Loan Rates and payoff

[blacklips]

Just looking for opinions, I know this topic gets beaten to death and no one has a crystal ball. About to graduate residency, roughly earn 275k, I'd guess medium cost of living, one kid, a spouse who works part-time. We have roughly 100k in retirement accounts currently. Might move locations in the next 1-5 years. Probably higher-income immediately if we move or in a few years if we don't (roughly 50k more). I have 312k in student loans currently federal. No PSLF. No other debts right now (both cars paid off, rent). I'm leaning towards refinancing sooner rather than later to take advantage of low-interest rates though understanding that the freeze could certainly be prolonged again. My refinance options look like this (all fixed):

5 year - 2.19% - Payment 5500
7 year - 2.38% - Payment 4100
10 year - 2.49% - Payment 2900
15 year - 2.8% - Payment 2100

Some psychology here as I know some are more debt-averse than others. I'd put myself generally in the middle. Mathematically with inflation being high I really see the appeal of longer payment periods. The 5 year plan wouldn't provide much in the way of financial flexibility. Additionally, if I am thinking of refinancing now to take advantage of low-interest rates, I figure that really only makes sense with a longer plan.

I'm leaning towards the 10-year plan for a few reasons.
1. It's a happy medium between the pay off all debt as quickly as possible mindset with the optimize cash flow mindset.
2. Interest in investing in more cash-flowing streams to increase passive income.
3. Trying not to have such a "hoard my nest egg" mindset which is what I come by naturally. I find myself rarely able to enjoy spending money without counting every dollar in my head and I would like to get away from that.
4. Provides financial flexibility if I have a job change or move or want to buy a house in the next few years.
5. Can always pay off early

Am I crazy about thinking about paying it off slowly on purpose? I know this group tends to lean towards paying off debt first. I can't guarantee I'd invest the entire difference between the 5 year plan and the 10 year plan, but I would at least a good chunk. I'd also like to provide myself and my wife a little more breathing room after such a long time of tight budgets. But then when I think about this I say why not do the 15 year plan? Still a pretty low rate overall.

[bovie]

Am I crazy about thinking about paying it off slowly on purpose? I know this group tends to lean towards paying off debt first. I can't guarantee I'd invest the entire difference between the 5 year plan and the 10 year plan, but I would at least a good chunk. I'd also like to provide myself and my wife a little more breathing room after such a long time of tight budgets. But then when I think about this I say why not do the 15 year plan? Still a pretty low rate overall.

This concerns me a bit.

That said--no, not crazy. In fact, smart.

In your position, I would for sure take the 15-year @ 2.8% rate. Free up cash flow, and throw it all into the market.

DO NOT SPEND IT.

People value their feelings differently regarding debt, as you know.

I value math and the resulting net worth that stems from my decisions. This decision would be highly likely to increase your net worth, comparatively.

[NumberWhizMD]

I think it really depends on what you are going to do with the extra money and what your cashflow looks like. I was on the "pay off student loans ASAP" group, and my debt to income was much higher than yours. Yes, we could have invested the difference, but we'd also still be paying those student loans. This would've also affected some of my job choices, as I would've felt "stuck" in a higher-paying job that I didn't like.

Our cashflow monthly now is SO much higher, and that includes the investing that we are doing. We are on track to exceed our financial goals, while still having plenty of leftover "fun" money each month. I couldn't imagine if several thousand per month of our income were still going to student loans, as you don't actually "see" the benefit of this (besides the amount going down).

There's a lot of questions to answer, and I realize that everyone is different. What I liked about our approach is now all of our income is our money to decide how to spend, as opposed to spending a certain amount each month that is automatically going towards loans that we never really see.

[Andrew StudentLoanAdvice]

I'm more in the middle of the boat than most. I'd make sure you are contributing 15-20% to retirement and then paying on your student loans. What term should you pick? The one where you can afford the large monthly retirement AND student loan payment.

[CordMcNally]

As long as you are saving appropriately for retirement, I would probably pick the 15 year. It's only a spread of 0.6% which isn't much in the grand scheme. This will give you some financial flexibility and then you can pay it off quicker if you want. I will reiterate that you should be maxing all of your available tax-advantaged retirement accounts.

[Tim]

I would pick the 15 year, with one requirement. Payoff that student loan before you buy a house.
You don't want any extra used to accumulate more debt. The last thing want is to get a 30 year mortgage with 15 year student loan payments just for cash flow.
The payment logic sucks long term. If you have the mindset of building wealth you will manage your total debt for the house down the road. Maximum flexibility at a very small cost.

[blacklips]

I would pick the 15 year, with one requirement. Payoff that student loan before you buy a house.
You don't want any extra used to accumulate more debt. The last thing want is to get a 30 year mortgage with 15 year student loan payments just for cash flow.
The payment logic sucks long term. If you have the mindset of building wealth you will manage your total debt for the house down the road. Maximum flexibility at a very small cost.

Not sure if I follow the logic here. If I'm paying it off over 15 years its on purpose with the idea that to invest the difference makes more mathematical sense to generate wealth. I'm not necessarily a "your house is an asset" type but it certainly can be. I don't see how renting for 15 years makes mathematical sense either. If your point is that I shouldn't wait that long to pay off my loans well then I might as well take the lower rate and just pay them sooner.

[Dewangski1]

I would go with the 15 year. I would take the flexibility it gives me and try to get everything else in your life figured out. Once you figure out how much you’re spending and saving, you can re strategize.

[Tim]

Not sure if I follow the logic here. If I'm paying it off over 15 years its on purpose with the idea that to invest the difference makes more mathematical sense to generate wealth. I'm not necessarily a "your house is an asset" type but it certainly can be. I don't see how renting for 15 years makes mathematical sense either. If your point is that I shouldn't wait that long to pay off my loans well then I might as well take the lower rate and just pay them sooner.

The tendency is keep the student loans and then add a mortgage with a longer term because you can “afford” the payments. Manage the total debt and don’t ignore the cost component of housing, regardless of the payments.
Just as the question of which payment on student loan is best, the same question comes not too long after. Whether you buy a house or rent for 15 years is a different question. Manage the total debt.

[NumberWhizMD]

Not sure if I follow the logic here. If I'm paying it off over 15 years its on purpose with the idea that to invest the difference makes more mathematical sense to generate wealth. I'm not necessarily a "your house is an asset" type but it certainly can be. I don't see how renting for 15 years makes mathematical sense either. If your point is that I shouldn't wait that long to pay off my loans well then I might as well take the lower rate and just pay them sooner.

If you're already talking about buying a house and paying student loans, you are potentially setting yourself up to be having more cashflow issues. I think most important is maximizing retirement, followed by paying off debt. If you keep kicking the can down the road and prolonging payments, in addition to adding more debt, you are going to have less flexibility with your income and will be working to pay of those debts a lot longer. I'm not saying wait 15 years to buy a house. Again, a lot of this comes down to what I mentioned earlier about your current cashflow situation. We were able to pay off debt quickly, maximize investments, and live in a VHCOL with 2 kids in full-time daycare and still have it done in less than 5 years with worse debt. But our cashflow monthly allowed that. Budget would probably be the most helpful in your situation to determine long-term sustainability.

[blacklips]

I would say that maximizing tax-advantaged accounts is a given and already part of the plan. We budget already. Lifestyle will be about the same as residency so we should certainly have the cash flow to pay off the 5-year plan and max out retirement, etc. But could the extra 3k per month be used better for building wealth long term? Seems like the consensus here is yes.

I understand the idea of minimizing total debt to a point, but it's really the same thing with leverage right? Don't want to overdo it, but some leverage can be a good thing. As long as I'm not over-leveraging buying a house (aka buying more house than I can afford because the payment is low) then why would I link this decision to my student loans? Considering I'm consciously paying off my student loans slower. I get all the homeownership costs stuff, and I'm certainly not in a rush, just thinking long term and at some point, buying makes more financial and life sense than renting.

I guess outside of the behavioral aspect, I've never entirely understood the "no good debt" train of thought.

[GlassPusher]

IMO it depends on how you look at it and if monies are interchangable (ie. you start investing at year 10 what you've otherwise been paying in school loans, if you reliably invest the $800/mos difference, etc) but it may be a wash, depends on return rates and how diligent you are about investing.

At the 15 year mark, assuming 6% returns, please someone correct me if I'm missing something...

with the 2.49% loan for 10yrs @ $2900/mos you will have:
--0 school debt
--saved ~$30k in student loan interest (paying it off 5 yrs sooner)
--have ~$200,000 more in your retirement account assuming ~$27k in interest from investing that $2900 starting at year 10 and $175k in contributions

with the 2.8% loan for 15yrs @ $2100/mos you will have:
--0 school debt
--have ~$230,000 more in your retirement assuming ~$85k in interest investing that $800 difference for 15 years and $144k in contributions
--paid ~$30k more in student loan interest


I will add that going from federal to consolidated private repayment means the debt follows you should something unfortunate happen (federal students loans are discharged upon death), so just account for that in your life insurance given the amount of debt you have.