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re: Question about wife's student loans
Posted on 4/10/13 at 10:23 am to FredSecunda
Posted on 4/10/13 at 10:23 am to FredSecunda
I assume your own student loan interest rate is 6.8% also (or close to that). That is a pretty decent ROI for a guaranteed return, I'd definitely do that.
OTOH, if you enjoy a company match on your 401(k) that should take priority up to the amount of the match. Obviously, a 100% immediate return is pretty sweet.
I do not advocate borrowing against your 401(k) to pay off student debt. The best case is that you pay your loan back, but remember you borrowed money that was untaxed and you pay back with money that is taxed. Even though you are borrowing from yourself that's a pretty stiff hidden penalty to pay.
And that is the best case. The worst case is that if you lose your job the full balance of the loan can be immediately due, but hopefully that will not happen.
OTOH, if you enjoy a company match on your 401(k) that should take priority up to the amount of the match. Obviously, a 100% immediate return is pretty sweet.
I do not advocate borrowing against your 401(k) to pay off student debt. The best case is that you pay your loan back, but remember you borrowed money that was untaxed and you pay back with money that is taxed. Even though you are borrowing from yourself that's a pretty stiff hidden penalty to pay.
And that is the best case. The worst case is that if you lose your job the full balance of the loan can be immediately due, but hopefully that will not happen.
0
Posted on 4/10/13 at 10:25 am to wiltznucs
quote:
as long as money keeps coming in they really dont care what the source is..
This is true. But you didn't pay taxes on your original 401(k) contributions. You did pay taxes on the income you used to repay the loan. This eliminates one of the biggest advantages of having a 401 in the first place.
Congrats for helping out Uncle Sam, he needs the money.
Posted on 4/10/13 at 10:34 am to foshizzle
quote:
This is true. But you didn't pay taxes on your original 401(k) contributions. You did pay taxes on the income you used to repay the loan. This eliminates one of the biggest advantages of having a 401 in the first place.
I understand your logic, but as I see it you are going to repay the student loan debt and its going to be in post-tax dollars no matter what. At which point the funding source really becomes irrelevant to me.
So you are really left with a simple decision, pay someone else an inflated interest rate or pay yourself a reduced interest rate and free up thousands of post tax dollars lost to interest along the way. Do I pay the Fed 8% or do I pay myself 4% while reducing my payment and freeing up thousands of post-tax dollars lost to interest?
My biggest trepidation is that the monies removed from the 401K arent gaining interest from investing activities rather only the 4% rate I'm paying for the loan.
To be full disclosure, this doesnt consider the possibility of job loss and a loan due note which I contend probably wont happen.
This post was edited on 4/10/13 at 10:45 am
Posted on 4/10/13 at 11:30 am to ljd4662
quote:
I guess that would be more motivation to get out of debt faster and start up retirement savings again.
"No, I don't need extra money, I'm trying to get out of debt first."
401k matching can give you an immediate return higher than 100% on your money, followed by an average of 8 percent or higher each successive year.
His debt is costing him 6.6% as a max, with most of it at a lower rate than that.
It's simple mathematics...
You'll won't find a single financial advisor that would put maximizing a match ahead of paying even high interest CC debt.
Posted on 4/10/13 at 11:37 am to wiltznucs
(no message)
This post was edited on 4/10/13 at 11:38 am
Posted on 4/10/13 at 12:02 pm to Siderophore
quote:
You'll won't find a single financial advisor that would put maximizing a match ahead of paying even high interest CC debt.
www.daveramsey.com
Step 1: $1000 in emergency fund
Step 2: Pay off all debts (excluding mortgage) pay them off smallest to largest
Step 3: 6 months of expenses in emergency fund
Step 4: 15% of income to retirement
Step 5: Save for childrens college
Step 6: Pay off house.
Youre right, no financial advisors recommend that. The idea behind it is focusing on one thing at a time to ultimately get out of debt and build wealth.
This post was edited on 4/10/13 at 12:03 pm
Posted on 4/10/13 at 12:09 pm to elposter
quote:
My private student loans (from school from 2002-2005) are variable and the rate right now is a little less than 3%. My federal loans are locked in at 2.5%.
You may be locked but rates are going to double this summer.
quote:
The interest rate on new government-subsidized Stafford loans is set to double on July 1 – to 6.8 percent from 3.4 percent – unless Congress acts to stop it. And there’s no guarantee it will.
Rates
Posted on 4/10/13 at 12:13 pm to ljd4662
quote:
Step 4: 15% of income to retirement
I suspect (hope?) that if you pressed him for details on this generalized advice, he would say something like, "I am assuming you are already contributing up to your match. I'm saying 1st pay off debts and later, start saving more than the match".
Stopping your 401K payments and employer match to pay down moderate interest rate debt is literally stepping over dollars to pick up pennies. Do you not agree?
Posted on 4/10/13 at 12:24 pm to ZereauxSum
quote:
I suspect (hope?) that if you pressed him for details on this generalized advice, he would say something like, "I am assuming you are already contributing up to your match. I'm saying 1st pay off debts and later, start saving more than the match".
LINK
doesnt get much clearer than that
Posted on 4/10/13 at 12:32 pm to ljd4662
quote:
doesnt get much clearer than that
Different situation. The key phrase there is:
quote:
They stopped paying on the credit cards last year.
And since they have $30K in balances, the fees and interest that are piling on are certainly far more than the employer match on a $50K salary.
Posted on 4/10/13 at 12:38 pm to ZereauxSum
quote:
And since they have $30K in balances, the fees and interest that are piling on are certainly far more than the employer match on a $50K salary.
Youre reading too much into it. The rules don't change depending on loan balance and interest rate. Its a very simple guide to getting out of debt that has worked for alot of people. If you dont want to follow it then thats your decision.
Posted on 4/10/13 at 12:43 pm to ljd4662
quote:
Youre reading too much into it.
How exactly? I'm using the information in your link.
quote:
The rules don't change depending on loan balance and interest rate.
Then they're terrible rules. If Dave Ramsey is going to tell me to turn down an employer match of 50%-100% to save 6 or 7, then he's a simpleton and so is anyone who listens to him.
However, that's not what he's saying at all in your link.
Posted on 4/10/13 at 12:43 pm to ljd4662
Double post
This post was edited on 4/10/13 at 12:44 pm
Posted on 4/10/13 at 1:17 pm to ljd4662
You don't have to repay your outstanding 401k loan if you leave your job. You only have to pay income taxes and the 10% fee.
To avoid paying taxes and 10% you need to repay the loan within 60 days.
To avoid paying taxes and 10% you need to repay the loan within 60 days.
Posted on 4/10/13 at 2:09 pm to FredSecunda
A few questions:
Does your wife plan to practice in the same city where you currently live? If yes, do any hospitals there have a loan forgiveness program where they forgive your loans if you practice x number of years? If no, are you considering moving to an underserved area that may have a program like this?
When she does finish residency or a few years thereafter, are you thinking about buying a larger house, or are you in your "forever house"?
Is she planning on doing any sort of fellowship after residency?
Without knowing anything else, I'd say keep contributing to the 401K, keep saving, and knock out your 5k loan for now.
Does your wife plan to practice in the same city where you currently live? If yes, do any hospitals there have a loan forgiveness program where they forgive your loans if you practice x number of years? If no, are you considering moving to an underserved area that may have a program like this?
When she does finish residency or a few years thereafter, are you thinking about buying a larger house, or are you in your "forever house"?
Is she planning on doing any sort of fellowship after residency?
Without knowing anything else, I'd say keep contributing to the 401K, keep saving, and knock out your 5k loan for now.
Posted on 4/10/13 at 2:13 pm to ZereauxSum
quote:
then he's a simpleton and so is anyone who listens to him
I may be a simpleton, but I have a paid for house and no debt.
Posted on 4/10/13 at 2:23 pm to ljd4662
quote:
I may be a simpleton, but I have a paid for house and no debt.
I don't know you, but I actually don't believe you're a simpleton. I think you're just trying to prove a point so I'll ask you plainly.
Would you advise me to stop contributing to my 401K and pay down my debts if I am current?
Assume that my employer is matching X and my loan interest is waaaaay less than X.
Posted on 4/10/13 at 2:33 pm to Ric Flair
quote:
Does your wife plan to practice in the same city where you currently live?
Not sure yet.
quote:
If yes, do any hospitals there have a loan forgiveness program where they forgive your loans if you practice x number of years? If no, are you considering moving to an underserved area that may have a program like this?
We want to live in a major city, so this really isn't an option.
quote:
When she does finish residency or a few years thereafter, are you thinking about buying a larger house, or are you in your "forever house"?
If we move to another city, we will obviously buy a new house but it will not be larger than the one we are in now. We plan to live in that house for five-seven years and then buy the "forever" house.
Posted on 4/10/13 at 2:45 pm to ZereauxSum
I think I would tell you to do what ever you feel is best for you because youre not changing your mind.
As for the OP, he is paying 6.85% (if i remember right) on a $60k loan. By just letting it sit for the next two years until his wife finishes her residency the loan balance will become approx $68,500. By paying minimum payments of $700 from that point on it will take approx 12.5 years to pay off (will have paid 105k over the loan term). Why not get really intense on paying off this loan and do it in say 2 years. I dont have the ability to figure out the savings in interest (it will vary based on how he pays it) but he will probably save $30k in interest.
Lets also guess that the OP makes $90k a year and his employer matches 5% (which is typical). Over those two years he will have gained $9000 in his 401K. If you ask me I would much rather not pay the bank $30k than have my employer pay me $9000.
As for the OP, he is paying 6.85% (if i remember right) on a $60k loan. By just letting it sit for the next two years until his wife finishes her residency the loan balance will become approx $68,500. By paying minimum payments of $700 from that point on it will take approx 12.5 years to pay off (will have paid 105k over the loan term). Why not get really intense on paying off this loan and do it in say 2 years. I dont have the ability to figure out the savings in interest (it will vary based on how he pays it) but he will probably save $30k in interest.
Lets also guess that the OP makes $90k a year and his employer matches 5% (which is typical). Over those two years he will have gained $9000 in his 401K. If you ask me I would much rather not pay the bank $30k than have my employer pay me $9000.
This post was edited on 4/10/13 at 2:49 pm
Posted on 4/10/13 at 2:59 pm to ljd4662
This example is a little warped. If he stops making the 401K payments (assuming he's earning 90K), that's an additional $375/month to put towards the loan.
There is now way he will shorten the life of the loan from 12.5 years to 2 by increasing his payments from $700 to $1075. He wont save anywhere close to $30K in interest. The math just doesn't work no matter what scenario you apply it to.
There is now way he will shorten the life of the loan from 12.5 years to 2 by increasing his payments from $700 to $1075. He wont save anywhere close to $30K in interest. The math just doesn't work no matter what scenario you apply it to.
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