Ok, so here is the situation. How bad is this debt?

I am one of the lucky few that was able to consolidate all my loans and get into a decent interest rate (sub 4%).

However, with all the talk about coming inflation, new repayment programs coming out, and just overall instability in the financial system, how much effort should I put into paying these things back immediately?

Someone correct me if I am way off here, but being able to write the interest off (at least while my income is below a set point), and with the interest rate and minimum payment being so low...should I be putting other things on hold and focusing on getting these knocked out in the next 4 or 5 years?

I have a coworker who until recently I assumed was just very poorly paid, that actually makes great money, but spends like 50% of his paycheck to pay off his student loans ASAP. Maybe I am wrong, but for me, I would much rather put it into a 401, pay off any other debt I have, or just save it. Am I going about this wrong, should I be eating ramen noodles and living in the ghetto for 400 a month rent so I can free up cash to put towards these loans?

If you didn't have a student loan, would you take one out so that you could invest in a 401k?

Probably not. By using debt, you are adding risk to the equation. These people who are throwing most of their money toward debt aren't doing it because it's the most mathematically sound. The are doing it for psychological reasons. It's more about focus and intensity than making a better ROI.

quote:

---

The are doing it for psychological reasons. It's more about focus and intensity than making a better ROI.

---

But once you pay those suckers off it's a hell of a good feeling. And it frees up a ton of cash to invest in other things.

quote:

---

If you didn't have a student loan, would you take one out so that you could invest in a 401k?

---

No offense, but this is a ridiculous premise. By that logic, no one would ever borrow money (at a ridiculous cheap rate in the OP's case) to start a business, buy a business, etc.


The psychology point is spot on though. According to the math, you would likely be better off making smaller payments to the loan as long as you are investing the difference. If you're not investing the difference and you're spending it on hookers-and-blow, then you're better off paying down the loan aggressively.

On the flip side, some people just can't handle debt. If you're that kind of guy, and your brain function is bogged down by owing people money, then hammer it out. Your peace of mind is often times worth more than the ROR you would get in your investment account.

Stive

Here is my contrarian view:

You can only monetize your education once and by committing a huge amount of your resources to paying a debt ahead of schedule you are robbing yourself of a spare cash cushion to meet unexpected challenges.

I have always set aside money until I had enough to wipe out the entire principal owed rather than slowly giving the lender more money. Did I cost myself more in interest? Yes, but I also covered my downside by having spare cash I could redeploy as needed. You can't redeploy cash you use to pay off a loan ahead of schedule by paying extra.

My advice is not to be a slave to your loan and to always manage your downside. Never committing more resources than I had to unless I could completely eliminate the debt has worked really well for me. A lot of life is about managing the downside - don't forget that.

No offense, but this is a ridiculous premise. By that logic, no one would ever borrow money (at a ridiculous cheap rate in the OP's case) to start a business, buy a business, etc.

***

Exactly. I don't think it's smart to take out a loan on an unproven business venture. I'd recommend working in the industry for a while, saving up the money, and invest that money into the business.

In response to 30,000, I think saving up the full amount is a little extreme. I believe you should have an emergency fund to protect you from financial emergencies. I just think saving up $30-40 k or whatever the amount is is more than necessary for an emergency fund. It probably just depends on your risk aversion. There's probably a happy median in between that's comfortable for you.

quote:

---

Exactly. I don't think it's smart to take out a loan on an unproven business venture. I'd recommend working in the industry for a while, saving up the money, and invest that money into the business

---

I thought you were using the "would you borrow money to fund a 401K" question to justify not funding the 401K until his debt was paid off? Was I mistaken?

If I wasn't mistaken, are you now stating that you wouldn't borrow money to buy a business? You would only save up for it and pay cash?

You may think it is extreme, but I am a strong believer in managing downside and having substantial liquidity.

I would invest up to the company match because a guaranteed 100% ror is hard to pass up. I would even consider starting a roth ira, but I wouldn't go too crazy with that. Eliminating the risk of debt is much more important to me.

And yes, I would NOT borrow money to start a company. If that company fails, not only do you lose that income, but you're still responsible for that debt. Anyone know what percentage of businesses fail?

At 4 or 5 years, you would want to do the company match.

At 1-2 years, I think you could make an argument for not doing the match, and throwing all money at the debt to get rid of it.

Point being, I think if you really sat down and did a budget you would find you could get that debt paid off 1 or 2 years quicker than you think right now.

Depends on what you need to contribute to get the company match. I only have to contribute 2% to get 8%...in that situation you'd be stupid not to do at least 2% regardless of debt situation IMO.

Everyone is different and it depends how you handle money.

[This message has been edited by Lostinla07 (edited 3/11/2012 4:59p).]

Not doing the company match on a 401k is stupid. Thats a 100% guaranteed return.

That's true...although not all are 100%. I worked for a company for a few weeks once that only matches 2% on 10%.

I'm surprised we haven't had any smart guys come on and talk about the tax deduction you get for paying student loan interest. Because that make's it totally worth keeping the loan around for 20 years.

I have about $4k under 2.5%. I would take my loan to my grave if it were an option. Don't feel weighed down in the least...

quote:

---

with the interest rate and minimum payment being so low...should I be putting other things on hold and focusing on getting these knocked out in the next 4 or 5 years?

---

my advice. pay yourself first. divide your money up into accounts, savings, investment and such to get yourself off on the right foot. Pay yourself where you feel comfortable and if there is anything left over then add it to the minimum payments.

Personally, I made minimum payments for first 4 years out of grad school while maxing out 401K, paying off higher interest debt (small private student loan at 7%, car loan) and building an emergency fund and non 401K investment base. Beginning about 9 months ago, I've tripled student loan payments to knock that sucker out in the next couple of years. It's at a low enough rate that it probably makes mathematical sense to just pay the minimums, but I don't have much confidence in the market short term and there is something to say for peace of mind of just not having to deal with it anymore.

quote:

---

I'm surprised we haven't had any smart guys come on and talk about the tax deduction you get for paying student loan interest. Because that make's it totally worth keeping the loan around for 20 years.

---

IF you're allowed to deduct it...

What is the apprx loan balance?

quote:

---

quote:
I'm surprised we haven't had any smart guys come on and talk about the tax deduction you get for paying student loan interest. Because that make's it totally worth keeping the loan around for 20 years.

---

You need to have a Modified AGI below 150K for a couple and 75K if you are single.

It also caps out at 2500 in tax savings per year so if you have high income and high debt (say you are an MD) it is worthless.

Just paid the loans down to 199k total.... long way to go still.

Guys, come December 21 it's not going to matter. Make the minimum payments until then...

holy !@#$, man.

If it were $50K or something, it might be OK to burn those down, but you'll be living like a peasant for years to pay that balance off. You may want to look into the Obama student loan deal to see if it applies to you.

Going back to my original comments: pay yourself first. You could scrimp and save for years and still owe $100K in student loan debt with nothing else to show for it.

Please tell me you are a MD and not an expert in mid-16th century European literature.

What did you start at?

quote:

---

Please tell me you are a MD and not an expert in mid-16th century European literature

---

This X eleventy billion!!!!!!!!!!!!!!!!!!

Education:
1996-2000 Texas Tech University – BFA
2001-2004 Texas A&M University – B.S. Interdisciplinary Studies
2008-2010 Michigan State University – M.S. Packaging

From the link in his profile... but with the prices photographers charge he could be making more than an M.D.

not an MD just a guy with a bunch of student loans... they helped pay for most of the ex's house...

I don't qualify for the Obama plan (10%), however I do qualify for the original version (15%).

Just wanted to see if there was anything I wasn't considering for repayment options. I honestly think that inflation is in my favor over time...least that helps me sleep at night.

that and I am leaning towards accepting a job in Sweden/China that will help ease some of the burden as I will be paid in RMB/CNY and can dodge out on paying US taxes for a few years. (330/365 exemption)

Ouch - you financed a house through student loans? A house you don't even have ownership of anymore?

Student loans are not bankruptable, so you're SOL there.

Note to self: when buying a house, use a mortgage, not student loans.

I feel for you man, that sucks. Best of luck.