Making advanced payment towards debt payoff (or invest instead?)

[I-Man]

Hey all,

I'm new to the site and learning a ton. I'm trying to figure out if it's worth making advance payments to one of my high interest student loans, or perhaps paying off another debt completely. The convention wisdom is to retain low interest student loans and deduct the interest from one's taxes. Alas, I think that I earn too much to deduct any student loan interest. Apparently there's a tiered structure for deductions based on salary but I haven't been able to find it online.

Here's my quick info:
-33, married, no kids, recently completed a full-time master's degree (hence being a little strapped at the moment)
-Personal income: $130K
-Wife's Income: $115K
-I will max out my 401K next year (I've only worked 1/2 of this year but have contributed 10% of each paycheck)

Assets:
-$23K in cash
-$8K in stocks/bonds

Liabilities:
-$22K in student loans at 8.5%
-$42K in student loans at 6.8%
-$7K student loans at 5.6%
-$5K in credit card debt at 6.24%
-$10K car loan at 5.1%
-$293K mortgage at 4.25%

If I can't deduct any student loan interest, I'm tempted to simply increase payments on my highest interest loans (at 8.5%). Does that make sense or am I missing something completely?

As an alternative, I'm tempted to save/invest some money rather than paying down debt in an effort to maintain some liquidity*. How best to do this, I don't know.

Any advice is much appreciated!

*My wife and I work in different industries and both have secure jobs so I'm not too worried about a large emergency fund (though I may wish to reconsider this).

[disneysteve]

Welcome. There is no absolutely right answer to the question but here are some things to think about. There is no such thing as a totally secure job so a minimum emergency fund of 3 months worth of expenses is a must and 6 months should really be your goal. And remember, that is expenses, not income.

Are the student loan rates fixed or are they variable? Your CC rate is variable. It can change at any time for any reason so while it is 6.24% today, they could jack it up to 20% next week if your payment arrives 5 minutes late. Even though you have student loans at a higher rate, I'd get rid of the credit card first.

What are your monthly expenses? You have 86K in debt not counting the mortgage. You earn 245K. With that kind of income, you should be able to clean this up pretty quickly. I paid off 102K in student loans and a couple of cars in 12 years earning less than half of what you guys earn. You should be able to knock this out in about 5 or 6 years easily.

So I'd write a check and pay off the credit card today and then start attacking the other loans from highest to lowest interest rate. At the same time, I'd beef up the EF to 6 months worth of expenses. And I'd keep expenses as low as possible to devote the most money you can to the debt repayment plan.

[I-Man]

Steve, many, many thanks for the advice. Additional info below:

Originally Posted by disneysteve

There is no such thing as a totally secure job so a minimum emergency fund of 3 months worth of expenses is a must and 6 months should really be your goal.

A fair assessment. I'll be sure to retain 6 months liquidity.

Originally Posted by disneysteve

Are the student loan rates fixed or are they variable?

They are fixed.

Originally Posted by disneysteve

I'd get rid of the credit card first.

DONE!

Originally Posted by disneysteve

What are your monthly expenses? You have 86K in debt not counting the mortgage.

It's kinda hard to tell as we just moved into the new house, but in addition to the typical internet/water/power bills I pay:

$100 phone
$250 car payment
$75 car insurance payment
$900 student loans
$500 groceries/eating out

Originally Posted by disneysteve

You earn 245K. With that kind of income, you should be able to clean this up pretty quickly

My student loan debt free wife who earns almost as much as I do (and is a year younger!) gives me a hard time (sarcastically), but you're right.

Many thanks!

P.S. do you or anybody else know if I can get any student loan tax deductions given our combined income?

[disneysteve]

Originally Posted by I-Man

$500 groceries/eating out

Is that just for the two of you? If so, that's a heck of a lot of money. I'd suggest cutting that back. Many people here will say they spend $100/month/person or less, though they don't earn 200K+. In your case, I'd at least trim back to $350/month, less if you are willing, and put the extra toward the loans.

do you or anybody else know if I can get any student loan tax deductions given our combined income?

I have no idea. When I was repaying my loans, the interest wasn't deductible for anybody. That didn't come along until later.

Are you guys both docs or some other high-earning field?

[jpg7n16]

I could look up the exact threshold, but you guys are way above it. It is around 65k for single, and so probably double that for married to 130k combined - would be close, but not exact. You're combined income is way over, so no deduction sorry. But you do have nearly $250k a year to console yourself with, so it's not that bad


edit: here's the website and the official stats -

Publication 970 (2009), Tax Benefits for Education See table 5.2 for specifics about the phaseout, but all you need to know is

Married Filing Joint: over $150k = no deduction allowed
Married Filing Separately: no deduction regardless of income

[I-Man]

Originally Posted by disneysteve

Is that just for the two of you? If so, that's a heck of a lot of money. I'd suggest cutting that back. Many people here will say they spend $100/month/person or less, though they don't earn 200K+. In your case, I'd at least trim back to $350/month, less if you are willing, and put the extra toward the loans.

It is, and yes it's a lot... eating out and cooking are our favorite hobbies. How we manage to not get obese I do not know :P. I agree that it's something we should cut back on.

Originally Posted by disneysteve

Are you guys both docs or some other high-earning field?

My wife is an actual rocket scientists. I used to be before transitioning into technology commercialization (taking patents and inventions from academia and industry and making products out of them).

[I-Man]

Originally Posted by jpg7n16

Married Filing Joint: over $150k = no deduction allowed
Married Filing Separately: no deduction regardless of income

That is what I was looking for and failed to find. Thank you!

Many thanks to all for the advice in this thread.

[littleroc02us]

Here is what I have come up with after crunching the numbers. Now before I start I want to let you know that although finances involve mathematics, that there is a lot of psychology to what your are doing. So, in saying that here is what I know from what you have told us.

Your Income: $245,000 = $14583 a month after taxes

Liabilities:

-Mortgage=$1746 a month (from the figures you stated)
-Bills each month total=$1825

*Basically this leaves you $9187 of disposable income based on the numbers you have given.

1st off I am of the belief when paying debt that you start with the smallest debt and pay as much as you can towards it and then pay minimum on the others. Don't include the mortgage in this scenario. I have mapped out a payoff plan for you. I am going off the figure that you have $9187 disposable cash each month to put towards your bills which I clearly defined above.

Month 1
-Pay off the cc bill of 5k
-Pay off most of the 7k (Smallest Student Loan) which leaves $2813

Month 2
-Pay off the remainder of the smallest loan which was $2813.
-Pay off most of the car loan of $6374 which leaves a balance of $3626.

Month 3
-Pay off the car loan of $3626
-Pay towards the 22k loan with the remaining cash you have of $5561, which leaves a balance of $16439.

Month 4
-Pay $5561 towards the school loan balance of $16439 and that leaves a balance of $10878.

Month 5
-Pay $9187 towards the school loan and you only have $1691 on your second largest school loan.

Month 6
-Pay off the school loan with $1691
-Move onto the last school loan of 42k and put the remaining $7496 towards the loan which leaves a balance of $34504.

Month 7
-Pay $9187 towards the $34504, which leaves a balance of $25317.

Month 8
-Pay $9187 towards the balance of $25317, which leaves $16130.

Month 9
-Pay $9187 towards the balance of $16130, which leaves $6943.

Month 10
-Pay off the balance in full.

Wow, if you manage to follow this for 10 months your 86k of debt is completely gone, you still bring in the same income if not higher, life is good. Next onto the mortgage. Your killing it at this point.

[fe2o3ez]

Originally Posted by littleroc02us

Your Income: $245,000 = $14583 a month after taxes

Don't forget to max out the 401K contributions. It may increase the payoff period by a couple months, but you will need all the deductions you can find.

Month 1
-Pay off the cc bill of 5k
-Pay off most of the 7k (Smallest Student Loan) which leaves $2813

Month 2
-Pay off the remainder of the smallest loan which was $2813.
-Pay off most of the car loan of $6374 which leaves a balance of $3626.

Month 3
...
Month 10
-Pay off the balance in full.

And that, my friends, is a REALLY big snowball...

Wow, if you manage to follow this for 10 months your 86k of debt is completely gone, you still bring in the same income if not higher, life is good. Next onto the mortgage. Your killing it at this point.

34, no debt (other than a reasonable mtg), married w no kids, and 245k income for the forseeable future? Next time we see you better be in the investment forum!

[jpg7n16]

I'm with DS on getting a base EF set up 1st. Probably 2-3 months expenses before getting started blasting this debt. (which according to the expenses you have listed, you probably already have)

Then I'd personally start with the largest interest rates. You're going to blast through this debt so fast (if you work at it), that you'll be rewarded with each extra payment. Hard not to be rewarded seeing a balance drop by several thousand each month!

With your income level, this could easily be gone within a year (like shown above). 18 months max.

[snshijuptr]

I also recommend the highest interest debt first unless you feel your motivation waning. I think you have a decent EF for the moment especially with you and your wife both having large incomes. I would first max out retirement, then tackle the debt (except for mortgage), then boost your EF to 6 months, then pay off your mortgage, then boost your EF to 1 year. Future goals should include paying cash for cars, paying cash for all wants (tv's, vacations, kids, etc), and any other future goals you have.

Make sure you contact each debt for an exact payoff amount before you make your last payment. This will keep you from over/under paying and make it less of a pain.

Congrats on paying off the credit card already!

[I-Man]

Originally Posted by littleroc02us

Here is what I have come up with after crunching the numbers...

My god littleroc02us, you're amazing! Many, many thanks for that breakdown. I've just paid off the credit card and now I'm on to the student loan. The plan makes perfect sense to me. Really, I can't thank you enough!

[I-Man]

Originally Posted by fe2o3ez

Next time we see you better be in the investment forum!

Ha! I hope to be there before too long. I've been researching portfolio theory and risk assessment so I hope to be able to speak more intelligently about that in the (not too distant) future.

[I-Man]

Originally Posted by snshijuptr

Future goals should include paying cash for cars, paying cash for all wants (tv's, vacations, kids, etc), and any other future goals you have.

I had a professor who said, "If I can give you one piece of advice as you leave academia, it is this: if you can't pay cash for a car, you're driving too nice of a car."

Thanks again to one and all on this thread!

[littleroc02us]

Once in a while I get something right.

[doxie]

I'm not trying to make waves, but I think a couple who makes $245K a year can afford to spend $500 a month on groceries and eating out. I'm not sure why spending money on food is so frowned upon in this forum.

I understand if someone is deep in debts and/or low on income that they need to trim the expenses down as much as possible, and doesn't need to be eating out and shopping at Whole Foods. In this case, the OP makes plenty of money, has a reasonable debt to income ratio, and can afford to pay off the debt in a reasonable amount of time. There's nothing wrong with enjoying a nice meal every now and again. For me, it's kind of a hobby.

Sorry to stray off topic, I guess I needed to get that off my chest

[disneysteve]

Originally Posted by doxie

I'm not trying to make waves, but I think a couple who makes $245K a year can afford to spend $500 a month on groceries and eating out. I'm not sure why spending money on food is so frowned upon in this forum.

doxie, I'd tend to agree with you if they were debt-free except their mortgage, but they aren't. They have $86,000 in debt. From what has been said, it also appears that they are not yet saving 15% for retirement and do not have a fully funded emergency fund in place.

I've got no problem at all with people who love to cook and love to dine out. My wife and I are very much like that. We spent $70 for dinner out with friends last Sunday nite and we are meeting people for brunch next Sunday morning that will run us about $40. And that doesn't count any dining out we do on our own as a family (went out for pizza Wednesday night for about $20). The difference is that we are debt-free except for a very modest mortgage and we are saving/investing upwards of 25% of our gross income.

When we were just starting out and I had 102K in student loans and we were both paying off our cars, we live much more frugally, cooked most meals at home from scratch, did a lot of comparison shopping and directed our efforts at paying down debt. I'm just suggesting that OP and his wife do the same. Make getting out of debt and building an EF priorities above going out for nice meals. The nice meals can come later when the debt is gone.

[Eric80]

I think that debt is such a burden so if you can then maybe consider doing this - or even maybe consider consolidating your debts to make it more manageable for you and then you will have spare cash to invest or do whatever you wish with.

[charlieh]

In this economy being liquid is a huge asset. So while it is nice to pay off most of your debts at least 6 months of an emergency fund but more reasonably a year would be smart. Fortunately you are diversified just by having both you and your wife with substantial income streams, so a move to pay down your debt should be both possible and smart. Just remember though that in this economy borrowing becomes near impossible without income streams, and many people in similar situations to yours have now lost their income streams, and been unable to tap whatever equity they have built up because of borrowing restraints. That's why while it is nice to have everything paid off, when it comes down to it access to cash can be equally as or even more important.