Student Loan or ???

[green_goblin12]

I know this question gets asked a lot, but I'm always looking for another take on it.

Student loans and mortgage are only debt. Wife's loan is about $7,000 at 3.0%. Mine is about $12,000 at 3.125%. So low interest rates. On paper it makes sense to invest that money instead of pay these off. But I think the psychological boost would be huge, personally. Plus freeing up more cash for savings is appealing.

I'd like to attack the lower balance loan in the next few months, including putting our tax return towards it (which would otherwise probably go to fund 2nd Roth-first one fully funded.)

Thoughts??

[bjl584]

If your motivation is a psychological boost and one of a strategy to reduce your overall debt, then go for it. Knock out the smaller balance loan first then move on to the other one.

[disneysteve]

If it is a choice between funding the Roth and prepaying the student loans, go for the Roth. The Roth contribution limit is low and has a finite window. You can't ever go back and make up for missed contributions and you can never regain the value of compounding. By paying $3,000 to the loans now, you'll be missing out on many more thousands in retirement savings years from now.

I totally understand the psychological boost. I did prepay my student loans pretty aggressively but we were able to do that and still fund our retirement accounts fully.

[bjl584]

If it is a choice between funding the Roth and prepaying the student loans, go for the Roth. The Roth contribution limit is low and has a finite window. You can't ever go back and make up for missed contributions and you can never regain the value of compounding. By paying $3,000 to the loans now, you'll be missing out on many more thousands in retirement savings years from now.

I totally understand the psychological boost. I did prepay my student loans pretty aggressively but we were able to do that and still fund our retirement accounts fully.

Dave Ramsey advocates stopping retirement contributions until debts are paid. I don't really agree with that fully, but I can see certain instances where it may make sense. If someone is drowning in debt, then maybe halting 401K contributions would make sense. But, for someone not so bad off, it doesn't make sense.

By the way, I missed the part about choosing between Roth contributions and paying down the SL's. If OP can do both then great, but if he has to choose one, then I am with you and would rather fund the Roth.

[disneysteve]

Dave Ramsey advocates stopping retirement contributions until debts are paid. I don't really agree with that fully, but I can see certain instances where it may make sense. If someone is drowning in debt, then maybe halting 401K contributions would make sense. But, for someone not so bad off, it doesn't make sense.

I agree with you. That is one of several areas where DR's plan is too black and white when real life just isn't like that. Is it better to put money toward a 29.99% credit card than into a 401k? Absolutely. Is it better to put money toward a 0.5% car loan than a 401k? Not a chance. But Dave Ramsey would have both people stop their retirement savings to get the debt paid off because his system is based totally on behavior - not finance. I'm not saying that's a bad thing because bad behavior is what got most people into the mess they're in and changing that behavior is critical to fixing the problems. But for folks who understand what they're doing, there is a better way to go about it.

[jpg7n16]

On paper it makes sense to invest that money instead of pay these off. But I think the psychological boost would be huge, personally.

I always like to remind people that it doesn't have to be either only the SL or only the Roth. It can be both.

You obviously see benefits to both options, so split available money between the two.

It could be 50/50, 2/3 here 1/3 there, 80/20, etc. Then you get the benefits of both.

Plus freeing up more cash for savings is appealing.

Though I will say something about this...

I never understand the thought of "well I have cash now, and my goal is to save more cash to my Roth. Therefore, I'll pay this debt."

If your mind is saying, "but I can save the interest, which I'll then invest" then

I don't understand the thought, "On this $100, I could invest and earn $8 extra every year which I would invest, or I could save this $3 expense every year which I could then save. And I know that $8 > $3. Therefore, I'll pay down my debt."

I've just never understood this mindset - though I see it all the time.

[graceful]

I always like to remind people that it doesn't have to be either only the SL or only the Roth. It can be both.

You obviously see benefits to both options, so split available money between the two.

It could be 50/50, 2/3 here 1/3 there, 80/20, etc. Then you get the benefits of both.

I totally agree. Another thing about an either or decision is that if you have a hard time making up your mind, guess what? Most people wind up doing NEITHER. Worse, for some people that money somehow gets spent in the meantime.

If you can't decide WHICH choice is the best, split it between the 2 and you can always change the future allocations later now if you start leaning towards one way strongly. The key to the start something NOW.

Good luck!

[green_goblin12]

Thanks for the replies.

While financially paying off the loans doesn't make as much sense, I think the security of not having this debt is worth something. When I think about the possibility of job losses or some other major event, I want to be in a position where I don't have to worry about paying debts. Yes we have an emergency fund, and our jobs are relatively secure, but I still worry.

I still plan on opening another Roth and funding it to some level. So I will likely split between the two.