Does this ROI make sense

[auron]

I'm considering using my profit sharing and tax refund checks on my student loan and am looking for someone to check my math/reasoning.

If I pay an extra $4000 on my SL, I will go from $6644.27 total interest paid to $5493.44 total interest paid. Net effect, $1150.03 less interest paid. This would take my loan term to 44 months (3.67 years).

So, ROI/term = 1150.03 / 4000 = 28.75%

or ROI/yr = 7.83%

Other than interest deduction, am I missing something here?

[Mr Tipps]

Im not exactly sure what you are trying to ask, however saving any interest is always a saving.
Put it this way if you were to invest the $4000 and earn even 5% interest over 1 year you would only earn $200 interest (and you would have to pay tax on that). Even over 5 years if you were to compound the interest you would only earn just over $1100 interest (again you would have to pay tax on that). If you have any other debt that is charging more interest than your SL pay that, otherwise I would suggest paying this off.
Hopefully this helped?

[Mr Nice Guy]

Opportunity costs is the name of the game here.

The best ROI depends on whether you can tie up your capital in an investment that earns a higher return than student loan interest. If not, or if there is a good chance it wont, then stick with the paying down the loans (assuming you don't have other debts. SL are one of the least imperative debts to pay down in most cases.)

[jpg7n16]

Originally Posted by auron

I'm considering using my profit sharing and tax refund checks on my student loan and am looking for someone to check my math/reasoning.

#1) What do you mean your profit sharing? Is that in a qualified plan? Would you be penalized and taxed for the withdrawal?

#2) Why are you still getting a tax refund? Refund means you paid too much all year.

If I pay an extra $4000 on my SL, I will go from $6644.27 total interest paid to $5493.44 total interest paid. Net effect, $1150.03 less interest paid. This would take my loan term to 44 months (3.67 years).

So, ROI/term = 1150.03 / 4000 = 28.75%

or ROI/yr = 7.83%

Other than interest deduction, am I missing something here?

Yes. You're missing that the interest compounds. You don't just take 28.75%/4 = 7.83%. You should actually take 1.2875^(1/4)-1 = 1.065214-1= 6.52%/year

What is the rate on your loans? (it should be pretty close to 6.5%)

Considering how the interest deduction is important, you should also take that into consideration.

6644.27*.75=4983.20
5493.44*.75=4120.08
4983.20-4120.08=863.12

863.12/4000=21.578%
1.21578^(1/4)-1=1.050059-1=5.01%/year

You'd likely be saving approx 5% after-tax for paying extra on your loans. Depending on your risk tolerance, that could still be a pretty good deal.

[auron]

Originally Posted by jpg7n16

#1) What do you mean your profit sharing? Is that in a qualified plan? Would you be penalized and taxed for the withdrawal?

#2) Why are you still getting a tax refund? Refund means you paid too much all year.


Yes. You're missing that the interest compounds. You don't just take 28.75%/4 = 7.83%. You should actually take 1.2875^(1/4)-1 = 1.065214-1= 6.52%/year

What is the rate on your loans? (it should be pretty close to 6.5%)

Considering how the interest deduction is important, you should also take that into consideration.

6644.27*.75=4983.20
5493.44*.75=4120.08
4983.20-4120.08=863.12

863.12/4000=21.578%
1.21578^(1/4)-1=1.050059-1=5.01%/year

You'd likely be saving approx 5% after-tax for paying extra on your loans. Depending on your risk tolerance, that could still be a pretty good deal.

I was only attempting to get a rough order of magnitude but thanks for doing the TVM math for me =). Profit sharing is just that; the company pays out part of the year end profit to all employees as a cash bonus (# is already after taxes).

The reason I am getting a tax refund is because I withheld at the normal single rate for my salary, but started the position June 20 (1/2 a year salary).

Correct, SL are my only debt (@6.8%).

So, really I'd have to earn 5%+infl or more to get a better ROI or reduce my D/I ratio...

[jpg7n16]

Originally Posted by auron

I was only attempting to get a rough order of magnitude but thanks for doing the TVM math for me =).

A few percent here or there can REALLY shift the decision. If you really were saving 7.8% by paying off your debts, you should do it. Market's expected to earn 7-11% by taking risk - and you could get 7.8% with no risk?? That'd be a no brainer!

Profit sharing is just that; the company pays out part of the year end profit to all employees as a cash bonus (# is already after taxes).

The reason I am getting a tax refund is because I withheld at the normal single rate for my salary, but started the position June 20 (1/2 a year salary).

Okay good to hear. My employer's profit sharing goes into a qualified plan. It's not after tax for me, so was concerned that you were cashing out retirement accounts early to pay off debt. Glad to hear that's not the case

So, really I'd have to earn 5%+infl or more to get a better ROI or reduce my D/I ratio...

Essentially, yes. You'd have to earn over 5% after tax on another investment to increase the ROI. Stocks are expected to earn 7-11% (before tax), but that's not guaranteed and is pretty risky. I'd only recommend that path if your risk tolerance is pretty high.

It boils down to - would you rather save 5% tax and risk free? or take the risk and try for 7-11%?

[auron]

I decided my #1 financial goal for the next 4 years is to totally pay off my SL's.

I wanted to post this somewhere more for myself than anything else. Just made a $6600 payment on my SL this loan (something deep inside me felt like it wanted to die as I clicked the transfer button), but it felt great after that moment of truth. I still have my $6k (4 month) EF and am well on my well to getting rid of this gremlin on my shoulder.

[woodie96]

Congrats Auron....
What a big sense of relief to know that you are that much closer to financial freedom.
Keep up the great work. Also, great keeping the EF intact. One never knows when emergencies will rear their ugly heads.

[flipyourdebt]

Good job. Don't forget that there may be ways you can lower your interest rate by consolidating your debt. Or perhaps you can get a deferment with your SL and have more time to save.

[auron]

Originally Posted by flipyourdebt

Good job. Don't forget that there may be ways you can lower your interest rate by consolidating your debt. Or perhaps you can get a deferment with your SL and have more time to save.

Currently, I only have 2 loans both at 6.8%. One is subsidized; one is not. I don't see any reason to defer when my main goal is to pay off the loan and I can afford it (EF is still healthy).

The strange thing is, before the SL servicing was switched to myedaccount.com (without a lot of publicity might I add) they offered .25% reduction in APR if you paid with automatic electronic transfer. Since switching to the new site, there does not seem to be this same feature.