Need advice

[Uneventoast]

Long Time Lurker, First Time Posting

I am at a loss on how to proceed with my finances, I cannot decide whether to pay off my student loans or to keep them as invest my money and enjoy life.

I am refinancing my home at the end of this month. I will have a 5% interest rate over 30 years and my monthly payment will be $600 a month. My principal on my home will be $112,000.00. My student loans are currently $390/month, 6% interest, and I owe somewhere around $56K on them. We do not have any credit card debts and we just paid off our second car. Our net take home pay is $4700 and I currently invest $200 after taxes in an IRA. My wife invests 10% of her pre-tax income in a 401K. I couldn't invest into my employers 401K until I have been there fore one year and that isn't until March and he doesn't match. My wife has $16K in her 401K (25K before the drop in the market) and I have $2500 in my IRA. She is also a state employee and has a retirement system with the state. We will have $5000 in a money market account and our plan is to fully fund it with 6 months of living expenses which will be an additional $5,800 which we plan to accomplish in the next three months.

I know that there is strong argument for paying off the student loans so we will be debt free(excluding the mortgage) but I have also read financial advisers and prognosticators say that low interest debt which can be written off your taxes is good debt and you should keep it because it allows you an opportunity to invest more.

My plan is to invest an additional 300/month into my IRA and my wife to increase her contribution to 15%. Save back money each month so we can purchase consumer goods with cash.

I have mixed feelings because I read a lot of personal finance blogs and listen to Dave Ramsey and they recommend stopping our retirement investments and pay off the student loans as soon as possible.

I don't know if there is a correct answer to this situation but I would love everyone's comments on what we should do.

[beenster]

Easy answer from my perspective pay off your student loans, this is a guaranteed 6% return on your money which is very hard to do under recent market conditions, the key is to pay it off quickly i.e 2-3yrs max, you can do it!

[jIM_Ohio]

I doubt with a mortgage payment of $600/mo you are getting any tax advantage- that is a guess though.

When will house be paid off? How many years had you paid on the old mortgage? What was the old mortgage payment?

How old are you?
What age do you intend/want to retire?
How much is invested for retirement now?
How aggressive is the investment portfolio?

I would suggest 20 percent of gross to savings.
15 percent to retirement.
5 percent to short term financial needs (which might be earlt debt repayment).

[Uneventoast]

We just moved into the home less than two years ago. There is a local bank that is offering $250 closing cost with no other fees or cost to refinance your loan. My loan was at 5.875 but with additional $5K we are putting down we are saving $200/month in interest and PMI.

I am 34 and my wife is 29. I don't plan to retire until I'm 65 because to be honest I like to work. I love my job and although it can be mentally fatiguing at times it is not very stressful.

For 08 tax year we had almost 7K in interest, a little over 1K in PMI. It is not a lot but with our income it does help.

Both of our investments are aggressive because we don't plan to retire for at least 25 years. She may "retire" a lot sooner but I doubt I will.

[jIM_Ohio]

with 7k of interest, what else was included to get itemized deductions above 11k?

7k interest
prop taxes?
state taxes?
local taxes?

what is your taxable income?

[Uneventoast]

I did a test run of my taxes today and I believe my state taxes were approximately 4K in state taxes, 1440 in property taxes and almost 4K in student loan interest and 1450 in local taxes.

I didn't include my local taxes, are those tax deductible?

[jIM_Ohio]

You are probably close to losing the benefit of deducting interest from mortgage- what was the total on schedule A? I think 13k, but that is using your estimates above.

Married or single? This also depends on income (what bracket are you in?).

[Uneventoast]

I'm not sure but our tax bracket may be 15%, married with a child on the way so I am sure 09 taxes will be better

[creditcardfree]

I would attack those student loans with any extra money you have. $56K is quite a bit and I would want that off my plate. Continue to invest at 10% and bump up the EF, too.

[jIM_Ohio]

Your not going to gain much in taxes based on your current bracket- do not use taxes as the reason to keep debt.

If you earne more money (more than 80k) this advice would change.

[Bernz]

I'd say at your age, you should take care of that student loan as much as you can after mortgage, 401k, and household expenses. I commend you for not owing anything on credit cards.