Pay off the student loans?

**siggy_freud** · 02-06-2013, 08:15 PM

House is a disposable asset should things get tough. Student loans stick with you no matter what (even through bankruptcy). They are roughly the same interest, so go for the student loans first.

**jpg7n16** · 02-07-2013, 06:03 AM

Originally posted by RedHotLama View Post

the math guy in me says keep putting extra towards the house.

The math guy in me says keep building up investment assets rather than pay extra on your debt, likely in a taxable brokerage account.

You could probably even find muni bonds paying 3.5% yield, to get more than you're paying, tax free. Stocks (although volatile) are expected at 7-11% long term. That's more than double what you're paying.

**RedHotLama** · 02-07-2013, 09:39 AM

Not sure what happened to jpg7n16's reply

The math guy in me says keep building up investment assets rather than pay extra on your debt, likely in a taxable brokerage account.

You could probably even find muni bonds paying 3.5% yield, to get more than you're paying, tax free. Stocks (although volatile) are expected at 7-11% long term. That's more than double what you're paying.

But if you're dead set on paying off debts to save less than you could make, then we'd need to know if your income is too high for the SL deduction. Mortgage interest is likely deductible for you, as most people with mortgages are able to itemize.

If you're in just the 25% bracket, 3.375% mortgage less the tax deduction is actually 2.53%.

If you are able to deduct the SL interest, then pay extra to the mortgage.
If not, pay off the SLs.

We are in the phase out for the student loan deductions. Plus the interest is only about 400 total for the year.

For the house we have interest of about 9k, plus taxes of 4k, so this gives us a minor benefit over the standard deduction. Plus our annual giving.

Income wise

160k combinded - 35k retirement/health care account = 125k AGI

After taxes and pretax retirement we take home about 7k per month. Expenses are about $4500 per month, including Roth contributions.

With the extra 2.5k a month we need to get some term life plus start a 529 for baby on the way. Any other things we should look at?

**Texas Saver** · 02-07-2013, 10:34 AM

Stick with student loans

Student loans should be paid off first. Follow Dave's Baby Steps, you can't go wrong.

**dfeucht** · 02-07-2013, 01:12 PM

Couple of thoughts. If you are in the phase out for student loans, the 3.375% actually could be less than the 3% because of the deductibility of the interest (as an actuarya saying 3.375% < 3% is always fun!)

The point of investments earning more than the interest payment is the right answer in terms of accumulating the most wealth - as long as you actually dilligently invest all of the money you would think of putting towards the loan.

When I had debts/loans to pay off I thought somewhere in the middle usually. I never put extra money towards a loan, because it didn't actually improve my immediate situation. My payments don't go down and I can't easily tap the equity I created by lowering my loan amount. What I would do if I have decided to pay off a debt is put any extra monthly payments into an account. I invested in mutual funds if I knew it will take me longer (home mortgage), or if I thought it would be short term I will put it into a "high-yield" savings account ("high yield" at 0.9% today doesn't feel right, but...). That way while I am accumulating the equity to pay off the loan I have access to that equity should I need it in case of emergency. My monthly payment remains the same. When I had the equity to pay the entire loan off, I could pay the loan off and improve my cash flow situation by removing the payment, or I could decide that leveraging the money for further investment or emergency protection is a better use, knowing that most likely at any point I could eliminate that debt.

That was and is my thought process.

**jpg7n16** · 02-07-2013, 04:49 PM

Originally posted by RedHotLama View Post

Not sure what happened to jpg7n16's reply

What happened to my reply was that sometimes I post more and realize I should post less

Looking back at the full post you quoted, I started thinking, "Why are you giving advice on how to best pay it off, when you don't think they should pay it off in the first place? Why give advice on how best to do what you don't think they should do?"

So I deleted that 2nd bit out of the post. You quoted it quicker than I could edit it.

I don't think you should pay off either, so I really shouldn't try to figure out the best way to pay it off, or which should be paid off first.

With the extra 2.5k a month we need to get some term life plus start a 529 for baby on the way. Any other things we should look at?

You definitely need to get a solid term life policy. That is not related to the debt at hand, and should be done regardless of your decision. Typical advice is 10x salary. Give or take.

I believe adding to a 529 is a good option -- if you are SURE that the funds will go to college. If you think they will, but don't want to limit your child, then you should not use 529 primarily. Use UTMA accounts instead. UTMA can be used for whatever they want, but it's all taxable (no penalty).

As stated above, I would save in a longer term allocation (college for unborn child = 19 year horizon = longer term). Maybe 70-85% stocks depending on your risk tolerance.

I would add money to that savings plan before paying down more of your own debts at those rates.

Pay off the student loans?