Would you prepay a student loan that is

[Deleted]

at 6.125% interest? All our student loans (my wife and I) are at about that rate and we have about 140K between the two of us.

For example, she has 78K with the feds and at the end of 30 years would have paid about 170K (balance and interest).

So at 6.125% and about 140K, should we rush to pay it off or just stick to the current payment plan and send the extra towards savings?

For now we want to go for a 50/50 plan once we are done with our credit card and my car loan (both loans will free up $700/month - so $350 extra towards savings and $350 extra towards student loans)

[❤ mollymouser ❤]

Do you have other debt?
Are you funding retirement savings?
Are you funding non-retirement savings? (emergency fund, short term savings?)
Aren't you discussing having children in another thread? Shouldn't you save for that?

[bobosensei]

DH and I paid off our student loans that were about that rate. Our reasons were a bit different though- we had about 35k in federally subsidized loans on a 10 year plan. After we got married I had moved to be with him out of state and was unemployed for 9 months. We realized that due to his career (army) that the frequent moves would mean that I could be unemployed a lot. So we paid off the balance in 3 years instead of paying the minimums and stretching it to 10.

I don't know that we would have prepaid the loans if we lived a traditional civilian lifestyle where my job is not always in jeopardy.

[Deleted]

Feb 20, 2011 2:12:13 GMT -5 ❤ mollymouser ❤ said:

Do you have other debt?
Are you funding retirement savings?
Are you funding non-retirement savings? (emergency fund, short term savings?)
Aren't you discussing having children in another thread? Shouldn't you save for that?

A) credit card debt that will be paid off by November 2011
My car loan that will be paid off by the end of 2012
My wife car loan but it is at like 2% so in no rush to pay it off

B) 20% to 401K for both of us and about 2-3K into ROTH a year

c) Yes, anywhere from 250-750/month (plus all extra paychecks, bonus, etc).

D) yes and that is part of our normal savings that will increase once car and credit card are paid off (Thinking about doing about 1K/month baby fund)

[Deleted]

Feb 20, 2011 5:40:49 GMT -5 bobosensei said:

I don't know that we would have prepaid the loans if we lived a traditional civilian lifestyle where my job is not always in jeopardy.

Thanks appreciate it. Our jobs are somewhat secure now but with my job where I might get move around, my wife may have some stints of unvoluntary unemployement.

[Deleted]

Feb 20, 2011 7:15:35 GMT -5 Lady Gaga Gaga Snerd said:

I hate owing money to anyone. I paid almost every loan off way in advance. The interest rate didn't matter to me. Not being in debt was my goal. I am now debt free.

CONGRATS!!!!!

I guess that is where we need to find a balance:
-> my wife wants to be debt free asap so she wants to throw everything we have towards debt
-> while I am more pay down high interest debt and invest with what is left.

[Regis]

I would not. Over the life of the Dow, NASDAQ & the S&P 500, the average annual return is about 6.9%. I would certainly take the calculated risk that I could make more by being in the market than pre-paying the loan. Of course, that's a personal decision and I'm a little riskier than some. I let real numbers decide how I'm going to invest and take all the emotion out of it. Some people can't do that. I'm in no way saying there's a wrong or right way to do it. You have to decide that on your own.

Regarding the other debts you have, I would go totally against the Dave Ramsey "snowball" school of thought. You're here on this board and seem disciplined enough to eliminate bad debt. Figure out where your risk tolerance level is on interest rates (mine is the 6.9% stated above). Start with the debt with the largest interest rate over your "comfort rate" and throw extra money at it each month. Make regular payments on everything else. Once you have the highest rate debt paid off, go to the next highest one. Rinse and repeat. When you get to only debt with interest rates below your "comfort rate", stop making any extra payments and let that money make more money for you.

[phil5185]

We realized that due to his career (army) that the frequent moves would mean that I could be unemployed a lot. So we paid off the balance in 3 years instead of paying the minimums and stretching it to 10.

Isn't that backwards? If I thought that I was going to unemployed occasionally, I would keep that $35,000 in reserve, I would not direct it to prepaying a loan.

[Gardening Grandma]

So at 6.125% and about 140K, should we rush to pay it off or just stick to the current payment plan and send the extra towards savings?

Can you get a return of 6.125 in savings? Unless you can get a better, guaranteed return, I'd pay it off.

[phil5185]

$140k, 6.125%, 30 yrs - $851/m ($306,000 total).
If you switched to $1191/m it would take 15 yrs.

Pay $1191/m for both scenarios -

1. Keep the loan, and invest the extra $339/m for 30 yrs at 11%, it would be $900,000. (If you got 6%, it would be $341,000.)

2. Use the $1191/m to fast-pay the loan in 15 yrs, then invest the $1191/m at 11% for the next 15 yrs, you'll have $546,000. (If you got 6%, it would be $353,000)

Personally, I would try for the $900k outcome, it is a solid risk - you have a higher probability of getting an 11% average return ($900k) over a 30 yr cycle than getting the $546k over a 15 yr cycle. And my goals align more with wealth building than with being debt-free.

[bobosensei]

Feb 20, 2011 11:57:50 GMT -5 phil5185 said:

We realized that due to his career (army) that the frequent moves would mean that I could be unemployed a lot. So we paid off the balance in 3 years instead of paying the minimums and stretching it to 10.

Isn't that backwards? If I thought that I was going to unemployed occasionally, I would keep that $35,000 in reserve, I would not direct it to prepaying a loan.

I'm not sure it was the best use of money, but at the time it was what made us feel safest. By paying off the loans we knew we would be able to live comfortably on DH's salary alone. Then it wouldn't matter if I was out of work or not so we didn't need the cushion money. To this day we still live off of one salary, and I expect that we will probably always live that way.

[Artemis Windsong]

And where are you getting 11% return?

[garion2003]

One thing to consider is that federal student loans have deferment and forbearance options.

I agree that maybe you don't want to take the full 30 years, but at least it's there if you need it.

I paid off my student loans (not that much, about 4K) early, but knowing what I do know I would have put much more into an EF. i still would have paid them off MUCH sooner, but wouldn't have rushed.

But like another poster said, I just could not bear the debt (at that time).

[phil5185]

And where are you getting 11% return?

I use broad market index funds - the SP500 index had a 16.3%/yr return over the last 12 months, averaged 24.5%/yr over the last 24 months.

[TD2K]

It all depends what you want.

If there were bonds out there offering essentially a guaranteed 6% return, they'd be snapped up so I don't think prepaying a student loan at this rate is out of the question.

[debtheaven]

In this case, I WOULDN'T look at it holistically. That's a huge amount of student loans, and they would BUG me.

I would choose ONE loan (either a small loan you could knock out quickly or the highest-interest loan) and put SOME of your extra money towards paying it off. Once that loan is paid off, rinse and repeat on the next one.

I'm NOT telling you to do that rather than invest, I'm telling you to do that with what you consider to be disposable income.

That's a lot to be saddled with PLUS a mortgage, PLUS childcare OR living on one income if your wife decides not to go back to work once you have children (something is telling me that could happen lol). I'd definitely try to get at least a decent chunk of that out of the way as I could before the kids and the mortgage come.

140K in SLs is significant SL debt. Neither of you is a neurosurgeon. That amount of SL debt could and probably will impact your financial decisions for years to come, especially since you seem eager to both buy your own home and start a family within the next few years. And, I'm guessing, maybe go down to living on one income.

ETA: I think you should tell your MIL that you and your wife can't afford kids until you both pay off a good chunk of her SLs. ;-) Your MIL's generous gifts could then be directed to a good cause LOL.

[cronewitch]

Math wise it is about my cut off for keeping debt. Over the next few years if you borrow money at higher rates you will wish you had saved instead of paid down debt. If paying down debt doesn't reduce the monthly payment or even if it does you reduced liquidity. So you are smart and can do your math deciding for yourselves on the mathematically correct answer.

More important is you need to look at personalities. Assume you had $1,000 a month leftover to decide what to do with. Send it away to pay down a debt and you are broke again except your emergency money. This means you don't have choices. If you instead put the extra money in the bank you would make less than 1% while paying more but if unemployed and you need the money it would be available. If you invested it for say 5 years so you put in 60K it may have grown or shrunk and you could then pay down debt or use it for something else or keep it invested.

So look at yourself and your wife to see what you think would really happen if you had $60K sitting doing nothing in a few years. First would it ever get put into the investment or would it go to increased lifestyle? Would you had used it for vacations, gifts to family and extra shoes or actually saved it? It the account did grow to a tempting amount would you two spend time thinking of all the options and building wants? If you would spend it you would be better off paying down debt. Losing liquidity can be a great thing for some people, bad for others.

[haapai]

I would choose ONE loan (either a small loan you could knock out quickly or the highest-interest loan) and put SOME of your extra money towards paying it off. Once that loan is paid off, rinse and repeat on the next one.

debtheaven. The trick is to break down the $148K into the individual loans and start analyzing.

Whose name is on the loan also matters, even if the two people involved are married and stay married. The deferment, forbearance, income sensitive, and consolidation options are tied to the individual who owns the loan.

Looking at this as $148K at 6.125% for 30 years is a gross oversimplification. You may find an interesting strategy if you are willing to break that number down into it's component parts and do your homework.

Not finding anything spectacular doesn't mean that you have wasted your time either. You'll learn a lot in the process, and that could come in very handy five or ten years down the line when you are facing a very different set of circumstances.

[Angel!]

Feb 20, 2011 8:24:00 GMT -5 TheHaitian said:

I guess that is where we need to find a balance:
-> my wife wants to be debt free asap so she wants to throw everything we have towards debt
-> while I am more pay down high interest debt and invest with what is left.

Do what your wife wants. The fact that you wife wants to gets these debts paid down is great & having already spent the money paying down debts prevents the temptation of having a bunch of money in savings just waiting to be spent.

With your wife, I am guessing there is always a possibility that in the future she will decide you need to buy X & since you have a bunch saved up then you can afford it. Now you have to have the conversation/argument where you explain that while technically you can afford it, that wasn't the purpose of the savings & you shouldn't buy it.

Personally, I would probably save the money instead of prepaying, but you guys are already saving a lot in your 401Ks. And your wife is a spender, so it is just easier to have the money gone rather than tempting her to make big spending plans. Plus, your wife gets to have made a big money decision, which can't hurt your marriage

[The J]

6% is about my limit, so I would work on prepaying it.