need advice on managing a large amount of debt

[m3racer]

Thanks everyone for the great feedback. I accrued my debt by graduating from an Iy League school (annual tuition alone was 40k ) and then having that principal sit for 6 years until I finished my surgical residency. This is my first year out and I've managed to save enough cash for emergency funds by still living like a student. Now I've got to decide what to do next. I really like that "hybrid theory"....pay off the student loan in a shorter time and still save enough to invest. Hedging my bet seems like the most practical thing to do....thanks again for the input.

[LivingAlmostLarge]

Can I point out something? Save for retirement first, then pay off CC, car loans, and mortgages before the student loans? Why?

If it's 6 figures like steve, they at least go away with debt. If you focus too much on student loans, and ignore other debt and savings, if you died you'd have a paid for education without the brain behind it.

I believe in paying it off as you can, but not ahead of off things.

[Scanner]

I had $53,000 of student loan debt upon graduating chiro. school (managed to not borrow for living expenses).

I recommend aggressively paying down and here's why:

Student loan debt is one of those debts that is difficult to discharge. The government doesn't like to loan and not get paid back. I have colleagues where that debt is just constantly haunting them, no matter how hard up they get.

And our screwball Bush administration made it even more difficult to escape creditors (and at a time when lenders are going nuts and the healthcare crisis is looming large and people go bankrupt because of medical bills).

Point is, you never know what's going to lay over the horizon for you. You could get a disability and have to take a job with a pharmaceutical co. or something less paying. Unlike a house debt, you can't sell and move to a simpler house.

Normally, I'm a hybrid type of person too - but this time, I'd play it conservative and go after the debt - at least get it down to 5 figures, instead of 6.

As far as LivingLarge's comment - that's what term life insurance is for - I'd imagine a surgeon should command a term life policy of 20 years of at least a million, if not more. Death is one time the gov't will forgive your student debt (I think - mighty of white of them).

Good luck.

[m3racer]

I just got off the phone with my CPA and he recommended taking out a home equity loan to pay off the student loans. I would than be able to write off the entire amount I pay in taxes with the HELOC. What do you guys think?

[simpleyme]

I wonder if at some point if hel interest will not be tax deductible?
I remember a time when credit card interest was deductible.

[anonymous_saver]

I just got off the phone with my CPA and he recommended taking out a home equity loan to pay off the student loans. I would than be able to write off the entire amount I pay in taxes with the HELOC. What do you guys think?

I think this would be a horrible idea. You are able to pay off these school loans off in a relatively low amount of time. No reason to put your house in jeoperdy.

I think you are fine with your previous plan instead.

[Broken Arrow]

I think this would be a horrible idea. You are able to pay off these school loans off in a relatively low amount of time. No reason to put your house in jeoperdy.

I think you are fine with your previous plan instead.

Ditto!

You mentioned in your very first post that your student loan is fixed at 4.5%, and that you can pay it off in 3-4 years. That in itself is a pretty sweet deal already. No need to put your house on the line for a tax write-off.

[m3racer]

Ditto!

You mentioned in your very first post that your student loan is fixed at 4.5%, and that you can pay it off in 3-4 years. That in itself is a pretty sweet deal already. No need to put your house on the line for a tax write-off.

Even if those deductions are thousands?

[disneysteve]

Even if those deductions are thousands?

The rate on the HELOC, even after the deduction, will probably still be over 4.5%, so you wouldn't be saving anything. Plus there are costs associated with taking out the HELOC.

I don't think you are going to find a better deal than 4.5%. I'm not quite sure what the CPA was thinking here.

[greedy4chips]

I wish I could take out a $240,000 HEL loan! I think my banker would have a laughing attack if I approached them, since our house is worth less than that.

If you can get a HEL for the same term length and the interest rate is no more than 5% you will come out ahead figuring in the tax deduction. (Your income level is too high to deduct interest on your student loans, I assume)

Look at your taxes from this year and see how much your refund/owe would change if you had $10,000 in interest to deduct. $10,000 is the approx 1st year interest on a $240000 loan at 5% for 4 years. Depending on what your adjusted gross income is you would get an additional 25-33% of that interest back.

So what does the extra .5% cost you? $55/month in additional interest that is not tax deductible. So if you can get anything above $660/year in a tax deduction by going with the HEL then go ahead and do it.

Just remember you cannot extend the Loan period or else the numbers won't work. Are you positive you will remain in that home for the full term of the HEL?

With all that said, I agree with disneysteve that you will be lucky to find a HEL with an interest rate low enough to make the move worthwhile. Any HEL above 6% will cost you money if your AGI puts you in the 25% bracket or lower, above 7.5% will cost you money if your AGI puts you in the 33% bracket or lower.

I just don't see the numbers working in your favor.

Ask the CPA to prove his point and then present that to us. If you find his numbers jive and create a profit for you then by all means do it. But I think you will see he wants you to pay your student loans off over many years and invest the difference. CPAs are really pushing the HEL to get people to invest in the market these days. Now that's what I call "betting the house".

[bigsaver]

At 4.5%, I would personally make the minimum payment. My loan is at 3%, and I just make the minimum payments since I invest the money at a higher rate in roth and 401k which I max out each year.

[b4freedom]

The reason that your CPA tells you this is because you probably don't qualify for the tax break that Student Loans potentially provides.

Your risk is this: Your interest rate isn't fixed so you could end up paying a lot more in interest.

However, it all depends on the terms. It's hit or miss. If you plan on paying of the HELOC but lock in your rate or have it capped and the tax savings will far outway the interest paid every year, then it might be worth it.

But, basically, we're all just guessing because we don't actually have numbers to calculate various financial options and most of the people here don't make enough to worry about losing certain tax deductions so it's not even a thought. If my CPA looked at my numbers and said, "Your tax savings will outsave your interest paid" I'd do what he said, assuming he compared it to all options (like investing). I'd also make sure he wasn't refering me to the banker and making additional profit in the form of a referal.

I'm assuming that you make over $115k. Cause things start getting wierd with tax law over $115k.

[disneysteve]

Your risk is this: Your interest rate isn't fixed so you could end up paying a lot more in interest.

OP didn't say CPA recommended a HELOC. He said home equity loan. That would have a fixed interest rate.