Loan looming over our heads

[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.

[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.

 

[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.

[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?

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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.

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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.

[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.

[CordMcNally]

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.

[hightower]

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.

[saildawg]

q-school wrote:

saildawg wrote:

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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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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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/

 

[q-school]

saildawg wrote:

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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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.

 

 

[jhwkr542]

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.

[saildawg]

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.

[Zaphod]

TotallyBroke wrote:

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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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.

[TotallyBroke]

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!

[familydocPA]

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.

[The White Coat Investor]

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.