Pay off student loans or save/invest

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legalwriter
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Pay off student loans or save/invest

Postby legalwriter » Fri May 11, 2012 4:37 pm

I now have $35,000 in student loan debt from law school. I graduated from law school 10 years ago. I am now making pretty good money ($105,000 per year in city with low cost of living as a tenured professor). Until now, I have only been paying the minimum under an extended 30 year plan with payments of $235 per month. The interest rate is a fixed 3.5 rates and interest is 100% tax deductible.

I am working on building up my emergency savings. I am currently at $20k in savings. Should I continue building up emergency savings or pay off student loans with more payments per month?

bill o
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Re: Pay off student loans or save/invest

Postby bill o » Fri May 11, 2012 4:54 pm

Fixed at 3.5% for the rest of the term, or just for now?

You have $20k in cash right now for your savings?

If your loan is really fixed at 3.5% that is a pretty low rate. I would be directing your extra income to investment accounts, either an IRA or a taxable investment account. Over the long term you could easily earn more than 3.5%.

flinch13
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Re: Pay off student loans or save/invest

Postby flinch13 » Sat May 12, 2012 10:38 am

Pay the loan off as SLOWLY as possible. You're much better off investing than paying ahead. You are likely to beat a 3.5% return annually by investing in diversified equities. Perhaps your situation is unique, but I believe you are taking a large risk keeping $20k in emergency cash... you are not making any interest on it, and when inflation picks up (it will, and quite suddenly I imagine), you'll wish you had more exposures to stocks.

My suggestion: Take half of your emergency savings and invest it. If you have $10k saved in cash, you're likely to be covered for just about any emergency that should happen.

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Re: Pay off student loans or save/invest

Postby bill o » Mon May 14, 2012 2:44 am

wsc143 wrote:I think you should pay back you student loan first because almost all debt is bad debt and debt can also mentally weigh down your spirits if you do not see the outstanding balances diminishing in size over the years.


Why? Please add some color to that.

DoingHomework
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Re: Pay off student loans or save/invest

Postby DoingHomework » Mon May 14, 2012 4:40 am

wsc143 wrote:I think you should pay back you student loan first because almost all debt is bad debt and debt can also mentally weigh down your spirits if you do not see the outstanding balances diminishing in size over the years.


All debt is not bad debt! This debt helped the OP get a law degree and earn $105k a year in academia. It costs only 3.5% a year, that's less than investments can reasonably be expected to return over the long run.

I personally would be in no hurry to pay that off. I'd build up a compensating account to reap the "mental benefit" of being able to pay it off at any time and invest aggressively after that.

mpacuk
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Re: Pay off student loans or save/invest

Postby mpacuk » Mon May 14, 2012 10:36 am

Do you actually get the 100% tax deduction?

I don't know about where you are, but in my experience, I "make too much money" to be eligible for the deduction, and I make less than you do.

legalwriter
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Re: Pay off student loans or save/invest

Postby legalwriter » Thu May 17, 2012 12:08 pm

Thanks everyone for the responses. Yes, the interest is at a fixed 3.5% rate.

The interest is less than $2,500 per year and we are married filing jointly with income less than $120,000 so 100% of the interest is tax deductible. My wife does not work outside the home. Currently, the interest on the student loans is at about $1,300 per year with payments of $235 per month.

As far as "peace of mind" is concerned, this is my only debt and the monthly payments are less than 5% of my income so to me, it's not a big deal. Plus, if I die, the debt can be discharged and my wife doesn't have to pay it. I have been making payments for the last 10 years on the student loans so it's just built into my household budget.

After looking at the numbers, with the low fixed interest rate plus the interest being 100% tax deductible, I just don't see the incentive to pay off the student loan debt early.

I think it makes more sense to invest rather pay off the student loans early. I already have some investments (bonds, mutual funds, 401k) that are performing well. I am also thinking about setting up a Roth IRA.

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Eagle
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Re: Pay off student loans or save/invest

Postby Eagle » Fri May 18, 2012 6:44 am

legalwriter wrote:I now have $35,000 in student loan debt from law school. I graduated from law school 10 years ago. I am now making pretty good money ($105,000 per year in city with low cost of living as a tenured professor). Until now, I have only been paying the minimum under an extended 30 year plan with payments of $235 per month. The interest rate is a fixed 3.5 rates and interest is 100% tax deductible.


Hey legalwriter. Looks like you’re in good shape financially. Also looke like you know what you're doing from an investment standpoint. So you make enough to pay the debt off correct?

legalwriter wrote:As far as "peace of mind" is concerned, this is my only debt and the monthly payments are less than 5% of my income so to me, it's not a big deal. Plus, if I die, the debt can be discharged and my wife doesn't have to pay it. I have been making payments for the last 10 years on the student loans so it's just built into my household budget.


I was under the impression student loans couldn’t be forgiven or discharged even through bankruptcy?

Forgive me but wouldn’t the responsible thing be to pay off your debt and leave your family name in good standing?

~ Eagle
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ambition
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Re: Pay off student loans or save/invest

Postby ambition » Fri May 18, 2012 6:56 am

eagle wrote:
legalwriter wrote:As far as "peace of mind" is concerned, this is my only debt and the monthly payments are less than 5% of my income so to me, it's not a big deal. Plus, if I die, the debt can be discharged and my wife doesn't have to pay it. I have been making payments for the last 10 years on the student loans so it's just built into my household budget.


I was under the impression student loans couldn’t be forgiven or discharged even through bankruptcy?

Forgive me but wouldn’t the responsible thing be to pay off your debt and leave your family name in good standing?

~ Eagle


Bankruptcy and dying are two very different things.

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Re: Pay off student loans or save/invest

Postby Bichon Frise » Fri May 18, 2012 9:54 am

flinch13 wrote:My suggestion: Take half of your emergency savings and invest it. If you have $10k saved in cash, you're likely to be covered for just about any emergency that should happen.


This would leave the OP with a $10k emergency fund. There are lots of emergencies that exceed the cost of $10k. While you may not be able to fathom them, be assured, they are out there. One example is my boss. His son got in trouble (long story) and the lawyer told him to bring $12k cash before work began. My sister in law (who lives in the desert) had her basement flood from an over charged aquifer. Well over $10k.

But, we should all keep an emergency fund at a size that allows us to sleep at night. And money in the stock market may or may not be there when the emergency arrives. We all get to choose what we do with our own money.

Eagle wrote:
I was under the impression student loans couldn’t be forgiven or discharged even through bankruptcy?

Forgive me but wouldn’t the responsible thing be to pay off your debt and leave your family name in good standing?

~ Eagle


There are a couple ways student loans are forgiven (the federal variety).

1) you work in an approved program which will forgive the loans. An example for a lawyer is a clerkship position
2) after a certain amount of time, the loans are forgiven. If you are poor and can get your payments reduced because of "hardship", you'll essentially pay a small amount for decades and at the end, the loans will be forgiven
3) you become disabled to the point where you cannot work. Very difficult to prove. Being on SSDI does not mean your loans will be forgiven
4) you die

The loan is in your name, so it doesn't fall on your spouse, relatives or "your name." The same with PLUS (parent) loans. If either the student or the person who took out the loan kicks the bucket, the loan is forgiven (estate may have to pay taxes on forgiven amount).

But I agree, if you are pulling in $105k/yr, you should make an effort to pay off your loans. Paying the minimum set forth by the gubmint or the loaning institution would settle any ethical qualms I would personally have. But again, we each get to decide that for ourselves.
Bichon Frise

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Re: Pay off student loans or save/invest

Postby Eagle » Mon May 21, 2012 8:18 am

Bichon Frise wrote:
Eagle wrote:
I was under the impression student loans couldn’t be forgiven or discharged even through bankruptcy?

~ Eagle


There are a couple ways student loans are forgiven (the federal variety).

1) you work in an approved program which will forgive the loans. An example for a lawyer is a clerkship position
2) after a certain amount of time, the loans are forgiven. If you are poor and can get your payments reduced because of "hardship", you'll essentially pay a small amount for decades and at the end, the loans will be forgiven
3) you become disabled to the point where you cannot work. Very difficult to prove. Being on SSDI does not mean your loans will be forgiven
4) you die

The loan is in your name, so it doesn't fall on your spouse, relatives or "your name." The same with PLUS (parent) loans. If either the student or the person who took out the loan kicks the bucket, the loan is forgiven (estate may have to pay taxes on forgiven amount).


Very interesting Bichon. Thanks for the information! So federal loans can be reduced/forgiven at some point. But not state or private loans right?

Since you seem informed about this kind of thing... My cousin is going through a difficult time as he and his wife has 100k or more of school debt. Most of it is all private loans unfortunately. They have lived with family since they were married. They have one daughter and his wife doesn't work. He brings in enough to pay for the minimum payments, provide for the wife/little one, and help some out the family with groceries. Any suggestions for them? Unfortunately I've told them the only solution I have is either for him to get a better job or the wife needs to go back to work.
~ Eagle
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DoingHomework
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Re: Pay off student loans or save/invest

Postby DoingHomework » Mon May 21, 2012 10:01 am

Eagle wrote:...he and his wife has 100k or more of school debt...They have lived with family since they were married. They have one daughter and his wife doesn't work. He brings in enough to pay for the minimum payments, provide for the wife/little one, and help some out the family with groceries. Any suggestions for them? Unfortunately I've told them the only solution I have is either for him to get a better job or the wife needs to go back to work.


It does not sound like he is providing if he only can only pay the minimum and "help out some" with groceries. "Providing" would normally include food and shelter, don't you think?

Two big questions:

1. Why did they produce a kid they can't afford?
2. Why did wifey borrow money to pay for school and then not work?

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Re: Pay off student loans or save/invest

Postby Tightwad » Mon May 21, 2012 10:07 am

1) you work in an approved program which will forgive the loans. An example for a lawyer is a clerkship position

Working off the loan & forgiving the loan aren't really the same thing.

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Re: Pay off student loans or save/invest

Postby DoingHomework » Mon May 21, 2012 10:57 am

Tightwad wrote:
1) you work in an approved program which will forgive the loans. An example for a lawyer is a clerkship position

Working off the loan & forgiving the loan aren't really the same thing.


I'd say they kind of are since the forgiveness is not directly compensation.

For example, it used to be that if you went and taught on an indian reservation for 2 years you'd have certain loans forgiven. But you got nothing for 1 year. And you got paid the regular wage for the job you had for those 2 years. So I wouldn't call that "working it off" so much as I'd say you are earning the forgiveness benefit much like people who go through ROTC get school paid for but then have an obligation to serve.

For a lawyer I think there used to be certain ways to earn forgiveness through pro bono work. That might be more akin to the "working it off" approach

But these things change all the time so it is important to research the details.

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Re: Pay off student loans or save/invest

Postby Tightwad » Mon May 21, 2012 11:18 am

DoingHomework wrote:
Tightwad wrote:
1) you work in an approved program which will forgive the loans. An example for a lawyer is a clerkship position

Working off the loan & forgiving the loan aren't really the same thing.


I'd say they kind of are since the forgiveness is not directly compensation.

For example, it used to be that if you went and taught on an indian reservation for 2 years you'd have certain loans forgiven. But you got nothing for 1 year. And you got paid the regular wage for the job you had for those 2 years. So I wouldn't call that "working it off" so much as I'd say you are earning the forgiveness benefit much like people who go through ROTC get school paid for but then have an obligation to serve.

For a lawyer I think there used to be certain ways to earn forgiveness through pro bono work. That might be more akin to the "working it off" approach

But these things change all the time so it is important to research the details.

Don't get me wrong, I'm not knocking it. If there's plans like this out there & recent college grads can do this to satisfy their loans...I'm all for it.


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