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Old 05-27-2011, 06:51 AM   #21
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I'd pay it off and be done with it for the purely emotional reason that I loathe owing money and making payments.

It has more to do with a sense of independence than anything else because my future options and opportunities are then limited by the amount of debt and the interest I've committed to pay on it.

And it's nice to know that I don't owe nobody nuttin'.
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Old 05-27-2011, 07:58 AM   #22
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Once I got out of graduate school and landed a job, I attacked credit card debt, car loan, and student loans. I got them paid off within a year or so and the feeling thereafter, once all were paid off, was excellent. If nothing else, you feel like you just gave yourself a big raise since there are no longer any payments. And that raise can go towards saving for ER if you like.
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Old 05-27-2011, 09:07 AM   #23
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Before you pay off your debt, you should really look at refinancing it at a lower interest rate. If I recall current student loan rates correctly, you could probably cut your interest rate in half, if not less. Paying 3.4% would be a great deal less tempting to pay off with cash that could be put to work (or invested in blue chip stocks with dividend yields that are around that percentage).
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Old 05-27-2011, 09:10 AM   #24
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@F. Scott Fitzgerald: The counterpoint I've been looking for! I'll ask my school's financial office re: refinancing at a lower rate before I make the jump. Thank you.
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Old 05-27-2011, 09:43 AM   #25
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Originally Posted by Texas Proud View Post
To the OP...

I am one that trys and balances the interest rate with the other options... to me 6+% interest is pretty high for me as debt... sure, I might be able to make more investing the money, but as pointed out by someone else it is not risk free... paying off this debt is a risk free 6.8% return...

If I could get the debt refinanced to the low 4s... or even in the 3s, I would keep the debt and invest my money in stock funds...
This was always my mindset when it came to figuring out whether to pay off debt or not, as well as whether to incur any new debt.

On a much smaller scale compared to the OP, I had an unexpected windfall in the first few months after I graduated from college in 1985. I had student loans of only $8,100 (still a fair sum back then) but somehow discovered I still had about $5,000 in an old custodial bank account I had forgotten about. Before the 6-month grace period expired to begin repaying the loan, I paid off $5,000 of the loan to not only lower my interest expense (the loan was about 8% and the interest was still tax-deductibe althouth the 1986 Tax Reform Act would soon phase that out) but to also lower the amount of the monthly payment.

I was still building up my own savings which were in a simple bank account at the time (I was not yet into serious investing yet, so an implied "return" of 8% looked really good!).

But getting more than halfway to paying off the loan was crucial in the middle of 1987 when I was able to pay the rest of it (less than $3,000) off, something I would not have been able to do if the outstanding balance had been higher. By then, I had already learned that the interest deduction was being phased out.
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Old 06-02-2011, 09:43 AM   #26
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I would never go out and borrow money ( even at 3-4%) to go invest it in the stock market. Even if you could refinance to a lower rate it makes more sense to me to pay off the debt. I had over $40,000 in student loan debt also when I finished school. It was such a freeing feeling to get that paid off. Nothing beats being debt free! My advice - write the check and don't look back. You'll be glad you did.
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Old 06-02-2011, 11:39 AM   #27
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Interest on student loans is tax deductible.You don't need to itemize - it's an above the line adjustment. At a 25% marginal tax rate real interest cost is 5.1%.

Student loans are an excellent way to build a strong credit rating. I would keep $10K or so of loans, refinance over 10 years, put enough cash in a bank account to cover the payments, and set up autopay. Curent tax savings and savings down the road on mortgage and auto loans should more than offset the current additional interest cost.
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Old 06-02-2011, 11:54 AM   #28
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I would pay them off. I paid off my student loans early even though the interest rate was much lower than yours. There's an intangible benefit to being debt-free, at least to me.
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Old 06-02-2011, 12:17 PM   #29
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Thanks to both of you for the helpful advice. If the interest rate were lower, I might try to beat it, but I really have no expectations of beating 6.8% (especially since I have to pay off loans with after-tax money...) so I think I might just go for it. I'm still open for contrary opinions if anyone has their reasons. Thanks!
You may want to wait a few years just in case they are forgiven or adjusted in the same manner as mortgages.
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Old 06-02-2011, 04:30 PM   #30
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@Texas Proud: Makes sense. I wouldn't take out a 6.8% loan to invest in the stock market, but I might do so with a 3% loan.
I had no idea you could still refinance student debt. I think the 30-year sweet spot between good debt & bad debt is somewhere around 4-5%.

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I would never go out and borrow money ( even at 3-4%) to go invest it in the stock market. Even if you could refinance to a lower rate it makes more sense to me to pay off the debt. I had over $40,000 in student loan debt also when I finished school. It was such a freeing feeling to get that paid off. Nothing beats being debt free! My advice - write the check and don't look back. You'll be glad you did.
You're saying to pay off the debt because you sleep better at night. That's an emotional basis for the issue. "Cautious" asked a question about beating the carry in the stock market. That's a logical basis for the issue.

Either one of those perspectives is a valid manner to address the question, and neither one is wrong. The problem comes when people make logical decisions and feel bad about them, or when they make emotional decisions and later decide that they weren't logical. He doesn't seem emotional about the subject, so it's appropriate to answer him in terms of the financial logic.

Another reason to pay off the student debt would be to lock up all that loose capital before you (or one of your loved ones) decide to do something stupid with it. Doesn't seem to be an issue here... yet!
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Old 06-02-2011, 04:38 PM   #31
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Originally Posted by Jay_Gatsby View Post
Before you pay off your debt, you should really look at refinancing it at a lower interest rate. If I recall current student loan rates correctly, you could probably cut your interest rate in half, if not less. Paying 3.4% would be a great deal less tempting to pay off with cash that could be put to work (or invested in blue chip stocks with dividend yields that are around that percentage).
Can government loans be refinanced with new government loans, or only private loans? I wold be very unlikely to trade a government loan for a private lender loan.

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Old 06-03-2011, 06:47 AM   #32
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I just obtained ~$150,000 from a one-time event. Now I'm trying to figure out what to do with this money. I have no debts except for a $50,000 federal graduate student loan at 6.8%. My income otherwise is $50,000/year.

I plan to invest a substantial portion of this money in ETFs, largely index funds such as SPY but also some higher risk ETFs (not leveraged, just more segment-focused).

I've read up on advice about student loans, but my federal graduate student loan interest rate (6.8%) seems to be quite a bit higher than what most people here have discussed, so I'd like to ask for your thoughts on what I should do with regard to my student loans. Should I accelerate the payment by some fraction, or should I just pay them all off? The minimum payment is ~$600/month.

Thanks!
You didn't say if you are a homeowner. I like a lot of the comments of being debt free and it is wise to seek out different opinions. Try to keep in mind, however, that the younger generations with their 50 or 100 or even 250 thousand in student loans are in uncharted territory. No generation in history has dealt with that type of debt and so your kind of on your own on these decisions. I know what I would do if in your position. I would buy a 150k foreclosure, paying cash. It would be a no brainer for me. I doubt many on this site have made their wealth by buying stocks. Don't get caught up in interest rate or inflation discussions when trying to build wealth. People get wealthy under all scenarios of environments.
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Old 06-03-2011, 08:54 AM   #33
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You didn't say if you are a homeowner. I like a lot of the comments of being debt free and it is wise to seek out different opinions. Try to keep in mind, however, that the younger generations with their 50 or 100 or even 250 thousand in student loans are in uncharted territory. No generation in history has dealt with that type of debt and so your kind of on your own on these decisions. I know what I would do if in your position. I would buy a 150k foreclosure, paying cash. It would be a no brainer for me. I doubt many on this site have made their wealth by buying stocks. Don't get caught up in interest rate or inflation discussions when trying to build wealth. People get wealthy under all scenarios of environments.

Since this is your second post.... you have not read a lot I guess...

From the reading that I have done, the vast majority of people have made their wealth from buying stocks... they are LBYM types that save.. BUY STOCKS and it grows....

The second most that I have read is real estate...

Not sure of third, but I would bet it is grow a company and sell....
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Old 06-03-2011, 04:51 PM   #34
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Since this is your second post.... you have not read a lot I guess...

From the reading that I have done, the vast majority of people have made their wealth from buying stocks... they are LBYM types that save.. BUY STOCKS and it grows....

The second most that I have read is real estate...

Not sure of third, but I would bet it is grow a company and sell....
I wasn't giving advice, just giving an alternative opinion that had yet to be given. I like real estate. Putting 100K in the market at one time, especially when it represents 200% of your annual income , is not something I would do at these prices. He has a good problem nonetheless.
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Old 06-03-2011, 05:40 PM   #35
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...
Another reason to pay off the student debt would be to lock up all that loose capital before you (or one of your loved ones) decide to do something stupid with it. Doesn't seem to be an issue here... yet!
Darn. I was just going to say something about taking all that money and going out and buying a nice fancy car. Or better yet, putting it as a downpayment on the car and then taking a vacation. You know, live the high life for awhile because you deserve it.
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Old 06-03-2011, 08:55 PM   #36
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Divide the 150k into 3 x 50k parts.

1) take the first 50k and divide it into 2x 25k. Put 25k into shorter term CDs as your emergency fund. Put the other 25k into a broad index ETF like VTI or SCHB.
2) take 50k and use it as a down payment on a home (assuming you are not yet a homeowner). Get a loan for the rest, with payments no larger than $600 per month PITI, perhaps up to about 100k principle on a 30 year loan.
3) pay off the student loan

In the end, your student loan is gone, you are a homeowner, the amount of money you spent servicing the student loan now goes to service a much more efficient home loan. You have a 6 month rainy day fund. You take the money you save on your current housing situation, and begin investing in earnest. At your age, I would go with an asset allocation of 90/10 or 80/20 equity/fixed (not including the emergency fund).

Good luck!

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Old 06-06-2011, 12:41 PM   #37
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I just obtained ~$150,000 from a one-time event. Now I'm trying to figure out what to do with this money. I have no debts except for a $50,000 federal graduate student loan at 6.8%. My income otherwise is $50,000/year.

I plan to invest a substantial portion of this money in ETFs, largely index funds such as SPY but also some higher risk ETFs (not leveraged, just more segment-focused).

I've read up on advice about student loans, but my federal graduate student loan interest rate (6.8%) seems to be quite a bit higher than what most people here have discussed, so I'd like to ask for your thoughts on what I should do with regard to my student loans. Should I accelerate the payment by some fraction, or should I just pay them all off? The minimum payment is ~$600/month.

Thanks!
You didn't say how old you were, but for the sake of argument, let's say 25. If you believe in the stock market returns of 9% with a 60/40 mix then your money will double 5 times turning your 150K into 4.2 million at age 65. Your done, you just won the game. Of course you will have to pay 500K to a million bucks in taxes on all those capital gains. The student loan becomes an after thought. Some will say not to put all your eggs in one basket. At a young age, I disagree. Personally, I still like my foreclosure idea, but either way I would not pay off the loan.
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Old 06-06-2011, 05:41 PM   #38
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You didn't say how old you were, but for the sake of argument, let's say 25. If you believe in the stock market returns of 9% with a 60/40 mix then your money will double 5 times turning your 150K into 4.2 million at age 65. Your done, you just won the game. Of course you will have to pay 500K to a million bucks in taxes on all those capital gains. The student loan becomes an after thought. Some will say not to put all your eggs in one basket. At a young age, I disagree. Personally, I still like my foreclosure idea, but either way I would not pay off the loan.
I was being facetious with the stock analogy. Just to be clear.
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Old 06-08-2011, 07:43 PM   #39
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I'd pay off any loan when I could go out the same day and easily beat the interest rate on said loan with a different loan. OP, Your loan interest rate is an example of this, even if adjusted for the tax deduction. My bank would give me 2.49% for a car loan. What are house loans these days (15-yr), 3.7%ish? That pretty much covers the expensive stuff (that would justify a large debt). Ok, well there's education debt like yours, but again, your rate isn't low.
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Old 06-08-2011, 08:43 PM   #40
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Originally Posted by cautious
I just obtained ~$150,000 from a one-time event. Now I'm trying to figure out what to do with this money. I have no debts except for a $50,000 federal graduate student loan at 6.8%. My income otherwise is $50,000/year.

I plan to invest a substantial portion of this money in ETFs, largely index funds such as SPY but also some higher risk ETFs (not leveraged, just more segment-focused).

I've read up on advice about student loans, but my federal graduate student loan interest rate (6.8%) seems to be quite a bit higher than what most people here have discussed, so I'd like to ask for your thoughts on what I should do with regard to my student loans. Should I accelerate the payment by some fraction, or should I just pay them all off? The minimum payment is ~$600/month.

Thanks!
Interesting, you can use firecalc to compare different results. Neat tool. If you pay off the loan and invest the 100K in a 60/40 mix for 30 years, the average end value is 422k. If you invest 150K in the same way, the average end value is 633k. You would then subtract the total loan expense from the 633K. BUT if you pay off the loan, invest the 100K AND add 7200/year, the average end value is 942,000. Looks like I gotta eat some crow.
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