Should I postpone investing to pay off student loans

[amh031000]

I've been running the numbers to see if it would make sense to temporarily (15 months max) divert my monthly investment dollars to paying off my pesky student loans. Here's the breakdown of what I owe:

9.25% - $3,184
8.25% - $6,436
6.8% - $25,144
5.25% - $5,216
2.39% - $7,403

Based on my calculations paying off the loans first and then adding my normal student loan payment to my monthly investing puts me ahead in the long term, even using a very conservative rate. However, I am currently making more in the market than I am paying in interest on these loans so I'm a little nervous about pulling the trigger on this plan.

Is is crazy to go all gung ho and knock these guys out or am I thinking too emotionally and it makes more sense to stick with the current plan (paid off in 5 years making double payments)?

As a note, with our income we're already phasing out of the tax deduction for the student loan interest so that's not really a factor.

 

[dvalley]

Saving 9% is like making 9% and most likely your investment returns won't be 9% or even 6% so if it was me I would snowball the top four of those debts first.

 

[Tractor guy]

I'd pay off the four loans with interest rates that are higher than 5%. You may be making a higher return in the market today but that is NOT guaranteed. You're comparing apples and walnuts. The money you save (equivalent to make) by paying off a loan early is equivalent to an FDIC insured bank account. Money in the stock market is at higher risk. As we all learned in 2008, the stock market can go down just as fast as it goes up.

 

[pb4uski]

While the market has been on a tear lately, I wouldn't look to recent returns as a barometer for future returns. I think I would first pay off the 9.25% and 8.25% loans and then split cash flow 50/50 to paying down the 6.8% and 5.25% loans and investing and pay the 2.39% loans on schedule.

To me, a risk free return of 5.25-9.25% would be attractive. Consider both risk and return.

 

[BTravlin]

I have to agree with most posters above, a guaranteed return of 5% or more is superior to the possible return in the market. Pay off the debt first and then aggressively ramp up your savings. As the recent market meltdown taught or reminded many people, debt is a heavy anchor and no job is guaranteed. Pay down the debt while you have the means.

 

[RockyMtn]

Saving 9% is like making 9% and most likely your investment returns won't be 9% or even 6% so if it was me I would snowball the top four of those debts first.

+1

 

[clifp]

+1
Given the limited deductability of student loan interest I'd concentrated on paying off the 6.8% and above. The only exception is if you are getting some type of company match for a 401K savings.

For the 5% I start investing while paying it off and the 2.39% pay off on schedule.

 

[amh031000]

Thanks for the support and advice. I don't have a 401k match unfortunately and I know we're not getting one in 2014 so I was feeling like this might be the right time.

I look forward to doing a loan payoff dance sooner rather than later.

 

[target2019]

It is better to apply 50% of your normal investment to your retirement fund and use the remainder to pay the loans. I just feel you need to be consistent in the way you save for retirement.

You mentioned a period of 15 months. Does this mean you will pay off all the student loans in that period?

 

[scrinch]

If I were you I would continue to save some toward retirement, but put 75-80% of available dollars toward retiring the >5% debt. Best of luck!

 

[chasesfish]

Pay loans, it's not even close

 

[amh031000]

It is better to apply 50% of your normal investment to your retirement fund and use the remainder to pay the loans. I just feel you need to be consistent in the way you save for retirement.

You mentioned a period of 15 months. Does this mean you will pay off all the student loans in that period?

Yes, the 15 month period would pay off all the loans. It would be shorter were I just to pay off the debts over a certain interest threshold.

 

[Meadbh]

15 months is a very short time in your investing career. The last loan at 2.39% is a substantial amount of money at a low interest rate. My suggestion would be to pay off all the loans except this one ASAP (which may be sooner than 15 months). Then you can get your investment program started without much delay. I personally hate having non tax deductible debt and how I would proceed at that stage is to devote 80% of my savings to investment and 20% to put against the principal of the last loan. That should eliminate the last debt within months, after which you can bump up your investments to 100% of savings.

 

[retire2020]

Yes..postpone. Payoff student loans and any other debts(credit cards/car payment etc..) before you start investing. I graduated in 1991 and paid off my student loan in 1994. Paid off my car loan in 1996 and started investing until I bought my house and had mortgage payments in 1998...suspended investing in 2000 and paid off my house in 2002. Resumed investing back and I'm doing fine. I hate debts. I then never borrowed...bought two new cars between 2001-2006 but saved money first and then paid cash - no car loans.

 

[target2019]

Yes, the 15 month period would pay off all the loans. It would be shorter were I just to pay off the debts over a certain interest threshold.

I am not sure that it is possible to pick and choose which of the student loans to pay off first. Do you know for sure?

Seem to recall my son saying he could not pay one down before another. His payment was always split proportionally between the three loans.

 

[amh031000]

Target2019 - All my loans are through Sallie Mae and they allow me to choose which loan to apply any payment over the minimum payments. I've den doing double payments all year and applying the overage to my highest interest loan.