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What would you do - pay off student loan or pay down mortgage?
Old 07-26-2009, 12:34 PM   #1
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What would you do - pay off student loan or pay down mortgage?

I'm trying to decide if I should pay off my final student loan or pay down my mortgage. Here's my situation:

Student Loan
Balance $12,000, 3% interest, not tax deductible, 118 months left

Home Mortgage
Balance $243,000, 5.25% interest, tax deductible, 357 months left

I'm in the 25% federal tax bracket and 7% for state. Is mortgage interest a tax deduction for state taxes?

If you had $12,000 to pay off debt what would you do in this situation?
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Old 07-26-2009, 01:22 PM   #2
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Pay off the mortgage. If you have drama student loan can be deferred for hardship, plus it's not backed by the roof over your head.
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Old 07-26-2009, 02:09 PM   #3
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Mortgage........If I had a 3% interest rate on any type of loan, I would be smiling everytime I made a payment.
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Old 07-26-2009, 02:37 PM   #4
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Hum logically I would go for the mortgage. But, paying off the student loan would have an immediate effect on your monthly cash flow while paying down the mortgage would not (unless you refinance). So I'd go with paying off the student loan.
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Old 07-26-2009, 02:45 PM   #5
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I agree with FIREdreamer with the addition that I would send what used to be your student loan payment to the mortgage company directed at principle to pay it down sooner.

DD
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Old 07-26-2009, 02:49 PM   #6
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You really can't go wrong. If you decide to pay off your student loan now, then I would suggest applying the student loan monthly payments (which will no longer be necessary) to your mortgage after they accumulate for a while.

If you apply $12,000 to your mortgage you will probably shorten your mortgage by about three years, I think? Check a mortgage calculator to make sure, such as the one at http://www.bankrate.com/calculators/...alculator.aspx which allows you to put in a one time payment like this.
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Old 07-26-2009, 03:15 PM   #7
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Basically apples and oranges from a rate perspective. I wouldn't pay down either, personally, but if you are wedded to debt reduction rather than liquidity/asset increases with the money, I would kill the student loan. Student loans cannot go away via BK and a 12k paydown on the mortgage does nothing for your cashflow on a monthly basis.
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Old 07-26-2009, 04:00 PM   #8
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Hum logically I would go for the mortgage. But, paying off the student loan would have an immediate effect on your monthly cash flow while paying down the mortgage would not (unless you refinance). So I'd go with paying off the student loan.
This is how I've been looking at it too so I'm leaning towards the student loan. It would be nice to get rid of the account too and owe money to one less institution.
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Old 07-26-2009, 04:03 PM   #9
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If you are determined to pay off one, I'd probably do the student loan only because you can improve your cash flow a lot more by completely eliminating a monthly payment and because they don't go away in bankruptcy.

Having said that, I can't get too excited about paying down a 5.25% deductible loan or a 3% loan regardless of deductibility. I don't think I'd do either, especially if I didn't have a rock solid emergency fund already.
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Old 07-26-2009, 04:17 PM   #10
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Having said that, I can't get too excited about paying down a 5.25% deductible loan or a 3% loan regardless of deductibility. I don't think I'd do either, especially if I didn't have a rock solid emergency fund already.
Would you invest in a taxable account before paying down the mortgage? I'm excited to become debt free even though I'm still many years off
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Old 07-26-2009, 04:42 PM   #11
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Originally Posted by FIREdreamer View Post
Hum logically I would go for the mortgage. But, paying off the student loan would have an immediate effect on your monthly cash flow while paying down the mortgage would not (unless you refinance). So I'd go with paying off the student loan.
I agree with above,
118 months left is what I was looking at
any money used to pay down mortgage is tied up

there is a third hidden option
invest the 12k conservatively (enough to beat the 3% student loan interest though) and keep liquidity on your side.
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Old 07-26-2009, 07:52 PM   #12
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If you have no emergency fund, I would turn the $12K into one. Invest it in something liquid and safe.

If you already have an adequate emergency fund, I vote for paying down the student loan for the reasons already stated.
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Old 07-26-2009, 08:59 PM   #13
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Would you invest in a taxable account before paying down the mortgage? I'm excited to become debt free even though I'm still many years off
I would invest the money (and have, since my mortgage and student loan rates are similar to yours).
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Old 07-26-2009, 09:03 PM   #14
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I agree with FIREdreamer with the addition that I would send what used to be your student loan payment to the mortgage company directed at principle to pay it down sooner.

DD
I vote this too--get rid of the smallest loan completely first (it will feel great) and then your mortgage balance will start shrinking too as you apply the student loan payment amounts to it.

And if things get tight you can always stop sending the additional amount to the mortgage co.
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Old 07-26-2009, 09:36 PM   #15
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I'd kill for a 3% loan.

OK, if it is just $12,000, I'd only maim for it. But I sure can't understand paying it off.

-ERD50
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Old 07-26-2009, 09:42 PM   #16
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I'd kill for a 3% loan.
What would you invest it in?
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Old 07-26-2009, 09:55 PM   #17
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What would you invest it in?
You need to review your total AA to answer that. But I will say that I just don't buy the argument that it must be invested in something 100% "safe". People will say that since paying off the loan can be considered 100% safe, any investment with that money must be also. That does make it apples-apples, but...

the logical extension of that is that no one should invest a penny in anything (other than an emergency fund), until they are 100% debt free. So, if you are taking that approach with your other debt also, then at least you are being consistent. I can't say if one approach is right or wrong, but I can say that one approach is inconsistent.

-ERD50
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Old 07-26-2009, 10:02 PM   #18
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Would you invest in a taxable account before paying down the mortgage? I'm excited to become debt free even though I'm still many years off
I don't have a student loan, but I could payoff my mortgage tomorrow if I wanted. Instead, I made the choice to invest the money like Brewer did. I am in no hurry to tie up a lot of money in my house and I am thinking that if hyper inflation is truly building up in the pipeline, I'd rather repay my mortgage with much cheaper dollars down the road. But if becoming debt free is really your goal, then you should go for it.
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Old 07-26-2009, 10:28 PM   #19
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You need to review your total AA to answer that. But I will say that I just don't buy the argument that it must be invested in something 100% "safe". People will say that since paying off the loan can be considered 100% safe, any investment with that money must be also. That does make it apples-apples, but...

the logical extension of that is that no one should invest a penny in anything (other than an emergency fund), until they are 100% debt free. So, if you are taking that approach with your other debt also, then at least you are being consistent. I can't say if one approach is right or wrong, but I can say that one approach is inconsistent.

-ERD50
This is the approach I'm taking:

1. Max out tax deferred accounts
2. Pay off debt
3. Invest in BMW taxable accounts

If I was close to retirement, maybe I would move #3 ahead of #2. However, I'm more than 20 years away so I have a lot time to build a solid nest egg in my tax deferred accounts.
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Old 07-26-2009, 11:09 PM   #20
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Bank5 - I agree with FIREdreamer's first post above. If you are going to pay off anything, pay off the student loan, which will increase your cashflow, which you can use to invest, pay down the mortgage, or once in a while just indulge yourself.

I agree with your 1-2-3 approach above, in principle, and if you are really mortgage averse. However, if hyper inflation does hit, you would want to have the mortgage. On the other hand, if you are like me (completely debt averse and love the feeling of having the roof over my head paid off) then eat away at the mortgage as well, after you knock out the student loan (for improved cash flow).

Just my two cents...

R
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