With student loans resuming payment soon, wondering how I should prioritize my finances. I’m sure many of us are thinking through similar things. Any wisdom is welcome!
My situation currently:
~3 years out of undergrad $200k annual comp with no house and single in HCOL city.
Student loans - $40k at 7.5% interest
Investments & retirement accounts - $70k
Cash - $25k
I haven’t paid off a dime yet since graduating (COVID pause started right then) and want to save up for a house. Should I pay some or all of the $40k upfront (would have to liquidate some stocks) or just stick to the monthly payment plan? 7.5% is not a easy hurdle to beat…I would park the cash elsewhere if I can get better yields but not sure where to look for.
Thanks!
7.5% interest on the loan — I would pay it off. Seem like a high enough rate to be worth paying. This is not a 3% mortgage.
Pay off the student loans unless you think the market would return more than 7.5% a year per the time frame of your hypothetical monthly payments.
I came to the decision to stay invested and make monthly payments toward my debt instead of lump summing since the weighed average on my loans is 3.67%. If it was around 6-7% I’d prob just pay it off.
Weighted average? Wouldn’t highest rate be what matters?
I have 5 separate loans with different amounts from the government, a couple as low as 2.75% and some as high as 4.45%
Depending on your spending habits you could probably halve that cash and buy some short term treasuries, you get several tax advantages and also keep some liquidity.
What others have said, but I would pay it off. I’m in a similar boat, except my loans are about ~4% average rate so it’s a tougher decision. I think anything over 5-6% is when you should prioritize the loans since the hurdle is starting to get fairly high, plus the phycological relief will probably feel nice as well.
Completely disagree with responses here. Invest fully and make not a dollar more than the minimum payment on the loan...this 7.5% hurdle talk is nonsense. The market rarely produces near that average. It can and is often far above and far below. Always keep investing during these periods and compound. You nor anyone else here has any idea how future legislation, inflation, rates, etc will turn out. Make the minimum payment and compound the rest into investments....and during those periods of drawdown and volatility you will have more cash available to buy during the best opportunities rather than throw extra money at something with a capped 7.5% upside that may or may not experience some sort of forgiveness down the line...it doesn't matter what one thinks is right or wrong here. Play the game.
IMO, this is horrible general advice. What happens when a job is lost during a market downturn? What happens when you want to transition to a lower paying job? Or even just the mental stability provided by being out of unsecured debt.
I think there's plenty of argument to be had around whether or not to pay down a low interest mortgage, or taking advantage of tax-advantaged accounts before hitting extra debt payments, but just closing your eyes and ears and not paying extra on something like high interest student loans because muh i'm playin the system her der makes no sense.
Right letting a 7.5% student loan compound over however many years making minimum payments seems like awful advice. Debt paid down fast/right away is an instant return.
If your job is lost during a downturn I’d imagine you’d have a longer runway if even if you sold stocks 30% below what you bought them at vs having paid off student loans.
Having 50k in safe investments and 40k in student loans will give you more runway to find a new job vs 10k in investments and no student loans.
Disagree. 7.5% interest on loans that you are paying with your after tax money (with only a small tax deduction on interest paid) vs volatile market returns that are taxed? Not to mention paying off the loans will increase cash flow. This looks like a clear case of paying off the loans, with a few potential exceptions:
1) are your loans under different tokens? ie, are some loans at 10% and some are at 4%? could you pay off the high interest tokens and let the low interest ones ride?
2) If you have reason to expect inflation to jump again, or if you have reason to expect student loan forgiveness to somehow pass congress, maybe pay down slower.
Never been more surprised to see a comment marked Most Helpful.
“Stay in the market because it compounds”. Really?
The loan compounds too. At 7.5%. Risk-free. This is an easy decision.
Agreed. I had to read that comment twice - makes no sense
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