Student Loan payback VS. Investing

[Sjgirl]

I saw a lot of posts talking about paying back student loan ASAP.
I am debating the Pros /Cons with it. I know it feels great to know you have no debt. I totally get it.
But if you can get better return with investing, what would you do?
I am curious to know what do you guys think about this topic?

What's the #1 reason you want to pay off your student loan?

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[lane one]

I'm in the boat of your loan interest rate being higher than any return on investment you could make, making it the best investment.

 

[El Trombopag]

I did the math, and it would have made the most financial sense to shuck off my obligations onto everyone else after 10 years [non-profit hospital] and invest heavily [6.8% loans]. I still opted to pay them off in 4 with few other investments during that time. If I had to do it again I would still pay them off fast. Being free from that burden has allowed me to reduce my hours, get into some other hobbies, keep sane, not detest going to work, etc. I don't think I'd be as 'happy' for the 10 year period in question if I had that student loan obligation hanging over my head. It's not always just about $$. As one gets older, time & quality of life become significantly more valuable.

 

[confettiflyer]

There's multiple considerations here:

1) Do you have heirs/dependents? Then saving into a retirement account should concurrently be happening with debt retirement, because upon death, loans discharge. If you expire at year 10 with no student loans and zero in retirement, heirs get nothing. Obviously, extreme example, and hopefully you have life insurance, but something to think about.

2) Do you have a health condition that could render you completely disabled/unable to work/dead within the next 10-20 years (i.e. progressive MS, Huntington's disease, cancer, Cystic Fibrosis?) Then prioritize retirement savings as student loans may be discharged secondary to complete disability/inability to work.

3) Do you qualify for loan forgiveness (PSLF, teachers, rural medical grants, etc...)? If so, prioritize retirement and minimal payments.

If nothing compels you like any of the above, split the difference. Every dollar you pay to student loans doesn't necessarily free up a dollar to pay yourself later, whereas a retirement plan contribution is a one-way payment to your retirement. Consider saving to meet any type of match and put the rest to student loans. Really, we should be contributing the full $18,000 per year to retirement accounts AND paying down student loans, we make enough money that we don't have to choose.

 

[BMBiology]

Why would anyone with student loan invest besides putting money in their 401 k? I only recommend 401 k because of the company match.

If your student loan interest is 7% a year, you would need to get at least 10% return a year from your investment just to get 7% return because you need to pay taxes on the gains. How are you going to get 10% return every year for the next 10-20 years? Not going to happen.

Take the guarantee 7% return and pay off your student loans.


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[flavor123]

as vtrx said, Peace of mind. With no dependents, it's easier to take advantage of the situation and try to knock out all my loans asap.

 

[pezdispenser]

Why would anyone with student loan invest besides putting money in their 401 k? I only recommend 401 k because of the company match.

If your student loan interest is 7% a year, you would need to get at least 10% return a year from your investment just to get 7% return because you need to pay taxes on the gains. How are you going to get 10% return every year for the next 10-20 years? Not going to happen.

Take the guarantee 7% return and pay off your student loans.


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^^ This.

I'll also add that even if you expect a 10% return from stocks, that's the average over very long periods like 100 years. From year to year returns can fluctuate a lot like negative 50% to positive 50%. Plus the downturns usually coincide with a bad economy so you could get laid off when your investments are losing 50%. But your student loans are still accumulating 7% interest no matter what. So pay them off as soon as you can, so you can clear your budget and move on to other things in your life like a house, family and retirement.

 

[Sjgirl]

Thanks for everyone input.
What if I can refinance to a lower rate. Let's say around 3%?

There are tax free investments out there. There is muni bond which currently give you 6% return.

We will all have more responsibilities later in life, wouldn't it be wiser to start preparing early? Some of the responsibility can come as in surprise (baby, family get sick)!

I think life insurance is def needed if you have a large loan, just incase.

 

[BMBiology]

^ why would a bond give you 6% return in this low interest, easy access to money environment? Junk bond = high risk.

It is not sexy to pay off your student loan earlier. It is even boring but it offers the best return.


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[confettiflyer]

I think life insurance is def needed if you have a large loan, just incase.

You do NOT need life insurance purely because you have a large student loan balance. Student loan balances die with the borrower, unless for some really odd reason you had a private loan cosigned with someone (then yes, you should definitely get insurance). Check your promissory note & figure out who cosigned it.

You DO need life insurance if you have dependents and/or other people who rely on you (or will rely on you) in the future. Not only for lost income potential, but if you actively take care of elderly parents or your own children, you'll need to consider adult/child care costs to replace your labor. Life insurance is dirt cheap. I think it's like $1M for $740/yr for a healthy 30 year old x 30 year policy. If you're healthy, don't buy workplace insurance, it's usually more expensive (because anyone can sign up, even someone who isn't healthy, so the price compensates for that).

 

[Sjgirl]

Thank you @confettiflyer I did not student loan will die with the borrower.
And I totally agree with what you said about the life insurance. Term insurance is very cheap and affordable.

I also want to hear your opinion on real estate investing, which I like because you can leverage. Thanks

 

[bradleyyoung04]

I don't want to be in debt to anyone, or any entity, so I am planning to pay it off as soon a possible. As someone else mentioned, this is an especially good point to do so because I have no dependents, no mortgage, no existing repayments on anything. I can start with that part of my life when I'm no longer repaying loans.

 

[mentos]

Do some of both. Why does it have to be all or nothing?

 

[confettiflyer]

Do some of both. Why does it have to be all or nothing?

Some people can't multitask? Or are singularly hyperfocused on one thing? I hear it all the time:

"I want to be out of debt before I get married/have kids."
"I want to be financially secure before I have kids."
"I want to knock out student loans before I buy a house."

Like....gimme a break, life happens, you gotta be able to balance everything. By the time you do complete task A, the love of your life has flown the coop, you become infertile, or a rational economic move gives way to dogma (like you gave up buying a house where the mortgage was < than rent in an area you're likely to stay in for > 5-7 years).

Some people, especially those who are single, graduated early, have low existing debt, and can mooch off of parents can pull off maximizing retirement and simultaneously retiring debt at a torrid pace. But if you graduated at 28 and went into residency/fellowship (2nd career?), had kids in school, have parents to care for (or they're dead, thus you have no boomerang support), struggle with underemployment (or in other words, are a human being), you have to divide and conquer.

 

[confettiflyer]

Thank you @confettiflyer I did not student loan will die with the borrower.
And I totally agree with what you said about the life insurance. Term insurance is very cheap and affordable.

I also want to hear your opinion on real estate investing, which I like because you can leverage. Thanks

Not all student loans die with the borrower, just double check. Some private loans may allow for claims on an estate, and other weird things.

As for real estate investing...don't do it, it's a lot of work, unless you have a lot of experience dealing with crappy tenants and/or hire someone to deal with it, it just ends up being a time and money sink for most people. Unless you're really motivated, you're better off spending that time bettering yourself in terms of pharmacy (at least initially), so better your financial position that way.

Plus I'd focus on buying a house for yourself first, at least you can live in it. If anything, when it's time to move up, you can keep the first house and rent it out. That makes more sense to me.

 

[wagrxm2000]

I saw a lot of posts talking about paying back student loan ASAP.
I am debating the Pros /Cons with it. I know it feels great to know you have no debt. I totally get it.
But if you can get better return with investing, what would you do?
I am curious to know what do you guys think about this topic?

What's the #1 reason you want to pay off your student loan?

Because a crash is just around the corner.

 

[RPh Who]

The opportunity cost is only on the additional amount that you would be using to pay down the loan. If you can save enough dry powder to buy stocks or LEAPs after a major downturn, you may be able to pay off the loan even more quickly when asset values begin to recover. This is the approach I am taking right now. If you have a -40k net worth for example, 10k in cash equivalents and 50k in loans is a much different picture than 120k in cash equivalents and 160k in loans. On one hand you have an emergency fund, on the other you have the ability to make potentially meaningful investments

 

[PharmaSex]

I have too much in loans and gather too much in interest (8.1%) to ever pay them off without making 200K a year. I pay the minimum on IBR and plan to use the public service loan forgiveness to cancel my loans in 10 years time. Right now I'm saving mad cash to buy a house

 

[TheWisePharmacist]

Good question, I think its more what you see your self doing down the road in 20 years. I'm huge in investing and decided extend my loan payments as far out as possible, mainly so I have liquid cash to follow my dreams and start my own business. Since I followed that strategy I can take a year off to start that business. I view my student loans as another bill such as the electric bill, water bill, and gas bill. So in short I think whether to pay your loans off fast or slow depends on your future goals in life.

 

[radio frequency]

I have too much in loans and gather too much in interest (8.1%) to ever pay them off without making 200K a year. I pay the minimum on IBR and plan to use the public service loan forgiveness to cancel my loans in 10 years time. Right now I'm saving mad cash to buy a house

I'm so curious how high your loans are and what your minimums are now.

 

[lane one]

I have too much in loans and gather too much in interest (8.1%) to ever pay them off without making 200K a year. I pay the minimum on IBR and plan to use the public service loan forgiveness to cancel my loans in 10 years time. Right now I'm saving mad cash to buy a house

EVER? this seems unlikely

 

[kwakster928]

You DO need life insurance if you have dependents and/or other people who rely on you (or will rely on you) in the future. Not only for lost income potential, but if you actively take care of elderly parents or your own children, you'll need to consider adult/child care costs to replace your labor. Life insurance is dirt cheap. I think it's like $1M for $740/yr for a healthy 30 year old x 30 year policy. If you're healthy, don't buy workplace insurance, it's usually more expensive (because anyone can sign up, even someone who isn't healthy, so the price compensates for that).

Usually, your work should pay for a basic life-insurance (paying for your 1 year salary or a fraction of) without cost.

One thing I would like to add is that, while you will most likely find attractive prices on many internet sites, you MUST consider the financial strength of the insurance company that you are buying the insurance from. Be sure to check the company's rating (although these ratings have become rather meaningless after the financial crisis).

Also, if you can afford it, a small whole-life policy is also recommended. Now... I have a different reason for recommending this. This whole policy is not about covering expenses but rather, potentially paying the Uncle Sam for the estate tax so that your children can have the full value of the wealth you have accumulated. (haha... now I am dreaming little here.)

 

[awval999]

Also, if you can afford it, a small whole-life policy is also recommended. Now... I have a different reason for recommending this. This whole policy is not about covering expenses but rather, potentially paying the Uncle Sam for the estate tax so that your children can have the full value of the wealth you have accumulated. (haha... now I am dreaming little here.)

The estate tax has a $5,000,000 exclusion before any tax is due.

I think the vast majority of pharmacist households don't have much to worry about.

 

[kwakster928]

The estate tax has a $5,000,000 exclusion before any tax is due.

I think the vast majority of pharmacist households don't have much to worry about.

Sure it is reachable. A simple investment calculator can tell you that, given enough time (like 20 years). What is not unknown is whether or not that exclusion limit will also increase over time, but we certainty can assume that would go up as well.

 

[BMBiology]

I have too much in loans and gather too much in interest (8.1%) to ever pay them off without making 200K a year. I pay the minimum on IBR and plan to use the public service loan forgiveness to cancel my loans in 10 years time. Right now I'm saving mad cash to buy a house

Did you know mortgage rule got changed last year? Lenders are now counting 1-2% of your student loan principle as your monthly debt.

For example, let's say you have 200 k in student loans and you make 120 k a year (pre taxed)

- 1% of 200 k is 2 k.
- Your total debt (student loan, mortgage, property tax, home insurance, car payment, credit card) is limited to 47% of 120 k which is 56 k or 4700 a month

Let's be generous and assume your credit card debt and car payment is just $500 a month.

$4700 - $2000 (student loan) - $500 = $2200.

So your mortgage, property tax, home insurance, HOA, PMI can't exceed $2200 a month.

Let's be generous again and assume you have 20% down payment so you don't have to pay PMI, got 3.7% interest rate (historically low rate) and let's see how much you can buy in California where property tax is just 1.2% (much higher in other states):

You can only afford a $465 k house which is nothing in California.

If you buy an apt or condo then you will need to pay HOA fee which is counted toward your overall debt and further affects your ability to borrow.

You don't ever get something for nothing..just remember that.






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[confettiflyer]

Did you know mortgage rule got changed last year? Lenders are now counting 1-2% of your student loan principle as your monthly debt.

For example, let's say you have 200 k in student loans and you make 120 k a year (pre taxed)

- 1% of 200 k is 2 k.
- Your total debt (student loan, mortgage, property tax, home insurance, car payment, credit card) is limited to 47% of 120 k which is 56 k or 4700 a month

Let's be generous and assume your credit card debt and car payment is just $500 a month.

$4700 - $2000 (student loan) - $500 = $2200.

So your mortgage, property tax, home insurance, HOA, PMI can't exceed $2200 a month.

Let's be generous again and assume you have 20% down payment so you don't have to pay PMI, got 3.7% interest rate (historically low rate) and let's see how much you can buy in California where property tax is just 1.2% (much higher in other states):

You can only afford a $465 k house which is nothing in California.

If you buy an apt or condo then you will need to pay HOA fee which is counted toward your overall debt and further affects your ability to borrow.

You don't ever get something for nothing..just remember that.






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Marry another low paid pharmacist and now you can buy a $930k house....something a touch more decent than a town home (still with a zero lot line and tandem parking) in IUSD.


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[BMBiology]

Marry another low paid pharmacist and now you can buy a $930k house....something a touch more decent than a town home (still with a zero lot line and tandem parking) in IUSD.


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Can't afford it because now you got to pay for the wedding and have babies to feed lol


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[TimmytranRX]

pay off the loans!

 

[rph3664]

Put as much as your employer will match in a 403(b) or 401(k), and concentrate on getting those loans paid off.

 

[BidingMyTime]

Because investment is always risky, no matter how "safe" it seems, there is a risk involved-that is the only reason why people can make money on investments, because other people can and have lost their money. Paying off your student debt is 0 risk. Although as has been mentioned, you don't want to leave employer matching money, so always put in enough in your 401-K to get the full employer match. Get a good life insurance policy for your family (or future family, it may be cheaper to get it now then wait), then I would put every dollar into paying off your student loans.

I think it's like $1M for $740/yr for a healthy 30 year old x 30 year policy. If you're healthy, don't buy workplace insurance, it's usually more expensive (because anyone can sign up, even someone who isn't healthy, so the price compensates for that).

Insurance companies really give $1,000,000 policies to common folk? Maybe I didn't shop around enough when I bought my life insurance, but a $1,000,000 policy wasn't an option at any cost.

 

[confettiflyer]

Insurance companies really give $1,000,000 policies to common folk? Maybe I didn't shop around enough when I bought my life insurance, but a $1,000,000 policy wasn't an option at any cost.

Because of banding a $1MM policy wasn't that much more than say $500k (bulk discount?). I shopped in 2013 and I'm paying the same today for $2MM as I did then for $1.2M ($400k x 3 laddered over 10-20-30 years). Consider running #'s again.

I was actually offered up to $5MM from one insurer with only a higher level paramedical appointment (I had an abbreviated one with blood/urine/vitals) + additional underwriting. I think > $5M may have required a CXR, more intense underwriting, and possibly a physician statement + EKG. I wasn't interested.


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