You’re EM. Why should it take you longer than 5 years to pay $430,000 in loans?
EM makes about $300k at least, right? 5-year fixed at 3.375% through SoFi would be $93,580/year, and assuming you’re tax-efficient (maxing pretax retirement) leave you with about $10,000/month after tax and loans to live off.
That being said, purely from a mathematical perspective, student loans are simple amortizing debts; the only “gain” you get from paying them early is avoidance of finance charges.
$430k at 4.4% over 10 years, assuming a normal amortization schedule, would cost you at most $102,290 over that span, or 23.8% of the principal, which annualized over 10 years (1.238 ^ [1/10]) would be 2.16%. So any money that you would invest as opposed to paying your loan would have to beat that number. A shoot-from-the-hip estimate of what it would take in compounding gains to beat the loss in finance charges of a simple amortizing debt is *half* the debt’s interest rate, because the principal which bears interest is getting smaller at a near-linear rate. It grinds my gears when people say an X% simple amortizing debt is a “guaranteed X% gain.” That’s bad math.
…back to a 2.16% compound gain…not a lot, is it? Seems like a no-brainer to let the loans go, right? I wouldn’t jump to that. That assumes that every dollar you’re not putting into your loans is going into an investment account that *will* beat it. Yes, it’s likely to beat the low 2s, but if your loans are being left to linger, are you *really* going to use every single dollar to invest? That complacency leads a lot of debtors to take their eye off the ball and end up spending money otherwise, including on depreciating and consumable expenses like cars, while still being in the hook for the interest, defeating the leverage argument. This is why Dave Ramsey, as often as he is wrong about several mathematical concepts, is relevant: the mindset around the ubiquity of debt is one of the hardest things to overcome.
And even aside from debtor psychology, having very large debt is a financial problem that goes beyond simple net worth calculation. You have to take into account more than just what’s going to result in the highest percent gain over time. Do you want a mortgage? What about a business loan? Maybe a car? (blasphemy, lol) Having debt in the hundreds of thousands is a big obstacle to those, even if you’ve got a big brokerage account. It also doesn’t account for the risk of losing income while in debt, in which case you can really get screwed, especially if you’re not properly insured…
So yes, if you are truly using leverage and investing every dollar which could otherwise go to eliminating debt, and only focused on overall net worth, then your mathematical argument is correct. There are other factors that cause that to be a suboptimal idea, though, which is why most veterans of a financial board like this one would caution you against letting large debts linger.
Thank you and thanks to everyone for your thoughts on this so far. I really do appreciate it a lot!
A little more background: Married with 3 kids (10, 8, 5). We bought a house right after fellowship (before I started learning about finance). I actually only started my educated financial journey 6-7 months ago after I realized I was getting ripped off by a whole life insurance policy. I’m squeezing our fixed monthly costs as much as I can now but I don’t think I can push the wife any further.
Part of my current problem is my employment. I’m half way through 2 years to partnership that is a sweat equity buy in. Income right now is good, but not close to what is quoted above for EM. I know income will increase, and I have a general idea, but not great projections on that yet. At my current income and situation, I’m not sure I could get rid of all loans in less than 7-8 yrs. I certainly hope that will change when I become partner.
Anyway, I have our family on a specific budget that is below my take home every month. Everything above that level goes towards student loans. The taxable account, in my mind and my wife’s mind, is an extension of student loans. I consider that money spent towards student loans. If the total is getting close to payoff amounts and the market crashes, I’ll just keep making minimums and continue putting all excess cash into the taxable (buying low). I can hold off until the market recovers and the balance in taxable account has recovered enough to pay them off.
I realize it is not without risk. Of the last 5 years I’ve had (small) retirement accounts, 3 of them were negative years for me. But, here 5 years later, they annualize to about 8% pre-inflation (which has averaged 1.4% over the same period). 6-7 months ago, I changed my investment strategy (thank you for the posts WCI which REALLY helped!). My thinking is that if I do a more aggressive fund to pay off student loans, it doesn’t matter much to me about the volatility because I can afford to wait for a Bull market.
Again, I really appreciate the discourse so far in this thread!
I do not think there is a universally *right* answer, and any agreement/disagreement based on your ultimate choice is simply a matter of opinion. All I really want is for people to ensure their opinions are based on the appropriate concepts.
You will find out that, quite often, the answer which produces the greatest mathematical net worth may not be the optimal answer for your and your family's lives from a holistic perspective.
So as long as you understand the nuts and bolts and how they fit vis-a-vis your individual and family situation, no one gets to tell you you're unequivocally wrong.
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