Help regarding mutual fund/student loans?

[MackTH]

Hi all,

I've been back and forth trying to figure out next steps and would welcome any thoughts about my situation. Here's the scenario:

Student Loans: $93,000 at 6.8% interest

Wife's Mutual Fund: $73,000

Cash/Emergency: 9-12 months expenses

Retirement: Negligible

Business Loan: $550,000 (5 year note, just starting payments ~11k/month)

Annual Income: $400k(ish)

Misc: 31 years old, one infant child. Own house ($1550/month mortgage). Cars paid off. No other debts.

I'm about to hit the one year mark at work at which point I will be able to invest in my company 401k plan. I'm considering cashing out my wife's mutual fund to pay off student loans, as the stock market is fairly stagnant and the student loans would be a better investment (in the short term at least). I've aggressively paid ~$130,000 of student loans since July 2015, but I'm afraid that between maxing 401k contributions and the business loan, cash flow won't allow me to keep doing so.

I really want the student loans gone...psychologically they feel like a black cloud. But I don't want to cash out the MF for purely emotional reasons. My thinking is that once the student loans are gone, we can begin replenishing the mutual fund going forward with whatever cash is left over each month.

What say ye? Take a deep breath, refinance the loans, and keep plugging away? Cash out the mutual fund and get rid of the student loans? Six, one half dozen, the other?

Thanks in advance for any thoughts.

 

[Zaphod]

Refinance ASAP. Do not cash out mutual funds to pay off student loans. Dont worry about psychological stuff, just the math. You'll do fine with both as your loans arent huge anyway. You cannot compare a simple interest of a loan over a one year period and compare it to the compounded interest in an investment over the next 30 years. Paying off a loan is not an "investment" it is savings, mostly from future payments. At some point in the next 30 years it is almost certain that one year of gains will be more than your whole loan amount. Inflation is your friend.

You dont have to do it all in one year.

[The White Coat Investor]

I don't know if I agree with that. You probably should take the basis on the mutual fund into account, and the interest rate on the business loan, and the interest rate you could get if you refinanced the student loans, but if it were me I think I'd cash out the mutual fund, cut my emergency fund to 3 months expenses, and pay off the student loan within the next month or two. Then I'd max out retirement accounts and throw anything extra at the business loan, all while maintaining my lifestyle at some reasonable level.

I hope your $400K is AFTER paying the interest on the business loan. Otherwise, that's a pretty huge chunk of your income servicing that. At least you'll be done with it in five years.

But this whole idea that Zaphod is advocating, that you should always carry debt in order to invest at hopefully higher rates can be seen to be nonsensical if you take it to extremes.

When in doubt and choosing between two good things to do, you can always just split the difference. Hopefully that will help you minimize regret. There isn't always a right answer to the pay off debt vs invest question, but there is usually a right answer for you.

[Zaphod]

The White Coat Investor wrote:

I don’t know if I agree with that. You probably should take the basis on the mutual fund into account, and the interest rate on the business loan, and the interest rate you could get if you refinanced the student loans, but if it were me I think I’d cash out the mutual fund, cut my emergency fund to 3 months expenses, and pay off the student loan within the next month or two. Then I’d max out retirement accounts and throw anything extra at the business loan, all while maintaining my lifestyle at some reasonable level.

I hope your $400K is AFTER paying the interest on the business loan. Otherwise, that’s a pretty huge chunk of your income servicing that. At least you’ll be done with it in five years.

But this whole idea that Zaphod is advocating, that you should always carry debt in order to invest at hopefully higher rates can be seen to be nonsensical if you take it to extremes.

When in doubt and choosing between two good things to do, you can always just split the difference. Hopefully that will help you minimize regret. There isn’t always a right answer to the pay off debt vs invest question, but there is usually a right answer for you.

Click to expand...

Not always of course, but there are a lot of fundamental reasons right now why its most likely beneficial. I of course agree one can nickel and dime themselves or fool themselves into buying unnecessary things because of it, but I think most on this forum are good at going one or the other (debt or invest) without wasting. If not, then of course pay everything down.

I only advocate that you approach it systematically and dont label one thing bad just because it is labeled debt, thats how the majority of us became doctors. Even with the very high costs and student loan burdens (mine near 500k) it only took a couple of years for me to realize that while it could have been better or lower, it was still a screaming good deal and Im glad I did it. Debt made to increase future production is ok, but shouldnt be abused or become unmanageable. Investing instead of over paying your debt is a form of future production on your capital so its a good trade, and long term math bears this out as well (inflation, fv, etc....assumes a refinance to more reasonable rate).

But what I continually see is people approaching it mathematically incorrectly and then making a decision based on that bad math. I agree that the business loan is a massive chunk of income, but he cant really do much about that now, and liquidity in his day to day would be my huge concern with that much fixed cost to service every month. You cant compare simple/compound interest as if the same and its done over and over again, and the decision is checked for "correctness" in a matter of months or couple of years which is also incorrect. This should be long term big picture type thinking, not something to be judged in the short term.

So of course I would string out that student loan and keep anything resembling an emergency or liquid cash on hand. I just dont see the logic in paying down a student loan with retirement type funds or in lieu of it with all the tax advantages just so that in the end that loan is gone, saving you a monthly payment that you now instead...just put into building up your retirement again?

Besides, we are missing the most important point, these are your wifes mutual funds, you liquidate these and at some point in the future get a divorce, you better be prepared to pay it back plus whatever interest/dividends/gains it would have achieved over the time period. I would not be comfortable with using her funds for this no matter what, even if it wouldnt be clawed back so to speak, just not worth it.