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Student loans or invest (With 2% student loan)

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  • Student loans or invest (With 2% student loan)

    Good morning!

    I have been torturing myself over the last few months about the best thing to do with my student loans. I am fortunate to have a high income now and could theoretically get them paid off in the next 1-2 years, BUT the student loan interest rate is now down to 2% fixed on a 10 year repayment that I am in 6 months in to.

    Student loans: $475,000 (Started at 550, paid off 75k so far)

    I have read every article WCI ever wrote on it, and it seems like generally he recommends investing in assets with a "moderate" expected return before paying off debts <3%.

    I have over half my in come auto deposited to a separate account for wealth building, so not a question as to whether I'd spend it rather than invest, just trying to best set up my automatic work flow for this separate account. Max student loans? 50/50? Max invest?

    I already max 401k, HSA, Roth, etc. Investments are VTSAX/VTIAX at market cap weight (60/40 right now)

    I know its in the weeds, but at 2% my overthinking is really in overdrive, would love people's advice!

  • #2
    Investing for the long term historically and mathematically wins.

    Paying down the loans faster psychologically wins for some.

    If you’re unsure 50/50.

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    • #3
      If you've been torturing yourself over this then it sounds like paying off the loans may do you more psychological good than investing at this point. I've still yet to meet or hear of anyone upset that they paid off their student loans

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      • #4
        Originally posted by FrugalBeardMD View Post
        I have over half my in come auto deposited to a separate account for wealth building, so not a question as to whether I'd spend it rather than invest, just trying to best set up my automatic work flow for this separate account.?
        Your plan is solid. You are walling off that income so it either gets invested or goes towards paying down your student loan. Mathematically it's better to put the money in equities rather than paying down the student loan. It's a 10 year payment plan which is a reasonable time frame (not 30 years).

        You can always pay down the loan if you change your mind.

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        • #5
          2% fixed for ten years? I’d invest for sure. Do the math on how much you will come out ahead investing, even assuming below average returns.

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          • #6
            Originally posted by FrugalBeardMD View Post
            a 10 year repayment that I am in 6 months in to.

            I know its in the weeds, but at 2% my overthinking is really in overdrive, would love people's advice!
            I know your 6 months in, but what lender? Splash quoted 2.86% fixed this week.

            WCI has a two criteria ROT that is more than loan vs debt. Maxing retirement accounts does not address it and neither does your 50% savings.
            1) Income ROT:
            Taxes effective tax rate say 24%
            Retirement savings. 20%
            Housing (including utilities) 20%
            Spending 34% (including SL)
            Getting into the weeds, but I think wealth accumulation and retirement savings are combined. A 6% housing would be needed with zero living expenses for 50% total savings.
            Clear up the snapshot of the income %’s.
            What are the plans for a house downpayment or do you already have it done?
            That is a snapshot of the debt to income.
            2) Debt ROT
            2x gross max.

            The problem comes with the taxable account.
            How much is actually retirement(restricted), house downpayment(future cash need) and planned debt (rule #2). Throw in Efund, you really get into the weeds.

            I really suggest you revise expand your thinking to comprehend to future goals, for retirement and housing before you decide to invest or pay debt. Housing is the biggest rock, deal with it.

            Back to your question regarding rates:
            If the anticipated goals are over 2x gross, pay debt, regardless of rate.
            If it is a true invest/pay debt decision, the numbers show greater return on the investment.
            I wouldn’t make that choice without the additional info.


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            • #7
              Originally posted by Tim View Post

              I know your 6 months in, but what lender? Splash quoted 2.86% fixed this week.

              WCI has a two criteria ROT that is more than loan vs debt. Maxing retirement accounts does not address it and neither does your 50% savings.
              1) Income ROT:
              Taxes effective tax rate say 24%
              Retirement savings. 20%
              Housing (including utilities) 20%
              Spending 34% (including SL)
              Getting into the weeds, but I think wealth accumulation and retirement savings are combined. A 6% housing would be needed with zero living expenses for 50% total savings.
              Clear up the snapshot of the income %’s.
              What are the plans for a house downpayment or do you already have it done?
              That is a snapshot of the debt to income.
              2) Debt ROT
              2x gross max.

              The problem comes with the taxable account.
              How much is actually retirement(restricted), house downpayment(future cash need) and planned debt (rule #2). Throw in Efund, you really get into the weeds.

              I really suggest you revise expand your thinking to comprehend to future goals, for retirement and housing before you decide to invest or pay debt. Housing is the biggest rock, deal with it.

              Back to your question regarding rates:
              If the anticipated goals are over 2x gross, pay debt, regardless of rate.
              If it is a true invest/pay debt decision, the numbers show greater return on the investment.
              I wouldn’t make that choice without the additional info.

              Great follow up questions:
              1)
              Already own a home, and have a 4 month emergency fund
              We are not saving for anything at this moment since we already have the home. So we max retirement accounts, and then of the take home, 55% is used for wealth accumulation, and the 45% of take home covers all our living, housing etc. So the wealth accumulation includes minimum student loan payment then the rest is either extra payments or investing.

              Laurel road is the lender, had a great experience with them. Used their offer where if you put money in a savings account they give you a 0.55% rate discount, pretty cool.

              Comment


              • #8
                I think the most important thing is that you're using the same, large percentage of your income to build wealth. How's the cashflow work if you pay off your loans in 5 years? Make sure that amount + 20% gross is going toward building wealth (combo of retirement accounts and student loan payback) and I think you're good. At a certain point math is math, and the dogma of student loans gone in 5 years regardless of interest rate just doesn't sit well with me.

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                • #9
                  Max invest

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                  • #10
                    Thanks for the input everyone!

                    I ran the numbers, and depending on interest rate returns from the stock market, doing minimum payments/max invest, vs max pay down then max invest, can lead to anywhere from a 300k to 700k difference. If anything like historical returns continue then it would be the difference between 4.5 million and 5.1 million in 10 years. Thats crazy! If we get below average returns then it could be more like the difference between 4.2 and 4.5 million. But still, 300k is like 3 years living expenses!

                    I think that I may split the difference and make enough extra to pay of loans a little early, but appreciate hearing from others that its okay for me to max invest because the math seems pretty compelling.

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                    • #11
                      Max invest only works as long as you have a good plan laid out and can stick to it. If you have the wrong asset allocation or risk tolerance and sell at a correction you may lose out in the long term.

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                      • #12
                        Invest. Unless debt gives you anxiety.

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                        • #13
                          Originally posted by Nysoz View Post
                          Max invest only works as long as you have a good plan laid out and can stick to it. If you have the wrong asset allocation or risk tolerance and sell at a correction you may lose out in the long term.
                          Totally true, the 2% return is guaranteed for at least a few reasons, such as that. Good reminder though.

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                          • #14
                            Originally posted by Fugue View Post
                            Invest. Unless debt gives you anxiety.
                            Debt does give me a little anxiety, but I've also not ever had debt with a massive taxable account that I could use to clear the debt with in 72 hour if I wanted/needed to. I think that if my net worth goes positive and is climbing I'd be okay with it since I'd have options. I look at it like potentially the best of both worlds, get whatever returns the market has to offer and if at any time I am tired of the debt just cash it out and pay off the loan, and I'm not really any worse off.

                            I may throw an extra little bit at the loans just to hit that 5-6 year pay off frame, but really it wouldn't take that much extra each month to hit that, and then invest the rest, which definitely prioritizes investing. However, I am interest in reaching FI as soon as possible, and so it would seem that I would benefit from investing ASAP.

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                            • #15
                              I can speak to experience with this situation. For starters, you can’t go wrong unless you panic with a market down turn and make bad choices. The fact that you are deciding between debt vs invest is great.

                              I decided to split the difference and do both. My sub 2% student loans have gone from 400k to just over 150K. I now have two accounts I could liquidate (taxable and money market home down payment fund) to pay them off but I am going to keep going with my strategy until they are gone.

                              I don’t think the scorched earth where you eat ramen and Mac n cheese is necessary though.

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