Would You Prepay This Debt at This Interest Rate?

[cronewitch]

As long as I am willing to take a chance on the markets I would not prepay a 6% loan. I would refinance it to a lower rate then keep it. I just did that last money 6.1 refinanced to 3.458 for at least 7 more years. I could pay it off but it would mean taking money out of investments that are doing better than that. I have earned over 13K in gains this month on about 500K invested. The invested money is a lump I have access to if I should need it. If I were to send it to the mortgage company I would save 612.47 a month on 134107 mortgage. It is cheap money I wouldn't park it in the bank at 1% while paying 3.458 but I think I can beat 5-6% in the markets long term.

[hcj]

I had ugly debt at one time and never thought I would have any kind of debt again outside of a mortgage. Now I have debt again, but it's been a deliberate choice on taking the debt at a rate that I feel is better than forking over my cash, that is for the exception of my car. I had been looking for a used one for 9 months and anything that was remotely low mileage was nearly as much as new, so I went crazy and bought new and financed it at 6.25%. My cash flow was seriously hit with the economy, but once things started to get normal again income wise, the rate has been bugging the crap out of me and I've been aggressively paying it down. Once savings got comfortable again and cash flow improved, it suddenly has became a huge priority to get rid of this debt. For some reason, it's stuck in my mind that anything above 5% is unacceptable. Maybe that's because I don't have anything else above 5% besides the car. I voted that I would pre-pay it as that's the mind set I am in now.

We're at the point in life where we don't have any big things to save for anymore like house DP. We max retirement accounts and as much as I wish I had a big chunk of change to make another real estate play, that big chunk isn't in the near future, so right now I want my urge is to increase cash flow by getting rid of debt so I can amass big chunks faster. I know it doesn't make any sense and Phil would roll over to know that I am doubling up payments on a 1.99% fixed for life cc just because I want the actual payment to go away.

Plus, I'm really weird about savings. Once I put 1$ there, I can't bring myself to touch it. Thus why I have some debt at really low rates. If it's in the checking account and I have an expenditure out of the norm, I'll write a check, but if I have to go to one of the savings accounts, I'll take a low rate offer.

Anyway, I'm digressing. I think that a 6% student loan depends on where you are in life. If you are still trying to save up your 20% house DP, maybe you shouldn't pay it off, but if it's a question of whether you add additional savings that you don't really need vs paying it off faster, then it's probably better to pay it off sooner.

[Deleted]

In your situation probably not. I voted no.

I agree with the other posters about 1) funding the EF, 2) 401k for company match. 3) Then it's your decision whether you want to be saving for another house or some other short term goal.

But if I had a pile of cash (like DH and I do) I wouldn't let it sit in a MMA (like we have been doing) and pay the interest on this loan. I would start pre-paying some monthly amount.

[Angel!]

Feb 3, 2011 20:53:15 GMT -5 verrip1 said:

OP:

Do I think you would likely make net more in the stock market than the 6% you pay out in interest? Nope, not a chance.

I only quoted one poster, but quite a few made similar statements as far as not getting 6% returns in the market. I am curious why so many posters feel this way given that historical the market has always returned at least 9% annually over any 30 year period.

I know it isn't guaranteed, but it is certainly much better odds than a few posters seem to be giving.

[Savoir Faire-Demogague in NJ]

I only quoted one poster, but quite a few made similar statements as far as not getting 6% returns in the market. I am curious why so many posters feel this way given that historical the market has always returned at least 9% annually over any 30 year period.

The equities markets return 10-11% historically. That is if one is 100% in equities. This could be why, plus they may be over weighted in fixed income. Just a guess.

[telephus44]

I wouldn't. Let me also add that I am 32 and had $17,625 in student loans. They started at 9% and when I consolidated I got them down to 4.5%. I did prepay them somewhat (took 7 years instead of 10). When I bought my house, I really wished I hadn't paid off the last $5K in such a hurry - I ended up borrowing from a 401K to make the 10% down payment. Keeping the loans would have eliminated that need and I would still have been well within the debt to income ratio.

Seriously - I wouldn't do it. Keep your options open. You are young. When I was in my mid twenties, all I could think of was how smart and clever I was to avoid all that interest and get rid of debt ASAP. As I get older, my mindset has become a lot more like Phil's - and I regret some of the decisions I made, including paying off the student loans. My last year I had interest payments of about $12 per month.

So I vote no. But I think 6-6-1/2% in general is where I'd fall.

[Savoir Faire-Demogague in NJ]

Seriously - I wouldn't do it. Keep your options open.

This is my position also.
The individual with $100K in liquid assets and a $100K mortgage always has more options and choices than someone with no liquid assets and no mortgage.

[runewell]

Feb 4, 2011 11:53:34 GMT -5 Savoir Faire-Demogague in NJ said:

The equities markets return 10-11% historically. That is if one is 100% in equities. This could be why, plus they may be over weighted in fixed income. Just a guess.

Because over the last decade the return was closer to 0%. And there's no guarantee about this decade.

[SVT]

Feb 4, 2011 13:00:30 GMT -5 runewell said:

Feb 4, 2011 11:53:34 GMT -5 Savoir Faire-Demogague in NJ said:

The equities markets return 10-11% historically. That is if one is 100% in equities. This could be why, plus they may be over weighted in fixed income. Just a guess.

Because over the last decade the return was closer to 0%. And there's no guarantee about this decade.

I'm confused, isn't a decade 10 years? LOL

What's been the return per year for the last 30 years, including this past decade? I know what it is, it's a question for you to answer. The point by Angel D, with which I agree with, is that if invested in broad based indexes and buying and holding them over a 30 year period, there's a decent chance you will get at least 9% per year over that time period.

politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html

[SVT]

Oh and I also want to add that I just started investing for retirement in like 2007, so I've experienced the better part of the past decade...buying low at the end of the decade. I may be naive but I don't think I will ever see the Dow below 10k again, or at least down as low as it was in 2008-9.

Call me naive, or call me optimistic. I'm going with optimistic

[dianartemis]

I voted yes, but merely because my limit is 5% or less on not pre-paying. Right now, my loans are at 3.25%.

However, if Fanny Mae ever gets a hold of that loan I'm paying it off ASAP. Several of my friends have their loans serviced by FM and they're on the phone every few months getting their payment straightened out. I do realize that many people are happy w/ FM, I just don't know them, or may not realize that their loans are through FM.

[Savoir Faire-Demogague in NJ]

Because over the last decade the return was closer to 0%. And there's no guarantee about this decade.

Those are raw numbers. Many here have grown their holdings many fold over the last 10 years.

[ca]

I voted no. 5.1% after tax is still pretty low. You really can't be too far wrong either way here, but I think the markets are going to return more than that for the next few years and really, you are young and the cash could be better used to start your life.

[formerexpat]

The less debt, the more freedom.

This isn't true in the poster's case, or in most cases for that matter unless you're talking about crippling debt that one can't get out from under. The OP has more than the $38k in student loans invested in cash & other invested assets.

More freedom is the person with $38k in invested assets and $38k debt that is due to be paid over a 15 year period, not the person with $0 debt and $0 invested assets. In this environment, liquidity is a greater freedom.

More importantly, during these years [i.e. 25 to 35], the OP needs to build as much of a base of invested assets as they can so it can compound over a full 30 year period at 10% per annum average.

I've got enough in invested assets to pay my house in full. It's foolish to take that money and pay off my home rather than let that money grow to over $5m by the time I'm 60 without any further contributions.

Unless for a specific reason, people shouldn't have $38k in cash - that's way too much dead money being eaten up by inflation.

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[DVM gone riding]

svt off subject, but what did you think of changing to direct loans?? Mine are locked in at 3.75 and 5% Changing to them doesn't change my rates at all but it does extend my payment period again and would lower my monthly payment. I have been playing with the idea but at the same time holding off. I think I have until I am under 60k (some time in 1 1/3 yrs) or I no longer have two holders of loans (2+yrs away) to decide this, but wanted to see what someone that had "been there done that" thought

[formerexpat]

I disagree. The 10% return everyone is quoting is hypothetical. When I was growing up everyone
"knew" not to speculate in the stock-market because it had essentially been underwater for a generation from the 1930s through the 1970s.

And those that were scared away from the market after the 29 crash, missed a 9% annual return over the next 30 years after reinvested dividends; or 7% after inflation since the 30 year inflation was so low.

The 30 year period from 1950 to 1980 returned 10.74% annualized, or 6.44% after inflation. Seems like everyone who "knew" better, knew wrong.

So while the 10% might be hypothetical, it's pretty clear that most every 30 year period has returned about 6.5-7% annualized. The most recent 30 year period is 7.28% after inflation.

You're only showing the irrational fear of risk that has been alive and well for many years.

Remember the irrational fear of risk the next time you state that wealth is concentrated too heavily at the top. Wonder how well distributed wealth would be if more than just 20% of people invested in the market over long periods of time outside of their 401k [which they under fund]?

Everything depends on risk tolerance, and if you want to protect yourself better against possible illness or bouts of unemployment, off-load the debt while you are working.

Illness is protected via insurance. Long term unemployment for a college educated person with a useful degree is statistically low. The overall unemployment rate for college educated people over 25 is currently 4.5%. My suspicion is that most of those people are in softer and degrees that we generally rally against on these boards.

And no one is saying that SVT won't have the assets at his disposal should he need them.

Always remember, interest compounds and debt is not free.

For debt, interest only compounds if you're allowing it to capitalize into the balance owed. The OP is not suggesting this method of debt management, and to my knowledge, all student loans are simple interest method.

As I've said before about this issue, the importance of managing wealth intelligently is on spread management and the amount you earn over the debt you have. The wealth and interest you earn will compound while the interest you're paying on debt will not. The interest paid on that student loan debt is a fixed amount.

You can't focus on only paying down the debt for the next 5-10 years AND THEN start saving for retirement. Time is too important in the equation of compounding asset balances and this method of wealth building is why most people can't afford a better retirement.[/size]

[schildi]

After having a healthy EF (a year worth of expenses?), I would pay down this debt.

[debtheaven]

You can't focus on only paying down the debt for the next 5-10 years AND THEN start saving for retirement. Time is too important in the equation of compounding asset balances and this method of wealth building is why most people can't afford a better retirement.

Former I totally agree with this ... but it sounds like the question of whether or not to prepay this debt is outside of retirement, ie, it's a question of whether or not SVT should allocate part of his disposable income towards paying this off faster. I know nobody in real life who wants to be paying on their college loans when their (hypothetical) kids are college grads themselves. If the OP opts to do that, more power to him LOL. And maybe he doesn't want kids, which would make that particular decision more palatable to me.

I also think there is a fundamental disconnect between some of the younger, high-income posters (like yourself and the OP), and some of the older posters (like Tough and me) that may never have been very high income, but have nonetheless managed to accumulate a very decent NW.

IOW, there's more than one way to skin a cat.

[Deleted]

As others have said - we don't know your personal situation. I answered maybe. Here are my thoughts (for what they are worth - : )

Before I paid on this debt I would consider the following more priority items:
1. Fully funded emergency fund
2. Take advantage of 401k contributions up to employee match.

If those two are covered, then I don't think it would have to be an "either or" situation. You could contribute part of your money to a Roth and still put some money toward the principle of the loan.

I am debt adverse - so paying down the debt would be a priority for me, especially one that would be hung around my neck for 25 years.
But funding a Roth would be a priority for me as well if I were your age.

But I think you can hedge your bets and improve your financial position by doing both. If you have $200 per month to save - then put $150 in a Roth and $50 toward the loan principal. That way you can take advantage of both situations. Neither will be quite as dramatic - but over the long run will probably serve you well.

Good luck on your new job.

[debtheaven]

But I think you can hedge your bets and improve your financial position by doing both.

EXACTLY!!! Too often here, people say "should I do this or should I do that?" My answer is generally, you should do BOTH.

[debtheaven]

Quote:
The less debt, the more freedom.


This isn't true in the poster's case, or in most cases for that matter unless you're talking about crippling debt that one can't get out from under. The OP has more than the $38k in student loans invested in cash & other invested assets.

Expat, sorry, I just saw this post. I respectfully disagree with you and stand by it. I have debt, I have savings. We am not high-income. For me, the less debt we have, the more we have to spend per month on the things that are important to us.

I think you are assuming that if I made that comment about less debt equaling more freedom, it means that one has either too much debt (you used the word "crippling") or not enough savings. But, neither assumption is true in our case, and I still stand by my initial statement. I will qualify it though:

For most people, most of the time, less debt equals more freedom.

We don't have much debt, and we have enough savings to pay that debt off several times over. But, since we are not high-income, I would rather leave our savings alone. Especially since the lion's share of that debt is "business debt", ie our rental RE investments. And I'm guessing that's probably the case for many of the older posters here.

Once again, there is never a "one size fits all" answer to a question like this.

[schildi]

Feb 5, 2011 18:11:41 GMT -5 @debtheaven said:

But I think you can hedge your bets and improve your financial position by doing both.

EXACTLY!!! Too often here, people say "should I do this or should I do that?" My answer is generally, you should do BOTH.

I agree. It does not always have to be one or the other only.

[formerexpat]

but it sounds like the question of whether or not to prepay this debt is outside of retirement, ie, it's a question of whether or not SVT should allocate part of his disposable income towards paying this off faster. I know nobody in real life who wants to be paying on their college loans when their (hypothetical) kids are college grads themselves.

Strictly speaking, from a wealth building perspective, ALL DISPOSABLE INCOME should be placed in a 30 year vehicle earning 10% over paying off a 4.5% after tax debt.

You may look at it as once I achieve this or that with my retirement savings, then I can pay down this debt or that debt but that's not how you should look at it if your sole objective is increasing net worth.

Net worth is maximized by utilizing spread management to the greatest degree. Banks and insurance companies get vilified for it as it's their business model. People should take note and copy the model, especially when you can use the banks own medicine against them. I will gladly take my 2.3% student loan debt to term, making the minimum payment the whole way through. I will also gladly make the minimum payment on my 3% credit card transfer for life until it's paid off 15 years from now. I will have both until my children enter college. Who the F cares - I'm making >7% spread on the money while the PV of the debt makes it the most asinine choice ever to prepay.

I'm saving over $100k a year. Are you saying I should prepay my 5% pre-tax mortgage? That's preposterous.

Some how you justify your debt because it's business debt while failing to realize that you should manage your own personal debt load just like a business. As business debt, I would keep 4.5% post tax debt to duration while making minimum payments the entire time for the opportunity to reinvest capital at a much higher spread. So if it make sense while you manage your business, how doesn't it make sense in personal financial management?[/size]

[formerexpat]

Never forget, some of the best returns came from buying discounted, stripped 30-year Treasuries in around 1981 or so and holding them till the present day.

Actually, the better play would have been to sell them as interest rates floored because of the increased market value of the treasuries [tax free gains] and then turn around to put the proceeds into a market. [/size]

[debtheaven]

Expat, I do see what you're saying. I may even not prepay one of the loans I was planning to prepay because of your post.

I think that we have to agree to disagree here. There are two huge differences between us: one, our income, and two, our ages. DH and I will be 55 and 52 this year, so the idea of investing for 30 years is not all that appealing LOL. I would certainly never advocate you prepaying your mortgage.

I am a big proponent of a paid-off mortgage later in life, but, we never pre-paid ours (just once, 2500K), we just got there in the fullness of time. I always joke that if we had to buy our house today, we couldn't afford the front door LOL.


that's not how you should look at it if your sole objective is increasing net worth.

Definitely. But at this point in our lives, given our incomes, that is not our sole objective (it never really was). But I really appreciate your post and your detailed explanation. As I said, I am currently reconsidering prepaying one of the loans I had originally planned on prepaying.

[SVT]

Feb 6, 2011 18:37:12 GMT -5 @debtheaven said:

I think that we have to agree to disagree here. There are two huge differences between us: one, our income, and two, our ages. DH and I will be 55 and 52 this year, so the idea of investing for 30 years is not all that appealing LOL.

debtheaven,

This discussion is actually supposed to be keeping a 20 some year old in mind. Please see the OP. So now it seems that you do agree with expat based on the age and income. Again see the OP.

[debtheaven]

I did, SVT. And my first answer (go back and read it) is that I would not want to be paying on my SLs when my own (hypothetical) kids were done with college themselves. Did you read my original response to your OP? I suggested shortening the timeline somewhat.

Please excuse me, I didn't mean to "hijack" your thread, but Expat responded to my post and I wanted to respond back.

ETA: My first responses were posts N° 17 and 18. I also stated that my personal interest threshold was 5%. I never reply without reading everything, I think that's just plain rude.

Best of luck whatever you decide to do.

[ners]

I would only prepay if fully funded emergency fund, retirement contributing to match and/or the maximum to the Roth

[formerexpat]

Expat, I do see what you're saying. I may even not prepay one of the loans I was planning to prepay because of your post.

I think that we have to agree to disagree here. There are two huge differences between us: one, our income, and two, our ages. DH and I will be 55 and 52 this year, so the idea of investing for 30 years is not all that appealing LOL. I would certainly never advocate you prepaying your mortgage.

I'm glad I could get you to think about your current situation and indirectly help for the better.

I understand the "want to be without debt" when you retire and admire it. I just hope you're also taking caution to not become the 80-85 year old widow scraping by because you're outliving the assets that you too conservatively placed. Having some money in that 30 year investment isn't a bad idea, even for a 55 and 52 year old.
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[debtheaven]

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