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  • Loan looming over our heads

    My wife has ~173k in loans left at 2.625%. We have just been paying them off slowly over time. The payment hasn't been a problem but the loans won't get paid off for quite a while longer (22 years based on my calculations). She never refinanced the loans, they were just consolidated after med school. Is it worth refinancing or should we just increase our payments to get rid of them faster? I haven't seen any refinancing terms with better rates than she has so I was hesitant to do so. Thanks very much!

  • #2
    You will not get a cheaper rate so no point in refinancing. Honestly at that rate I personally would just make the minimum payment for the next 20 some years. If you are otherwise all set and no other debt of any kind and your retirement stuff is fully maxed and such, maybe, if the thought of having a loan really bothers you, I’d entertain paying them off. Or, even better, stick the extra amount you’d pay towards the loan in a taxable account and invest it properly and see what happens. I just can’t bring myself to turn down such cheap money.

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    • #3
      Nothing exists that low. Why would you refinance to a higher rate....

      I agree it's cheap...but 22yrs is a lifetime. Why not aim for 15? Or 12? Or any arbitrary # and then yes, invest the rest in VTSAX.

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      • #4
         




        You will not get a cheaper rate so no point in refinancing. Honestly at that rate I personally would just make the minimum payment for the next 20 sone years. If you are otherwise all set and no other debt of any kind and your retirement stuff is fully maxed and such, maybe, if the thought of having a lond really bothers you, I’d entertain paying them off. Or, even better, stick the extra amount you’d pay towards the loan in a taxable account and invest it properly and see what happens. I just can’t bring myself to turn down such cheap money.
        Click to expand...


        Thanks for the quick response. I was kind of thinking along the same lines since her rate seemed so low relative to what I am seeing today. I like the idea of getting out of debt faster but your suggestion of perhaps investing the difference since she is at such a low rate does intrigue me. This then defaults back to the invest/pay off loans discussions of the past.

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        • #5
          Dreamgiver is right - don't refinance. As for paying off early, that is more emotional than tactical. I'm sure her lenders would love for you to pay them off faster, but I see no reason to do so unless having the debt causes you enough angst to affect your sense of well-being. The fact that you described the loan as "looming" makes me wonder...
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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          • #6
            While I probably wouldn't refinance (although First Republic might give you a slightly lower rate), and I might not rush to pay it off, I'd probably pay it off before investing much in taxable, certainly before buying bonds in taxable.
            Helping those who wear the white coat get a fair shake on Wall Street since 2011

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            • #7
              Another version of the "payoff debt vs. invest" question.

              In my own case, I graduated with about $110k of student loans at very reasonable rates (2-3% mostly).  I paid them off aggressively (in about 2.5 years) because once I started I just wanted them gone.  This was clearly the "wrong" decision in retrospect, given the market returns over the past few years (look at PoF's recent repost for numerical details).

              But here's the catch - I don't regret paying them off for a second. It is a great feeling. But I also don't feel like the interest arbitrage is as worth it as people make it out to be, and won't really move the needle much in terms of your expected retirement.

              I was able to max out all retirement space, which gives us about $80k/year all-in, and put the rest towards loans. We live comfortable and I'm thrilled they are gone.

              Given that the title of your post is that the loans are "looming over your heads," I think it's clear which way will make you happier.

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              • #8
                Don't refinance unless you can get a better interest rate.  If you want the loan gone before 22 years, just pay extra.  Remember that in the investing verses paying off loans to account for the extra risk.  The math is usually in your favor, but people forget to calculate the risk of owing someone else money.  Using an easy online loan amortization calculator, you can play with the numbers.  Here is what I found.

                If you want the loan gone in:

                3 years, pay $5003 per month

                5 years, pay $3080 per month

                8 years, pay $2000 per month

                15 years, pay $1164 per month

                 

                Once you have a low interest rate, the biggest determinate of when the loan is gone is how much you put towards the principal of the loan.  Pick a target date and go for it!

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                • #9




                  Don’t refinance unless you can get a better interest rate.  If you want the loan gone before 22 years, just pay extra.  Remember that in the investing verses paying off loans to account for the extra risk.  The math is usually in your favor, but people forget to calculate the risk of owing someone else money.  Using an easy online loan amortization calculator, you can play with the numbers.  Here is what I found.

                  If you want the loan gone in:

                  3 years, pay $5003 per month

                  5 years, pay $3080 per month

                  8 years, pay $2000 per month

                  15 years, pay $1164 per month

                   

                  Once you have a low interest rate, the biggest determinate of when the loan is gone is how much you put towards the principal of the loan.  Pick a target date and go for it!
                  Click to expand...


                  Whats the risk in owing someone else money? Whats this risk really mean when accounting for the fact they intend not to spend but save and thus would have some percentage (based on how much was in savings, cds, mms, or market) available to shift into payoff if one of these risks materialized?

                  Since you're best savings come from the interest reduction department, a larger up front payment does the most benefit even if otherwise letting it run on schedule after that.

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                  • #10
                    Paying off debt is never a wrong decision.  It may not be an optimized decision, but it is not a wrong decision.  If you are investing as aggressively as you would pay off your loan then you would likely come out ahead in investing.  The problem is most people instead of investing will buy stuff that they don't need.  Paying off debt is more emotionally rewarding than consistent investing.

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                    • #11
                      It should be mentioned that people here are debating invest vs pay off debt. If you wouldn't invest the extra but rather spend it on a new Tesla, then the math says pay off debt. It does take discipline if you choose not to pay off the debt sooner.

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                      • #12




                        Paying off debt is never a wrong decision.  It may not be an optimized decision, but it is not a wrong decision.  If you are investing as aggressively as you would pay off your loan then you would likely come out ahead in investing.  The problem is most people instead of investing will buy stuff that they don’t need.  Paying off debt is more emotionally rewarding than consistent investing.
                        Click to expand...


                        I agree with everything you said except the last sentence.

                        how can you know this?  there are plenty of posts where people are excited to get 1 million, 5 million or whatever net worth.  there are plenty of posts where people are excited to tell sallie mae or loan company goodbye.  probably different for same person at different points in their life.

                         

                         

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                        • #13







                          Paying off debt is never a wrong decision.  It may not be an optimized decision, but it is not a wrong decision.  If you are investing as aggressively as you would pay off your loan then you would likely come out ahead in investing.  The problem is most people instead of investing will buy stuff that they don’t need.  Paying off debt is more emotionally rewarding than consistent investing.
                          Click to expand…


                          I agree with everything you said except the last sentence.

                          how can you know this?  there are plenty of posts where people are excited to get 1 million, 5 million or whatever net worth.  there are plenty of posts where people are excited to tell sallie mae or loan company goodbye.  probably different for same person at different points in their life.

                           

                           
                          Click to expand...


                          Ok q-school you make a good point.  I should say it is my opinion that "Paying off debt is more emotionally rewarding than consistent investing", for most people.  Perhaps I am influenced by all the debt free screams etc, heck even WCI did one.  https://www.whitecoatinvestor.com/were-debt-free/

                           

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                          • #14
                            I have similar loan terms on my student loans.  I have 88k at 2.625%.  Payments are only $488/month so right now it's nothing.  I just don't want that debt hanging over my head any more.  Even though I know the math favors holding on to it, I still want it gone.  I am getting rid of it this year.

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                            • #15
                              I was in the same boat. I had a little over $200k at a lower rate. I continued to max out all available retirement accounts as well as the backdoor Roth and then I put the extra money towards the loan. Could I have made more in the markets over the last two years? Absolutely. But, I don't regret paying them off and it is still one of the best decisions I've made.

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