Loan looming over our heads

[hightower]

Zaphod wrote:

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?

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The simple answer is that you have to make an income each month and make your payments or face the consequences.  For student loans the consequences of not paying them are fairly steep (wage garnishing, law suits, credit ruined, tax refund intercepted).  That's a risk.  It's not too different from indentured servitude. You're not really free to do as you please as long as you have that debt.

Yes, you are absolutely right that those who are thrifty and save aggressively can eventually accumulate enough savings/investments to pay off those loans at any time which does give you the sense of being free.  But, that's not always a guarantee.  Investments can fail/lose value, yet the loan balance remains.  Yet, there's zero risk to paying off your loans early.  The balance goes away and you're instantly free to do as you please with your own money.  Yes, there's a potential for lost opportunity, but again there's no guarantee that any money you invest will return anything and could actually be a loss.  Besides, you should make the lost opportunity calculation BEFORE you agree to borrow or spend money.

There's always two sides to this argument and I don't necessarily think either side is wrong.  My brother in law and I debate over this all the time.  He favors leveraging himself with low interest debt and I favor being debt free.  It's probably a personality difference more than anything.

[Zaphod]

hightower wrote:

Zaphod wrote:

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?

Click to expand…

The simple answer is that you have to make an income each month and make your payments or face the consequences.  For student loans the consequences of not paying them are fairly steep (wage garnishing, law suits, credit ruined, tax refund intercepted).  That’s a risk.  It’s not too different from indentured servitude. You’re not really free to do as you please as long as you have that debt.

Yes, you are absolutely right that those who are thrifty and save aggressively can eventually accumulate enough savings/investments to pay off those loans at any time which does give you the sense of being free.  But, that’s not always a guarantee.  Investments can fail/lose value, yet the loan balance remains.  Yet, there’s zero risk to paying off your loans early.  The balance goes away and you’re instantly free to do as you please with your own money.  Yes, there’s a potential for lost opportunity, but again there’s no guarantee that any money you invest will return anything and could actually be a loss.  Besides, you should make the lost opportunity calculation BEFORE you agree to borrow or spend money.

There’s always two sides to this argument and I don’t necessarily think either side is wrong.  My brother in law and I debate over this all the time.  He favors leveraging himself with low interest debt and I favor being debt free.  It’s probably a personality difference more than anything.

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Unless one is very financially independent, even with all loans paid off, these 'risks' still exist. If you dont pay your taxes on your house, its gone, mortgage or not. There are very few scenarios in life where one doesnt have to have incoming money to pay off living expenses.

If you have enough money to choose whether or not to crush your loans down in this fashion, these arent very real risks no matter what. If you're in a situation where these risks exist, you're probably not able to crush your loans. Its a circular, vague ominous evil hyperbolic kind of thing to say. As I said on another post we should discuss real factors that actually apply. All this emotional, watch out for the boogey man type reasoning is not going to engage anyone that is rational.

There are great reasons for paying off debt, they should be listed as such in a realistic manner.

And of course everyone who has paid off their debt feels it is the right choice and theyre glad they made it, as does everyone who invested instead. It would be very weird if that were not the case, humans are programmed to do just exactly that, its called "choice-supportive bias". No one should be surprised at this aspect and its not a good reason to do anything.

[Bonez]

Setting aside the "emotions" of being student-loan or car-loan debt free, what are the other advantages to paying those loans off early (in general)? Lets say hypothetically you have some student loans at 2.625% interest and you're maxing out tax-advantaged retirement accounts, have a sufficient EF, , sufficient insurance coverage for everything you need, no cash flow issues with making all payments on time and can pay cash for everything else you buy. If the current returns in "the market" are higher than the interest rate on your debt, what are the other reasons beyond emotional ones, to pay off the student loans any faster than their current term when you could invest in a taxable account? If the returns on your investments start going down anywhere close to what your student loan interest rate is then you just hold off on investing any further in your taxable account and shunting that cash towards the student loans instead. The few things I can think of off the top of my head...

 

- credit issues with high debt potentially? probably not a problem unless you're looking to finance something else

- if not properly insured and lose your ability to earn then you've got a mountain of debt that likely can't be discharged. but could take money out of taxable account to make payments on the debt at that point

I guess I can't think of many reasons not to just pay the minimum payment and put more money in a taxable account if you take the emotional aspect of the "looming debt" out of the picture. I'm thinking about this personally myself, so if anyone can chime in please do.

[adventure]

Bonez wrote:

what are the other advantages to paying those loans off early (in general)?

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(I may have typed this backwards - e.g. disadvantages instead of advantages, but I think they still stand).

Time, Risks, and oppourtunity costs.

Time:

- Time to manage all of it. Even if you put the loans on auto pay, you have to spend the time to check it once in a while.

- more debt means more mail to your inbox/mailbox to sort though (time...)

- complexity on a tax return potentially.

Bonez wrote:

– credit issues with high debt potentially? probably not a problem unless you’re looking to finance something else

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This could impact your credit score, I suppose - depends on the type of debt. Mortgage debt won't hurt too much, but consumer debt will lower the score potentially. Keep in mind, your score may actually increase as you pay all the payments on time.

Risks:

- more debt can more complications, more paperwork, more accounts - just more to keep track of, more risk of something going wrong, going missing, getting stolen. So, if you reduce that, the benefit is less risk.

and

Bonez wrote:

– if not properly insured and lose your ability to earn then you’ve got a mountain of debt that likely can’t be discharged. but could take money out of taxable account to make payments on the debt at that point

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Agreed, but you added some risk as the taxable account isn't necessarily certain.

Oppourtunity costs.

- Debt is restrictive in some sense, so it can restrict the oppourtunities you can pursue. (Yes, debt/leverage can facilitate others, but that isn't the focus of the answer to your question).

- The ability to change course is lessened. If your plans require you to fund debt repayment for some period of time, there are usually restrictions (e.g. you have to work at X level to pay for it). So you are less able to work less, or find a different calling/career or way to spend your time.

 

[Zaphod]

adventure wrote:

 

Oppourtunity costs.

– Debt is restrictive in some sense, so it can restrict the oppourtunities you can pursue. (Yes, debt/leverage can facilitate others, but that isn’t the focus of the answer to your question).

– The ability to change course is lessened. If your plans require you to fund debt repayment for some period of time, there are usually restrictions (e.g. you have to work at X level to pay for it). So you are less able to work less, or find a different calling/career or way to spend your time.

 

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These are some of the important reasons why one should otherwise pursue debt elimination, a real tangible benefit that makes perfect sense and can help guide you to the next course of action. It also retricts your ability to take risks and the jobs you would take (along the opportunities line above) even if you dont think about it conciously its there.

Dont find the time argument too compelling. I check my student loan websites, maybe once a year for keeping track of nw. I only get emails about those things, and I dont read those either since everything is in the subject (ach payment processed). Now if one came by that said ACH failed, I'd have some work to do. If you get mail or have to write checks, thats your own choosing.