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Started By
Message
Making lump sum payments on student loan debt- wise or unwise?
Posted on 1/7/13 at 9:09 am
Posted on 1/7/13 at 9:09 am
I have roughly $120k in law school debt, with at least a handful of the 10-12 individual loans being at interests rates at or above 8% per annum.
Fortunately for me I started working (and paying these loans) right out of school a few years ago. That said, I've noticed recently that I haven't even dented these loans to date but I've at least been able to save up a nice emergency fund (likely much more than I "need" as my job is fairly secure) to date.
Would it be prudent to take some of those savings and pay off some of the smaller loans that are at 8% or higher? I.e., I have one Grad Plus loan for approx $2600 that is at 8.5%. Would it be wise to just pay that one off now with some savings? Does it really do me any good given that's less than 2% of my overall student loan debt? Would I better served just making my current payments and using that money elsewhere?
EDIT for additional considerations:
* I have a 401k through work and do that already.
* I do not own a home yet and will need a down payment at some point in the next 2-3 years.
* I have a term life policy that will supplement my retirement income down the line.
Fortunately for me I started working (and paying these loans) right out of school a few years ago. That said, I've noticed recently that I haven't even dented these loans to date but I've at least been able to save up a nice emergency fund (likely much more than I "need" as my job is fairly secure) to date.
Would it be prudent to take some of those savings and pay off some of the smaller loans that are at 8% or higher? I.e., I have one Grad Plus loan for approx $2600 that is at 8.5%. Would it be wise to just pay that one off now with some savings? Does it really do me any good given that's less than 2% of my overall student loan debt? Would I better served just making my current payments and using that money elsewhere?
EDIT for additional considerations:
* I have a 401k through work and do that already.
* I do not own a home yet and will need a down payment at some point in the next 2-3 years.
* I have a term life policy that will supplement my retirement income down the line.
This post was edited on 1/7/13 at 9:12 am
5
Posted on 1/7/13 at 9:17 am to Jwodie
Are you paying anything above the minimum payments? My wife and I have about 67k in student loans - Though emergency fund is my top priority, I pay our minimum payments + 50% each month to help lessen the blow, though I haven't made any lump payments to debt.
Out of the 4 things I owe money for (house 4.375%, wife's car 2.6%, HELOC 4.5%) student loans (6.8%) are the only thing I pay more than the minimum for right now.
Out of the 4 things I owe money for (house 4.375%, wife's car 2.6%, HELOC 4.5%) student loans (6.8%) are the only thing I pay more than the minimum for right now.
Posted on 1/7/13 at 9:29 am to Jwodie
If you have the available funds to pay down debt at > 8%, definitely do it. It was the first thing I did when I built up emergency fund & paid off current debt. I'd be more focused on paying down the debt, than contributing to 401k. I'd do enough to get company match, and that's it.
Posted on 1/7/13 at 9:51 am to NaturalBeam
quote:
Are you paying anything above the minimum payments?
I have not been. Just paying whatever the monthly statements are (given they're approx $1100/mo.
). quote:
If you have the available funds to pay down debt at > 8%, definitely do it. It was the first thing I did when I built up emergency fund & paid off current debt. I'd be more focused on paying down the debt, than contributing to 401k.
Thanks for the insight. I'm still wondering whether it'd be prudent to make a balloon payment toward some of it or just start paying above the minimum payments and leave my emergency fund/savings intact...?
This post was edited on 1/7/13 at 9:53 am
Posted on 1/7/13 at 9:54 am to Jwodie
I agree - I wouldn't touch the emergency fund, but I would make some of that debt my next priority (except for what your employer will match through 401k). Anything other than that, I would go after some of the debt through increased monthly payments.
Your young enough not to worry about retirement right now with that much student loan debt.
Your young enough not to worry about retirement right now with that much student loan debt.
Posted on 1/7/13 at 10:11 am to NaturalBeam
Depends on how large your emergency fund is right now. 3-6-9-12 months?
$2600 is not a lot of money and I would pay that in full if that doesn't put a dent in your emergency fund. 8.5% is too costly to not pay down ASAP.
Regardless of the amount of the loan (you said you have 10-12 separate), pay down in lump sums as much as you are comfortable the loans with the highest interest rate. Only you know how much money you want to keep in the bank to feel secure in case you were to lose your job.
$2600 is not a lot of money and I would pay that in full if that doesn't put a dent in your emergency fund. 8.5% is too costly to not pay down ASAP.
Regardless of the amount of the loan (you said you have 10-12 separate), pay down in lump sums as much as you are comfortable the loans with the highest interest rate. Only you know how much money you want to keep in the bank to feel secure in case you were to lose your job.
Posted on 1/7/13 at 10:39 am to lynxcat
quote:
Depends on how large your emergency fund is right now. 3-6-9-12 months?
My emergency fund is 12 months + at this point, hence my initial inquiry.
quote:
$2600 is not a lot of money and I would pay that in full if that doesn't put a dent in your emergency fund. 8.5% is too costly to not pay down ASAP.
I agree it's not a lot relative to my savings and the interest rate sucks. I guess the question was rather to shell out that lump sum now or just make increased payments going forward...
Job security isn't an issue whatsoever.
Thanks for the insight guys. Would always welcome more.
Posted on 1/7/13 at 10:46 am to Jwodie
quote:
I agree it's not a lot relative to my savings and the interest rate sucks. I guess the question was rather to shell out that lump sum now or just make increased payments going forward...
Job security isn't an issue whatsoever
If you consider yourself to have great job security, I would even consider only keeping 6 months emergency fund, and throwing everything else at the loans with high interest. It reads like you don't have children, wife, or house, so having > 1 yr for emergencies is probably not necessary. You are essentially throwing lots of money away at those interest rates.
I would assume you are likely only taking the standard deduction(no mortgage) on your tax return, so you aren't seeing any tax benefit from the loans either. Get rid of 'em.
This post was edited on 1/7/13 at 10:50 am
Posted on 1/7/13 at 10:55 am to LSUAfro
quote:
If you consider yourself to have great job security, I would even consider only keeping 6 months emergency fund, and throwing everything else at the loans with high interest. It reads like you don't have children, wife, or house, so having > 1 yr for emergencies is probably not necessary. You are essentially throwing lots of money away at those interest rates.
I would assume you are likely only taking the standard deduction(no mortgage) on your tax return, so you aren't seeing any tax benefit from the loans either. Get rid of 'em.
All true and that is exactly my current situation (no kids, wife, mortgage (yet). I know I have way more in savings than I "need" right now so I'm trying to do something smart with a portion of it.
Seems prudent to make some lump sum payments to my student loans but it's crazy to even think about parting with such large sums at one time and getting nothing tangible in return!
Posted on 1/7/13 at 11:05 am to Jwodie
Yeah, if you've got 12 months built up, I would part with 6 of it.
*OTOH, if you're thinking about a down payment on a house in the next couple of years, then that's something else to think about.
*OTOH, if you're thinking about a down payment on a house in the next couple of years, then that's something else to think about.
This post was edited on 1/7/13 at 11:06 am
Posted on 1/7/13 at 11:48 am to NaturalBeam
Let's get a more interesting situation.
Say you have a consolidated student loan of about 200K with an interest rate of 7.1%.
IBR payments are a few hundred (~300) a month. Each month paying at this rate, at least $800 in interest builds up. So in theory, you have to make at least 800 more a month in payments just to service the debt for 25 years to pay it off. Budget is tight, and the best you can do is make minimum payments for 25 years servicing the debt at full minimum payment which is about $1,100 month under this scenario.
However, you could just pay IBR for 25 years, and take the $800 in savings every month and put it in 401k, Roths, actually go on vacation once in a while and not kill yourself, etc.
After 25 years, the debt is forgiven, except I THINK with IBR you pay a tax on the forgiven amount, which would be something on the order of half a million dollars.
Taking away any moral superiority, purely financial decision.
What do you do?
Say you have a consolidated student loan of about 200K with an interest rate of 7.1%.
IBR payments are a few hundred (~300) a month. Each month paying at this rate, at least $800 in interest builds up. So in theory, you have to make at least 800 more a month in payments just to service the debt for 25 years to pay it off. Budget is tight, and the best you can do is make minimum payments for 25 years servicing the debt at full minimum payment which is about $1,100 month under this scenario.
However, you could just pay IBR for 25 years, and take the $800 in savings every month and put it in 401k, Roths, actually go on vacation once in a while and not kill yourself, etc.
After 25 years, the debt is forgiven, except I THINK with IBR you pay a tax on the forgiven amount, which would be something on the order of half a million dollars.
Taking away any moral superiority, purely financial decision.
What do you do?
This post was edited on 1/7/13 at 11:50 am
Posted on 1/7/13 at 11:55 am to Teddy Ruxpin
gonna need to put some aside to pay the tax after 25 years unless you plan on raiding the savings or 401(k)
gotta take that into account
gotta take that into account
Posted on 1/7/13 at 12:01 pm to boosiebadazz
quote:
gonna need to put some aside to pay the tax after 25 years unless you plan on raiding the savings or 401(k) gotta take that into account
Exactly. You have the "savings" invested for 25 years to pay the tax(however, I am not sure if there are any rules to how the tax is applied, ie do they tax the whole amount forgiven or the loan amount up to principal forgiven), hoping for a greater than 7.1% ROI I imagine versus just paying the whole time. Guess that would be the debate if I'm thinking about it right.
ETA: It appears it will all be taxable income.
This post was edited on 1/7/13 at 12:06 pm
Posted on 1/7/13 at 12:02 pm to Jwodie
quote:I think you may have something other than "term", unless you meant to say that it will supplement somebody else's retirement income.
I have a term life policy that will supplement my retirement income down the line.
Lord help us if they have started calling whole life "modified term" or some similarly deceptive variant.
Posted on 1/7/13 at 12:04 pm to Teddy Ruxpin
you'd have to take it from a savings or pay the penalty associated with withdrawing from the 401(k)
i do agree with your idea of paying the minimum and still living a full life instead of paying more and hating your life and still not making a big dent in the total
does your wife have an income yet?
i do agree with your idea of paying the minimum and still living a full life instead of paying more and hating your life and still not making a big dent in the total
does your wife have an income yet?
Posted on 1/7/13 at 12:08 pm to boosiebadazz
quote:
does your wife have an income yet?
Not married, but in the works.
She will have half that amount of debt but make about 6 figures starting out starting this fall. She already has the offer.
I honestly think with her starting income and expected pay increases a long the way I think its doable to pay it down/off before 20 years. I'd rather pay it off then send that money out each month.
Basically, we'll be the "working rich."
Household Income higher than 95% of the country with little money.This post was edited on 1/7/13 at 12:09 pm
Posted on 1/7/13 at 12:10 pm to Teddy Ruxpin
But you'll still be rich
Tulane can eat a dick
Tulane can eat a dick
Posted on 1/7/13 at 12:11 pm to schlow mo
quote:
schlow mo
hey schlow. Agreed.
Posted on 1/7/13 at 12:11 pm to Teddy Ruxpin
i think you'll find it a bit easier when both incomes come online
i think it's doable, but it'll be about your spending habits
but part of me says frick it, spend what you want and pay the minimum and enjoy your life. but that is only if you aren't thinking of public office down the road
i think it's doable, but it'll be about your spending habits
but part of me says frick it, spend what you want and pay the minimum and enjoy your life. but that is only if you aren't thinking of public office down the road
Posted on 1/7/13 at 12:14 pm to boosiebadazz
I agree that it is a tough decision with that much money taken out
Plus we never know what the gov is going to do with the student loan bubble
Nothing would grind my gears worse than living like a poorie for 5 years crushing out this debt only to have the gov enact some ridiculous legislation forgiving it after 10
Plus we never know what the gov is going to do with the student loan bubble
Nothing would grind my gears worse than living like a poorie for 5 years crushing out this debt only to have the gov enact some ridiculous legislation forgiving it after 10
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