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Just got a pile of cash; should I pay off student loans?
Old 05-26-2011, 12:41 PM   #1
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Just got a pile of cash; should I pay off student loans?

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!
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Old 05-26-2011, 12:46 PM   #2
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By paying off your loan you will be "earning" a risk-free 6.8% per year on the $50k loan amount, and that's hard to compete with from an investment/risk standpoint. I say pay it off and be debt-free.
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Old 05-26-2011, 12:48 PM   #3
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Seems like freeing up $600/month on a salary of $50k/year would create a lot of flexibility with regards to other opportunities that might arise.... and at nearly 7% interest, I'd be keen on refinancing that or paying it off outright. This is especially true given the difficulty of discharging student loans if it ever came to having to declare bankruptcy.
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Old 05-26-2011, 12:54 PM   #4
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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!
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Old 05-26-2011, 01:04 PM   #5
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I would definitly pay off the loans in full. Are you a home owner? If you aren't and you expect to stay in the same area for several years, then i'd use some of it for a 20% down payment. Otherwise, I don't think you can go wrong investing it long-term in index funds like you already suggested.
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Old 05-26-2011, 01:14 PM   #6
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I'm still open for contrary opinions if anyone has their reasons. Thanks!
Parties where your friends are complaining about student loan payments will be awkward. You can't exactly commiserate with them and you'll be a social pariah if you say "well, I owed $50k but I was tired of paying it so I wrote a check for the full amount."

You'll miss out on deducting the interest on your taxes.... if you manage to get over the standard deduction and itemize, that is.

You'll no longer have the benefit of using the department of ed's awesome, blazing fast, state of the art website to service your loan.

Owing money to the government means you'll always have someone that cares looking out for you willing to hunt you down no matter where you move.

An extra $600 a month can go straight to someone's head. That's a loaded mid-size sedan payment right there. You could afford to order of the McD's dollar menu 600 times more per month! Who can handle choices like that?!?
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Old 05-26-2011, 01:16 PM   #7
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@Webzter: Playing both sides now, ehh? The social and intellectual benefits that you've pointed out actually far outweight the financial gain of paying this off early, I've now concluded!
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Old 05-26-2011, 01:47 PM   #8
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I'm still open for contrary opinions if anyone has their reasons. Thanks!
OK, I'll throw out one, but by no means take this as a recc one way or the other - it's just ONE consideration:

As I understand it, student loans are forgiven at death. So one factor in your decision, to make this more apples-apples, would be to consider the added cost of $50,000 of life insurance. Because paying off the loan and passing would leave your estate $50,000 poorer. The life insurance would null that out.

Probably a small factor, and maybe only a paper calculation if you have no one to leave money to. Overall, at 6.8%, I'd lean to paying it off since you would still have the $100,000 in liquidity. And I'm one of the apparent minority on this forum who has no fear of moderate amounts of debt, as long as the rates are low and liquidity is not compromised.

-ERD50
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Old 05-26-2011, 01:57 PM   #9
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And I'm one of the apparent minority on this forum who has no fear of moderate amounts of debt, as long as the rates are low and liquidity is not compromised.
I'm one of those who is not afraid of "good" debt. "Good" debt will make you money in the future. Is your student loan "good" debt? IMHO it was "good" when you took out the loans as it enabled you to complete your education. If your education is now completed, that debt has no future value. This is a great opportunity to say goodbye to it.
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Old 05-26-2011, 02:00 PM   #10
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@ERD50: thanks for the additional consideration. I'm under 30 and single, so the life insurance wouldn't benefit any real dependents.

@Meadbh: technically I still have a bit of time left before I complete the degree; my situation is highly unusual. I can't quite see how the question of whether or not my education is completed changes the calculus. I agree with the gist of your statement but am not sure if I'm missing some material difference here.
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Old 05-26-2011, 02:03 PM   #11
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Originally Posted by ERD50 View Post
OK, I'll throw out one, but by no means take this as a recc one way or the other - it's just ONE consideration:

As I understand it, student loans are forgiven at death. So one factor in your decision, to make this more apples-apples, would be to consider the added cost of $50,000 of life insurance. Because paying off the loan and passing would leave your estate $50,000 poorer. The life insurance would null that out.

Probably a small factor, and maybe only a paper calculation if you have no one to leave money to. Overall, at 6.8%, I'd lean to paying it off since you would still have the $100,000 in liquidity. And I'm one of the apparent minority on this forum who has no fear of moderate amounts of debt, as long as the rates are low and liquidity is not compromised.

-ERD50

I don't mind a moderate amount of debt....

I got zero percent for furniture purchase for 4 years...

I got 4.?% for a car loan for 6 years...

I got 4.5% for a house loand for 30 years...


The only negative was that my credit rating took a big hit when all three of these were taken out within one year... my average length of open accounts dropped a lot... but, it has been going back up so no long term problem...
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Old 05-26-2011, 02:06 PM   #12
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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...
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Old 05-26-2011, 02:07 PM   #13
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And I'm one of the apparent minority on this forum who has no fear of moderate amounts of debt, as long as the rates are low and liquidity is not compromised.

-ERD50
Well, really, that was the basis for my rec to pay it off. On a $50k salary, a $600/month loan payment is a significant cashflow hit. And, since you can't wipe out a student loan in bankruptcy*, it's sort of "there" no matter what.

If it were a lower interest rate, or a smaller percentage of monthly pay, I'd likely advise differently (although, in full disclosure, we paid off the remaining $3k we owed on student loans even though the $116/month it freed up was not significant)

* from my limited look at it and limited understanding of bankruptcy law
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Old 05-26-2011, 02:15 PM   #14
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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.
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Old 05-26-2011, 02:41 PM   #15
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I would pay it off. You took out the loan because you did not have the money for the education at the time. Now things have changed.

My daughter had almost that amount in student loans. Now she has under 20k which we together will pay off within about a year.

It is a good feeling to be working down the balance.
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Old 05-26-2011, 03:30 PM   #16
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I would pay it off. I am carrying much more student loan debt than that, but mine is at 0.75% fixed for 30 years. At 6.8% you are getting a risk free 6.8% return. Double what you would get from a bond fund right now, and not too much lower than what some say you'll get from stocks long term.
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Old 05-26-2011, 03:37 PM   #17
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Eh, you're young, pay off the student loan--you'll still have $100K to invest and plenty of time to sock away/invest the equivalent loan payments (i.e., you'll recoup that $50K in no time, it's hoped). If you were almost at retirement and living off your investments, keeping the cash might make sense, but imho not at your age.
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Old 05-26-2011, 05:34 PM   #18
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It looks like the winner is paying off my debt. Thanks for the input, everyone!
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Old 05-26-2011, 05:48 PM   #19
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I think using some of the money to pay off the debt is the best idea. You will then be debt free!
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Old 05-26-2011, 06:11 PM   #20
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@Meadbh: technically I still have a bit of time left before I complete the degree; my situation is highly unusual. I can't quite see how the question of whether or not my education is completed changes the calculus. I agree with the gist of your statement but am not sure if I'm missing some material difference here.
It's about utility.

X years ago you really needed an education, and you didn't have any money. Therefore the utility of borrowing the money at 6.8% interest was high.

Now you've got the education, and you have money, too! Today, would it be worth your while to borrow money at 6.8% to get the education that you already have? I think not.

Pay off the loan and you will start your career debt free. That has a high utility for someone hoping to ER some day!
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