when, if ever, do you throw money at good debt?

[StepRightUp]

At what point does one start throwing extra money at "good debt"?

I have a student loan balance of ~$16,000 at 3% and am making monthly payments of $310. No other debt.

I have a 5 month EF. I'm contributing 18% of my gross to retirement. I have a $100/mo car replacement fund. I have a $60/mo vacation fund.

After the above, minus my monthly expenses, I'm left with an extra $50-75 a month.

Since near-term returns are so low at present (savings accounts, money markets, etc), is now the time to pay extra off student loan principal each month, lopping off an extra $600+ a year?

Or do many of you think that anything extra like this should go to retirement for the long-term return?

I imagine it's a mix of balancing the simple truth of the math with the psychological benefit of reducing debt faster.

I'm curious to hear your points of view.

[bjl584]

This is one of those cases where it depends on your appetite for risk. You can theoretically earn more than 3% on your money by investing it elsewhere rather than throwing it at your loans.

On the other hand, if you don't like debt and want to clear the loan, then paying extra would make more sense.

Do you mind being leveraged? Would it be advantageous for you to get the loan paid off soon (example would be sometime in the near future you apply for a mortgage and having the SL debt on your credit report would impede your ability to get a pre approval for the amount that you want), or can you afford to keep the debt around and just invest your moneyt elsewhere.

Part physcology, part personal that depends on your own attitudes and life plans.

[StepRightUp]

Thanks, Brian.

You've brought something to mind. I live in a metro area where the rent is not cheap, yet at the moment I'm probably paying below average rent. This will not last forever, especially if I need/choose to change my living situation. So in preparation for this, perhaps the sooner I can rid myself of that $310 a month loan payment, the better.

The thought of dabbling in stocks at the moment doesn't really appeal to me. As you said, one could "theoretically" achieve higher returns, but that is only theoretical. I feel I would probably get more satisfaction reducing my debt.

[bjl584]

Originally Posted by StepRightUp

Thanks, Brian.

You've brought something to mind. I live in a metro area where the rent is not cheap, yet at the moment I'm probably paying below average rent. This will not last forever, especially if I need/choose to change my living situation. So in preparation for this, perhaps the sooner I can rid myself of that $310 a month loan payment, the better.

The thought of dabbling in stocks at the moment doesn't really appeal to me. As you said, one could "theoretically" achieve higher returns, but that is only theoretical. I feel I would probably get more satisfaction reducing my debt.

There you go. You just answered your own question.

[JoshuaHeckathorn]

Originally Posted by StepRightUp

Thanks, Brian.

You've brought something to mind. I live in a metro area where the rent is not cheap, yet at the moment I'm probably paying below average rent. This will not last forever, especially if I need/choose to change my living situation. So in preparation for this, perhaps the sooner I can rid myself of that $310 a month loan payment, the better.

The thought of dabbling in stocks at the moment doesn't really appeal to me. As you said, one could "theoretically" achieve higher returns, but that is only theoretical. I feel I would probably get more satisfaction reducing my debt.

Making the last payment on student loan debt is a glorious day. Get there as fast as you can with what extra cash you do have, and then you'll probably feel more comfortable taking additional risk on the investment side of things.

[littleroc02us]

IMO I'm amazed when people say they are keeping their good debt around because it's "Good Debt." What is Good debt? I've never understood how any debt is good, maybe it's called that because at the time you were going to school the loan was good to get so that you could finish your schooling. Debt=Risk, bottom line. I don't think it's wise for anyone to keep any debt around that is 50% of your yearly gross income, unless you enjoy keeping it forever, I just think it shorts you on disposable cash.

[MonkeyMama]

I wouldn't necessarily label student loans as "good debt." I've probably been watching too much Suze, but unlike a home loan, student loans are REALLY hard to get out of. You can't bankrupt them, etc.

As such, I'd personally pay off a student loan very quickly. I just wouldn't want that hanging over my head if I were disabled, laid off, etc., etc.

[greenskeeper]

Originally Posted by littleroc02us

IMO I'm amazed when people say they are keeping their good debt around because it's "Good Debt." What is Good debt? I've never understood how any debt is good, maybe it's called that because at the time you were going to school the loan was good to get so that you could finish your schooling. Debt=Risk, bottom line. I don't think it's wise for anyone to keep any debt around that is 50% of your yearly gross income, unless you enjoy keeping it forever, I just think it shorts you on disposable cash.

[StepRightUp]

Debt is often a fact of life. If it is used as an investment, as an education should be (hopefully leading to an increased yearly income), and the interest rate is below x%, then I believe that is an example of good debt. Especially compared to credit card purchases and high interest car loans.

But I hear what you all are saying. I look forward to being in a position to accelerate its demise.

[littleroc02us]

Originally Posted by StepRightUp

Debt is often a fact of life. If it is used as an investment, as an education should be (hopefully leading to an increased yearly income), and the interest rate is below x%, then I believe that is an example of good debt. Especially compared to credit card purchases and high interest car loans.

But I hear what you all are saying. I look forward to being in a position to accelerate its demise.

Believe me when I say this that it's an incredible feeling when a problem arises in your life like a car problem or a house problem and you simply just write the check with no emotion because you have put yourself in a debt free position and the use of a precise budget so as to not have to worry when you go to bed at night. I don't have to sell and investment or cash out my principle of my Roth IRA. Feels good!

[maat55]

You might consider lowering your investments to 10% temporarily and add it to the extra funds to payoff your debt quicker, especially, if you are in your twenties.

[cschin4]

Debt is debt. Some with a better or worse interest rate. But, debt is debt. Getting out of a debt has always been my goal. I paid off every loan i ever had for anything from student loans, car loans and mortgage early. Now I own my cars, home, no cc debt, etc. People who accept the notion of "good debt" need to be careful because a lot of this type of thinking just tends to promote more debt.

[littleroc02us]

Originally Posted by cschin4

Debt is debt. Some with a better or worse interest rate. But, debt is debt. Getting out of a debt has always been my goal. I paid off every loan i ever had for anything from student loans, car loans and mortgage early. Now I own my cars, home, no cc debt, etc. People who accept the notion of "good debt" need to be careful because a lot of this type of thinking just tends to promote more debt.

And that's why marketing is so profitable, for people who are led to believe for example that you must finance a car because it is so great and you will be so cool if you buy it and people will notice you.

[MonkeyMama]

Originally Posted by StepRightUp

Debt is often a fact of life. If it is used as an investment, as an education should be (hopefully leading to an increased yearly income), and the interest rate is below x%, then I believe that is an example of good debt. Especially compared to credit card purchases and high interest car loans.

But I hear what you all are saying. I look forward to being in a position to accelerate its demise.

I personally believe in "good debt." I just don't think student loans, held long after graduation, fall in that category. A lot of risk comes with it. It is better than high-interest credit card and car purchases, maybe. Doesn't make it "good."

[LivingAlmostLarge]

If there weren't student loans like there wasn't mortgages, only the rich would go to school and buy homes. As it stands now it seems more and more, people can only go on for higher education with parents help or massive student loans. Which doesn't seem fair in choosing who gets to be a doctor, lawyer, etc.

[StepRightUp]

To make it more interesting, in an effort to save more for retirement, I am saving up the $3K minimum to open a brokerage account with Vanguard, in addition to my IRA (which is maxed for 2011).

Instead of retirement, would you debt-haters use that $3K to pay down what will then be a $14,800 student loan balance at 3%. I am 33 y/o btw in case that influences your thinking.

[jpg7n16]

Originally Posted by bjl584

This is one of those cases where it depends on your appetite for risk. You can theoretically earn more than 3% on your money by investing it elsewhere rather than throwing it at your loans.

On the other hand, if you don't like debt and want to clear the loan, then paying extra would make more sense.

Do you mind being leveraged? Would it be advantageous for you to get the loan paid off soon (example would be sometime in the near future you apply for a mortgage and having the SL debt on your credit report would impede your ability to get a pre approval for the amount that you want), or can you afford to keep the debt around and just invest your moneyt elsewhere.

Part physcology, part personal that depends on your own attitudes and life plans.

Originally Posted by bjl584

There you go. You just answered your own question.

I agree 100% with these two posts.

Originally Posted by StepRightUp

To make it more interesting, in an effort to save more for retirement, I am saving up the $3K minimum to open a brokerage account with Vanguard, in addition to my IRA (which is maxed for 2011).

Instead of retirement, would you debt-haters use that $3K to pay down what will then be a $14,800 student loan balance at 3%. I am 33 y/o btw in case that influences your thinking.

What would I personally do? Save up and start the brokerage in addition to my retirement accounts. Pay the minimum on loans, and invest as much as possible.

Given what you've said above, what do I think you should do? Focus on paying off the loan first, then save up for the brokerage account.

[MonkeyMama]

Originally Posted by jpg7n16

[/b]personally do? Save up and start the brokerage in addition to my retirement accounts. Pay the minimum on loans, and invest as much as possible.

Given what you've said above, what do I think you should do? Focus on paying off the loan first, then save up for the brokerage account.

Good advice!

I should clarify, in your situation, I didn't see it as a good debt. I think both answers above are fair, depending on the overall situation.

[littleroc02us]

Originally Posted by LivingAlmostLarge

If there weren't student loans like there wasn't mortgages, only the rich would go to school and buy homes. As it stands now it seems more and more, people can only go on for higher education with parents help or massive student loans. Which doesn't seem fair in choosing who gets to be a doctor, lawyer, etc.

Read the book Zac Bissonete "Debt free U" he has shown how he went to Umass debt free, he is a senior now and works to pay for school. He didn't blame the system he went out busted his butt and found a way.

[StepRightUp]

This is fascinating and paralyzing at the same time. It seems that there are two philosophies:

1. Debt is evil. Debt is risk. Remove it at all costs. It should be the number one priority. "Good Debt" is a myth.

and

2. Invest. Invest. Invest. Retirement savings is paramount after high interest debt is taken care of (I have none). Pay the minimums on low-interest loans and invest the rest.

I may adopt a mix of the above because I believe in balance of risk. I could open the Vanguard account because I do need to save more for retirement and a brokerage account is the necessary vehicle for this. Once I open this account July 1, I will have achieved a 16% savings of my yearly gross for retirement halfway through the year, including a maxed Roth IRA.

I could then use the last six months of the year to max my student loans payments with what I would have been contributing to retirement in those remaining months, reducing the balance by about 28% in those six months.

I love this forum.