Quote:
Originally Posted by puck36
First I want to say that I big on Dave Ramsey. If $90,000 in student loan is the only debt you have then I would make the payment each month and put any and all extra money on it. I would pay it off as fast as I could. That way you have money to save for retirement. On DaveRamsey.com he has a link to College loan Corporation ( www.collegeloan.com). You could listen to InDebtInDC post and "drag out your student loans for as long as possible" or you can pay it off ASAP, it is your choice. I personally do not listen to any BROKE people for money advice. I have been debt free for almost 2 years.
"Broke is normal. Why be normal?" - Dave Ramsey
"Debt is so ingrained into our culture that most Americans can't even envision a car without a payment ... a house without a mortgage ... a student without a loan ... and credit without a card. We've been sold debt with such repetition and with such fervor that most folks can't conceive of what it would be like to have NO payments." - Dave Ramsey |
Federal subsidized student loans typically range from 2-5%. Plus by law the lender is required to offer you forebearance if you have financial hardship, or deferral if you return to school full-time. On top of that, student loan interest is tax deductible. Plus there's a chance that the law may change again in the borrower's interest.
Please tell me what kind of loan offers you that kind of benefits.
What if you become eligible for Social Security with a student loan balance? Will it most likely be forgiven? Maybe.
In summary, the student loan is the least aggressive loan you can get barring friends and family loans.
Does that mean he shouldn't pay it off? No, but most likely his income won't be sufficient to max out 401(k) and Roth/traditional IRA limits.
Cost of student loan = 2-5% X 70% (after tax deductions) = 1.4-3.5% effective cost of capital.
Earnings of pretax retirement = 4-30% X 130% (remember that you're paying off student loan with taxed dollars) = 5.2%-40% effective return on investment before employer matching
Earnings of Roth IRA = 4-30% effective return on investment
Earnings of taxable capital accounts = 4-30% X 90% (capital gains) = 3.6%-27%
Assuming you have no other debt, the financial choice would be to make the minimum payment on the student loan, max out 401(k)/501(a) contributions, anything lefterover you put into Roth IRA up to the IRS limit. Anything leftover you put in moderate to aggresive growth funds.
When the balance eligible for withdrawal in your investment accounts equals your student loan balance, you may withdraw and pay off the loan, or let it go. Your choice, but at least you have a choice. If you do the above, your breakeven point will be about 5 years with a pretax investment of $1500 monthly. If you choose to pay the loan only, you will only be able to apply roughly $1000 after tax to the balance each month. After 5 years of doing this you'll still owe roughly half the current balance.
If you have more disposable income, we'll adjust, but judging from your degree and average industry salary it'll be tough to make more.
With all due respect, a homeless person has neither asset nor debt, but I wouldn't necessarily take advice from one. Additionally, a good coach doesn't necessarily have to be a successful athlete to be a good coach.
Therefore, I respectfully submit that your reasoning is fallacious. The approach I've given above will pay off the student loan more quickly than applying all after-tax disposable income to the debt.