Incoming first year IB analyst making $85k base with an expected bonus of 35k after tax (unless corona affects it which is very much possible). I have 33k in Federal loans @ 4.3% and a 3.8k private loan @ 8.6%. How would you go about paying this down? Would you use most of your bonus to pay down the loans?
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I would say to pay the minimum on them all until you get your bonus and then just dump the whole bonus on the loans. Note, if any of your loans are subsidized they will not accrue interest until 6 months after you graduate- do not pay anything on these loans until that point in time until you need to. However, for the unsubsidized loans/private they have been accruing interest the entire time, so I would just pay minimum until the bonus hits. Hopefully there will be a decent bonus.
Why not pay ASAP?
Because a dollar today is worth more than a dollar tomorrow. Unless it just gives you peace of mind.
Agree with what Brownfield Capital said, except I would probably pay that 8.6% off as fast as you can. It shouldn’t take you long given it’s only $3800. No need to keep accruing 8.6% if you can afford to pay it down. After that, I would pay min on the 4.3% and use the bonus to pay it off (I did that personally).
Yes - crush the private loan as soon as you can.
For the federal? My opinion is you would be crazy, in this climate, to pay that off entirely - or even a large part - early if you don't have to. Currently, I'd say you have slightly less than a coin flip's chance of part - or all - of those being forgiven in the next few years. Hell - maybe even the next day or two if another $1 trillion stimulus comes down the pike and they slide it in.
To be clear - that doesn't mean consider the loan gone and/or assume that you'll get it forgiven... I would simply keep the option open in the next few years, pay it down as you go seeing what happens.
See if you can refinance both into a single loan with a lower interest rate. Then pay down as fast as possible.
Pay minimum always in younger years - no need to rush it. Also refi that expensive rate you'll be able to get lower than that 8.6% if you have good credit/cosigner situation (parents). Ended up refinancing a few months ago through Citizens which I found through Credible to consolidate my graduate loans which were in that ballpark.
Get a suga momma
You need to focus on building a year or two of emergency funds (rent + living expenses) before blowing your whole bonus on paying off a student loan. Finance is a fickle mistress and the economy is in a tenuous spot... always prioritize having enough to weather the storm. With that said, pay the high interest rate loan asap since it's minimal.
Pay down the private loan - pay minimum on federal / invest the rest in the market
I might be the most conservative person here. I personally would pay down as much as possible to be debt free, if it means tighten the purse strings for a year or two I rather set a clean sheet. If you can get risk free return higher than your interest rate then fine, if not I personally don't think you should have salary income that has a huge beta to market conditions (since jobs in banking is really not that secure esp now after covid) and then go invest your personal income into another high vol return until you have decent amount of savings for the rainy day. That just my two cents.
If you do get that 35K bonus after tax def pay down the private loan first, and I personally will pay down the entire federal loan as 4%+ is really insane spread over base rate.
Definitely pay down all loans ASAP. I had $40K in loans when I graduated and finished paying them all off with the tax return I received my 1st year (months before I actually received my bonus, which I was then able to save 100% of).
No better feeling.
With Coronavirus, cash is king. Pay down as little on the loans until things get back to normal and you have job security locked in. No one knows what will happen, and you don't want to be caught on the wrong foot. With cash you can just pay down the debt as soon as the economy clears back up anyway; if you put money down against the debt, you might be caught with too little at some point.
The first thing you should do is refinance. There's no reason to be paying such high rate. I'm currently barely paying 2% on my student loans. FYI, I graduated from my MBA almost 6 years ago and have been paying down the minimum I can, I haven't paid more than 2.75% (my rate is variable) during that time so it's been a complete no brainer. Given you have a good job, refinancing should be a breeze.
Step #1 - refinance both. My girlfriend has a FIXED RATE student loan with First Republic at 1.85%. They have the lowest rates I've ever seen.
Step #2 - live frugally and either save the difference or use the difference to pay down your loans. don't make the mistake most analysts make and get the apartment in a high rise luxury building. your employment/income is not guaranteed and you should be prioritizing the debt before anything. at this stage in your life, you should have 3-4 roommates and rent should be no more than $1,000-$1,200 until the debt is paid off. I promise you that nobody gives a shit about your fancy apartment except you.
To echo what other users have said, don’t forget to invest your money. Roth IRAs historically have an 8-10% annual yield, which is a lot higher than your rate for your federal loan. I would personally make sure to max out my Roth contributions every year before my income is too high to qualify for one (and the limit is 6k a year btw, $500 a month). 401k typically has an annual yield of 5-8% so make sure you contribute to that as well.
It really comes down to how much risk you are able to stomach. If yield on investments >> interest rate on loans, you are technically in the green. Why not do a healthy mix and do $1000 a month towards your loans, $500 to Roth, and 15% to 401k? And even though the fed loans have a lower rate than the private, the interest comes out to significantly more simply because of the size of the principle.
IMO it would be a mistake to not max out your Roth IRA.
Don’t forget to put money away monthly for an highly liquid emergency fund, because shit happens**
Refinance to a lower % for the private loans, and keep the federal ones. If you refi the federal loans to private you won't be eligible for any forgiveness if that comes up in the next few years. Also, you can deduct $2,500 in interest each year from your student loans so might as well take advantage of that
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