getting them out of my life!

Not likely to happen, but what if the market crashed and you lost your ability to make an income?  Hospital closed, wrongly accused of inappropriate behavior, freak accident?  (obviously you can and should insure against some of these)...  I would hate to cash out at the bottom of the market to pay my bills...

[the more I read this its a fairly weak/unlikely argument - but I will still feel much better not having a monthly payment devoted to debt!!!  Then I will go ballistic saving!!]

[hightower]

I would invest.  The magic of compounding interest works best when you start early and give it as much time as possible.  Those interest rates are super low.  I have a similar loan (104k at 2.6%).  I plan on saving and investing.  As your taxable account grows you could always pay off whatever is left on the loans.  And you're super lucky to have such a low rate on your mortgage.  That's excellent. Save a lot, invest, earn some interest, see your portfolio grow and when it's significantly bigger than your debt, you can decide if you want to get rid of all your debt at that point.  But, I agree its a personal decision really.  Whatever feels best to you.

[DMFA]

I don't think it's ever really *wrong* to pay off 2-4% debt.  History says you're much more likely to out-gain that in the market, but you're basically choosing a sure-fire low gain than a likely higher gain, albeit with some risk.

If you're shooting from the hip, I break it down into a rule of 2s (my personal opinion):

• 0-2%: let it go (much more likely to beat it in the market, might even benefit vis-a-vis inflation)


• 2-4%: likely better in the market, but prob not wrong to pay it off


• 4-6%: could def pay it off, though history says it could be better in the market


• 6+%: kill the beast

WCI talks about this (though not quite in this form) in his student loans vs investing thread [link], but groups it into <3%, 3-5%, 5-8%, and >8%.  Just depends on how your attitude toward debt is.

[Zaphod]

Its personal. I absolutely agree with taxable if everything else is manageable and there is no cash flow issues. You can get a tax free muni fund dividend in the range of your interest rate for goodness sake. Remember this loan is simple interest, and investing is compound. That accounts to a large difference over long time frames.

I have nearly given up trying to have the logical discussion about it, and it really is your choice. Agree with rate ranges that should impact the weighting of your decision, and yours are so low.

[Kamban]

brent311 wrote:

I wound not mind paying off school loans early, but at a 2.5-2.7% interest rate I am curious if I could find something else to invest in that would give me a much better return. I’m just not sure which direction to go?

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The younger you are and the longer the time frame to have the money invested in an index stock fund, then choice would be to invest it. But if you have a shorter time frame to retirement, paying the student loan might give you more peace of mind.

Or maybe invest $25K and pay off $25K of student loan.

[brent311]

Thanks everyone for all the replies. I am getting the consensus that although it is not wrong to pay the loans off, that due to the currently low rates that I should invest most, if not all, the extra money in a taxable account with mutual funds/EFTs. As the interest rates rise into the 3.5-4% range I will begin contributing my extra savings toward paying off the school loans rather than putting in the market.

One other thing, I do have a rental home that I bought with my father 12 years ago before starting med school.  I still rent it out and I need to check on that interest rate as I would not be surprised if it is in the 5-6% range. My dad still manages it so I havn't had to deal with it much in the last few years but eventually he will hand it over to me.  I may work on paying that mortgage down.

[The White Coat Investor]

No bad choices here. Split the difference if you can't decide.

[smartmoneymd]

While it's unlikely that you might "forget" to make a payment on a loan, it has happened to me and several of my friends. For that reason, you can't go wrong paying off a loan, even at <3% rate. It sure gave me better piece of mind.

I've automated my bill payments before, but have had at least one erroneous charge a year that has made me paranoid about checking my statements.

[Zaphod]

smartmoneymd wrote:

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You've had missed payments with ACH with things like loan services? Havent had one in all the years I've had them set up.

[GXA]

Agree the decision is personal.  I personally would not be in any hurry to pay off those loans unless there is potentially a cash flow issue upcoming (e.g. end of career).  The sooner you start investing, the quicker you get to the exponential growth phase!

I would vote for a taxable account with index funds.

[jfoxcpacfp]

One other thing, I do have a rental home that I bought with my father 12 years ago before starting med school.  I still rent it out and I need to check on that interest rate as I would not be surprised if it is in the 5-6% range. My dad still manages it so I havn’t had to deal with it much in the last few years but eventually he will hand it over to me.  I may work on paying that mortgage down.

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Glad you mentioned that. Remember that your rental mortgage interest is deductible as an "above-the-line" deduction (on schedule E) when making your decision. That doesn't necessarily mean I would recommend that you not pay it down, but the deduction should factor into what you decide to do.