Pay down debt or invest?

**jIM_Ohio** · 02-25-2010, 07:44 AM

Originally posted by JonAtUD View Post

Hi everyone,

I'm going to be graduating my MBA program in a few months. I hope to be earning about $80K...and I estimate I'll have $30K per year to save/invest/whatever.

I feel like I'm drowning in student debt though. When I graduate, I'll owe about $150K total in student loans. Fortunately the interest rate is low...about 6.5% on average. But I'll still be paying about $1700 per month as the minimum loan payment for the next ten years.

I know I could probably earn a higher interest rate than 6.5% if I invested my excess money elsewhere...but would I be better off to pay down my debt until it is a reasonable level? I'm very worried about what this level of debt will do to my credit rating, and what might happen if I should be out of work for even a short time.

What would you suggest - Invest the money at the highest-return investment I can find, or pay down some of my debt?

YES

If you have 30k per year to invest or save...

Make sure 20% of gross minimum is saved (20% of 80k is 16k per year).

I would allocate it like the following
a) 15% to retirement accounts
b) 5% to savings accounts (emergency fund) once this is 6 months expenses, move this to a) or c)
c) pay extra on the debt to reduce payment from 10 years to maybe 6 or 8 years.

**JoshuaHeckathorn** · 02-25-2010, 07:14 PM

Congrats on the MBA! I remember asking myself the very same questions when I finished my program and was in a similar situation. I basically did what jim is suggesting, although I decided to invest a bit more in retirement up front. It makes me feel good to max things out, and the more you invest at an early age, the better.

So, if your new employer offers a 401K, you may want to max it out, enjoy the maximum tax savings, and hopefully receive a company match too. There goes $16,500. Throw 5% in a high-yield online savings account to keep building your EF, and that should still leave you with about $10K to make extra payments on the student loans.

**SmarterSpend** · 02-26-2010, 01:56 AM

I disagree with Jim because he is putting too much into retirement too early.

I believe you should reduce the percent into retirement funds to 10% and use the remainder to pay off debt in order to reduce interest and cut the time to 7-8 years.

Assuming you are in your 20s and 30s, you can move the number up to the 15% once your student loan is paid off.

**jIM_Ohio** · 02-26-2010, 03:41 AM

Originally posted by SmarterSpend View Post

I disagree with Jim because he is putting too much into retirement too early.

I believe you should reduce the percent into retirement funds to 10% and use the remainder to pay off debt in order to reduce interest and cut the time to 7-8 years.

Assuming you are in your 20s and 30s, you can move the number up to the 15% once your student loan is paid off.

No such thing as too much to retirement too early. The more you put in early the less you put in (the less it costs you) to actually retire.

other than that, decent advice. If OP only put 10% to retirement, that is not failure.

**snshijuptr** · 02-26-2010, 07:00 AM

It roughly depends on the type of student loans you currently have. If you are unemployed the federal stafford loans go into remission until you are employed again. That's just a useful FYI. And then after you start an Emergency Fund as my brother the financial planner told me when I was in the same predicament "I cannot guarantee you a 6.5% return on your investment." Basically if you want a safe guaranteed return on your investments, then you should payoff your loans. Of course if the choice is retirement, you may be getting a guarunteed return from an employer match. Also remember that you gain tax benefits from either loans of retirement. I say you figure out which in the next year or two will give you the biggest returns.

Also remember that your credit score only maatters when your ready to make a large purchase.

**SmarterSpend** · 02-26-2010, 11:58 PM

Jim, I agree with you in that aspect, but he has a dilemma here: if he invests more into retirement now, he is going to waste extra money paying off interest. This is why I proposed balancing the two.

**jIM_Ohio** · 02-27-2010, 07:29 AM

Originally posted by SmarterSpend View Post

Jim, I agree with you in that aspect, but he has a dilemma here: if he invests more into retirement now, he is going to waste extra money paying off interest. This is why I proposed balancing the two.

We each proposed balancing off the two.

Reality is this, he will pay interest unless he pays off all the loans in full before he puts a dime to retirement.

Anything in between (the compromises you and I each listed) suggest some retirement and some debt payoff. As long as the retirement investments "beat" the interest rate on the loans, more to retirement is the better "long term" financial plan. And its exponential for retirement savings- by this I mean 10% to retirement or 15% to retirement is a big big difference (could mean retiring as much as 10-20 years apart on same income). Paying extra on the debt is probably a difference of being student loan free in 10 years or in 5 years.

Without running numbers, tough to say for sure...
best to compromise and do some of both, but there is "no such thing" as investing too much to retirement too young. Many younger investors will need to invest in Roth when they are young, because its possible later in life a person makes too much to be eligible for that type of plan.

**Grant_Beehler** · 02-28-2010, 06:01 AM

Pay down debt is always my first option.

**Mike75** · 03-06-2010, 03:18 AM

Originally posted by JonAtUD View Post

Hi everyone,

I'm going to be graduating my MBA program in a few months. I hope to be earning about $80K...and I estimate I'll have $30K per year to save/invest/whatever.

I feel like I'm drowning in student debt though. When I graduate, I'll owe about $150K total in student loans. Fortunately the interest rate is low...about 6.5% on average. But I'll still be paying about $1700 per month as the minimum loan payment for the next ten years.

I know I could probably earn a higher interest rate than 6.5% if I invested my excess money elsewhere...but would I be better off to pay down my debt until it is a reasonable level? I'm very worried about what this level of debt will do to my credit rating, and what might happen if I should be out of work for even a short time.

What would you suggest - Invest the money at the highest-return investment I can find, or pay down some of my debt?

I have seen many such posts on this forum and have always advised that you pay-off your debt first. Being under debt puts extra pressure on our minds. Plus, the interest that you are paying, no matter how low it is, is just money down the drain as it is not giving you anything in return.

So, pay off the debt first.

**Penny Pincher** · 03-10-2010, 05:19 AM

All in all it comes down really to two things:

What will let you sleep better at night - short and long term. And what rates are you paying verses what rate can you earn.

**dannin** · 03-16-2010, 11:25 AM

I'd have to advise to pay off your debt. There is a certain peace of mind that comes with not having to worry about $150,000 in debt hanging over your head.

With the market gyrations going on right now, do you have a guaranteed plan that will beat the 6.5% interest you're paying on the loan?

**safari** · 03-16-2010, 11:39 AM

The numbers don't really make sense to me. If you will be making $80K a year, that would leave you with about $50K after all the taxes. Your student loan payment at $1,700 a month comes out to $20,400 a year, so you will be left with $29,600 to live on. How are you going to save $30K a year?

**fe2o3ez** · 03-24-2010, 08:26 AM

No matter what the numbers are, I say pay down the debt to get about 10-12 months ahead, whatever you are comfortable with. That way if you lose your income for any reason, you have some wiggle room.

Once you have that, then I would move towards Jim Ohio's suggestion of distribution.

**coach2wealth** · 03-26-2010, 10:31 AM

I vote to pay down the debt too.

1. There is no investment paying a GUARANTEED or RISK FREE return near 6.5 much less over and above it.
2. There is the risk cost of borrowed money.
3. There is the stress of debt.

Get aggressive on a tight budget and kill this baby before it grows up.

Pay down debt or invest?