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pay off debt or save and invest?


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2012 Feb 8, 7:25pm   28,684 views  63 comments

by xlr8   ➕follow (0)   💰tip   ignore  

I have about $180 thousand in student loans that I am very slowly paying off. Its at about 4.7% average rate.
Should I make extra payments and try to pay off the loans, or should instead invest and grow money that way?
Last year I made out with 6.5% overall return on my investments.

#investing

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1   Underdark   2012 Feb 8, 10:22pm  

$180 thousand? Jeeeeesus.

I would concentrate on paying your debt first. A 6.5% return on investment is a good year and I would not expect that sort of return every year. Also paying off your student loan builds good credit. See if you can consolidate your stident loans into a lower rate.

2   AJ1201   2012 Feb 8, 11:32pm  

Alternately, look for a job in Europe and forget the student loan lol............

3   uomo_senza_nome   2012 Feb 9, 12:33am  

xlr8 says

$180 thousand in student loans

OMG. There's something terribly wrong that getting an education should require someone to enter a lifetime of debt servicing.

Can you refi student loans? 4.7% seems high for a student loan..I thought they were in high 2's to low 3's.

I would also say pay down the debt first. It will pave the way for a better financial future.

4   Dan8267   2012 Feb 9, 2:15am  

In general, paying off debts is preferable to seeking a return. If you pay off your debts, you get a guaranteed 4.7% return on saved interest. You did well to get a 6.5% overall return on your investments, but I doubt that's sustainable without taking some risk. Safe investments are returning less than 1% today.

I wouldn't advise chasing risk for a possible 1.8% increase in return. So, I'd go with paying off the debts, starting with the highest interest ones. That's what I did when I graduated from college.

5   clambo   2012 Feb 9, 2:20am  

Do both.
If you wait until you are free of debt to invest for your retirement, you may not ever get there.
Get a Roth IRA at Vanguard, T.Rowe Price, etc.

6   FaithInHim   2012 Feb 9, 4:09am  

You should wait until America goes into hyperinflation, and pay the debt off with a trillion dollar bill! Lol! Just kidding, I doubt you would be able to do that. Congress would create a package that rework all the loans, and then your student loan would be worth 10 trillion dollars.

7   clambo   2012 Feb 9, 5:12am  

I didn't mention another reason to pay the loan back but not at the expense of investing for retirement.
The dollars you use in the future for paying off your debt will be lower value dollars.
The stocks you buy in your Roth should be worth more.

8   Dan8267   2012 Feb 9, 5:24am  

clambo says

Do both.
If you wait until you are free of debt to invest for your retirement, you may not ever get there.
Get a Roth IRA at Vanguard, T.Rowe Price, etc.

That's true. I forgot to mention, fund your retirement accounts to the max each year because it's use it or lose it. But once you fund all your retirement accounts, I'd pay off debts first.

9   drew_eckhardt   2012 Feb 9, 8:31am  

uomo_senza_nome says

xlr8 says

$180 thousand in student loans

OMG. There's something terribly wrong that getting an education should require someone to enter a lifetime of debt servicing.

Apart from things like law where the school you graduate from determines your career there are much more affordable choices like starting at your in-state community college (can be $3k for 30 semester hours/year) and finishing at the 4 year college (under $10K a year) while living with your parents yielding a total cost under $30K.

$180K of debt for a 4-year undergraduate degree is a choice (and perhaps not one made by the original poster; for example a law or medical degree is involved). While in the banks' best interest it's not necessarily good for students.

10   clambo   2012 Feb 9, 8:52am  

Another reason to invest in retirement accounts is that their contents are immune from civil judgement.
Now, as far as flaking out on college loans they may have special laws and you may have agreed to special terms, which I don't know anything about.
But *in general* a bonus of retirement accounts, or "qualified accounts" is their immunity.
This is how a guy can have a $30 million judgement against him and still be able to draw his NFL pension. (OJ Simpson).
Therefore, I recommend to always fund the IRA and other accounts with the max available always.
Some people could be clever and put all financial assets into a variable annuity, and never "annuitize" but still have shielded this money from all claims of any kind.
How you got up to $180K in debt is amazing but regardless, that's water under the bridge. The presumed reason for the education in the first place was to be able to work and retire. So, make contributions for that end.

11   freak80   2012 Feb 10, 2:10am  

$180k??? Yikes! Pay that off ASAP. I don't think there's anywhere else to get a no-risk 4.7% rate of return. Pay down the loans with the highest interest rate first.

12   mdovell   2012 Feb 10, 4:36am  

180K! Please tell us you are a lawyer or a full medical doctor...

I thought 100K was high enough.

Of course go after the debt. The government is dead serious about collecting it now that it is co-opting collection agencies and paying them an extra 30% or so in order to accomplish it.

13   B.A.C.A.H.   2012 Feb 10, 11:04am  

xlr8,

Would you mind sharing with us, how it is you wound up with student loans of 180K?

14   xlr8   2012 Feb 10, 12:08pm  

2 professionals and neither of our parents had money to put us through doctoral level degrees.

15   B.A.C.A.H.   2012 Feb 10, 1:25pm  

OK, I get it. Two students, four degrees. All with loans. Yikes!

16   forouza1   2012 Feb 11, 12:05am  

180K? That's nothing. Talk to some recently graduated dental/law/medical students coming out high cost of living areas (LA, SF, NY) or private institutions.

My wife's brother graduated from a top dental school in SoCal and racked up 400K in depth (I'm guessing 150K in tuition/supplies, 200K for 4years of living expenses, and probably the rest in interest). Him and his friends certainly enjoyed the good life (running up bar tabs at ritzy LA clubs etc...) and now he's paying for it having no choice but to go to some Podunk city in the middle of nowhere to make enough to cover his expenses. Even if he did live frugal, I don't think he could have left without 250K in debt.

17   RentingForHalfTheCost   2012 Feb 11, 1:48am  

wthrfrk80 says

$180k??? Yikes!

Funny how everyone thinks 180K is a huge amount to invest in someones education and the increase in life quality that comes with it, but look at a $1million dollar cottage in agreement. Good schools, short commute, safe neighborhood, etc. You are still buying a run down PIS people!

Pay down the 180K but no rush. Your education will have you making that in less than a year eventually. Don't cut yourself short and become bitter because that is all you focus on. Enjoy the benefits of being employed. Travel, buy cool stuff, invest, and slowly pay down the debt man.

Life without fun is really not worth living.

18   Shaman   2012 Feb 11, 3:43am  

My advice is to delay repayment until it becomes trivial. Take what money you can save, and after like ten grand for a safety net, put the rest in a trading account and get busy! With some smart picks and conservative investing in single stocks (conglomerates are for decade long growth at nominal rates) you can see 50% or better per year. Even after paying capital gains taxes, you will be way up. Romney showed us that cap gains tax is nothing to fear.
Yes, this is my own strategy. As of this second month of 2012, I'm up 18% on my investments. I haven't had any big winners (whole foods, sprint) but when you are looking for 5-10% gains and then sell when you see that, you free up your money for the next investment. Add a string of those together and the year end result can be huge! So far if my investments keep doing moderately okay, I will be up 130% by the end of the year.
So use that big educated brain to
Make yourself some money!

19   REpro   2012 Feb 11, 5:24am  

RentingForHalfTheCost says

Pay down the 180K but no rush. Your education will have you making that in less than a year eventually. Don't cut yourself short and become bitter because that is all you focus on. Enjoy the benefits of being employed. Travel, buy cool stuff, invest, and slowly pay down the debt man.
Life without fun is really not worth living.

I agree. Thinking too much of debt can develop “back pain” eventually. High inflation time is inevitable, but before this happen, expect another 10 or so years of very low inflation.

20   MoneySheep   2012 Feb 11, 6:20am  

If you have debt you should give all your effort to pay it off.

Some readers above also suggested funding your retirement account 401k IRA Roth etc. But I disagree. you should get rid of your debt first.

Having debt is like having anchors tying to your neck.

21   Shaman   2012 Feb 11, 7:01am  

"Gambling with your savings on the stock market in a trading account is highly NOT recommended."

This is very true, largely because the average private investor both knows little about how to do so and because most people are pretty dumb about money and thus require big dumb investment strategies. I have a 401k account too, and my company offers a large pension, but I realize I can truly count on neither because they are not within my control. Unwise investment of pension assets could get my six figure retirement cut severely or nearly eliminated. Retirement account trading is also very limited to supposedly "safe" investments like blue chips or government bonds. I mistrust both, but trade that account as I can, maximizing it with the blunt instruments. For instance I traded all my blue chips for government T-bills right before the last market meltdown occurred. I made very little on my 401k money over the next year, but didn't lose like 95% of the others, and I was poised to make a killing when the big bounce happened in 09.
Point is, if you are smart and savvy and a bit of an autodidact, you can do much better for yourself trading smart instead of following the herd. Especially in this age of land sharks who enjoy stampeding the herd off the nearest financial cliff.
The "safe" money was in housing, remember? Until it wasn't of course. Until the most predictably conservative investment in American history broke the back of America's middle class.
Go against the grain. That, I thought, is what Patrick.net is all about!

22   scott777   2012 Feb 12, 3:13am  

Find a way to WALK from this debt. Unless you have a really great job. It sounds unethical but it is even more unethical to loan this kind of money to a young person without any collateral. THE BANKSTERS know the government will pick up the tab if you walk and the government will not allow you to file bankruptcy on this debt. How ethical is this? It is debt slavery. Even if you are earning $175,000 a year your loan is like a house payment. And if you earn over a certain amount of money you cannot write off the interest. Join the military or leave the country or become emotionally disabled. Put that $175,000 education to work on walking from this debt. Otherwise this debt will prevent you from having a family and ever owning or even being a loan owner of a home. If you do the math you are screwed. This was a bad decision on your part but the banksters and the government allowed it. If you are poor but highly intellegent the government should sponser advanced education beyond a $40,000 loan. We need our smart people educated. In the future people will leave the country when they get these kinds of student loan debts. No point in paying it back unless you are making over $250,000 a year. And if you are after taxes and your loan you still will be living an average lifestyle. What is the point.? Sorry to rant..

23   GUAB   2012 Feb 12, 8:46am  

scott777 says

Find a way to WALK from this debt.

lol. yeah, good luck with that.

24   Eliza   2012 Feb 12, 1:09pm  

If you can swing it, you might try placing an equal value on these three things:
1) Put some money aside for that theoretical 6 month basic expenses cushion. This money should not be invested. It should be in something boring and stable, chugging along at a guaranteed rate with FDIC or NCUA coverage. Things happen, and you might need that money to get by at some point, and you want it to be there even if the stock market is acting funny.
2) Fill your retirement accounts (or at least an IRA for each of you if you are eligible).
3) Pay off that loan so that you can stop worrying about it. Get the lowest interest rate you possibly can.

25   xlr8   2012 Feb 12, 1:43pm  

You cannot walk away from student loan debt. This has been tried years ago when students graduated and declared bankruptcy. Now government will go after you to pay the loans back

26   Clara   2012 Feb 12, 2:34pm  

Another reason why I think PHD is so overrated. From a totally financial point of view, you can't afford the degree. Why spend a lifetime paying for it... "Y U No smart enough to figure that out to begin with??!"

27   tdeloco   2012 Feb 12, 3:35pm  

Clara says

Another reason why I think PHD is so overrated

"Don't let your schooling get in the way of your education"
-Mark Twain

28   StoutFiles   2012 Feb 12, 10:19pm  

scott777 says

Find a way to WALK from this debt. Unless you have a really great job. It sounds unethical but it is even more unethical to loan this kind of money to a young person without any collateral.

It's a good thing he can't do this, otherwise we'd have a huge wave of people not paying off those loans either. No one forces you to sign up for decades of debt slavery. If you make that decision and it fails financially, you have to own up to it.

Hopefully this guy is making enough money to pay back his debts. The rule of thumb is your starting salary should be greater or equal to the amount of debt you have.

29   mdovell   2012 Feb 13, 12:22am  

Clara says

Another reason why I think PHD is so overrated. From a totally financial point of view, you can't afford the degree.

I was under the impression it depends as to what institution you go to.

I still don't see how 180K was possible unless it included graduate and undergrad and even then that's pretty high

Here's chicago which for business is pretty high end
http://www.chicagobooth.edu/phd/costs.aspx

but this site claims it would cost 200-300K
http://education-portal.com/articles/How_Much_Does_a_Doctorate_Degree_Cost.html

Here's a blog that details things I think in a more honest manner
http://phdtips.blogspot.com/2009/03/how-much-does-it-cost-to-get-phd-degree.html
From what I thought was that you'd be working pretty much for the institution and that although it wouldn't technically come at a high cost you are basically working and being paid a low amount in exchange for not being charged.

30   DrPepper   2012 Feb 13, 9:50am  

I'd pay off the debt. When you pay off debt you basically know your gain ahead of time. Its guarenteed to save you X amount of money. Right now, I don't see the stock market really being a safe place for money. Even if it was, I'd lean towards debt reduction because debt is essentially a chain around your neck until its gone.

31   everything   2012 Feb 13, 9:59am  

30% debasement by 2030?, don't worry about them to much, I waited the maximum time before interest started accruing, then paid them off one at a time, then again my total student loan debt back in 95 was only 10k, I was very careful about not borrowing any more than I needed.

32   AdamCarollaFan   2012 Feb 23, 3:19am  

at a 4.7% interest rate, you should look into consolidating to get a lower rate.

live frugally, max out the retirement accounts, and dump as much as you can to pay off that albatross of a debt. you'd "earn" 4.7% just by servicing the debt.

i think the majority of PhD programs are a scam. they're going to contribute to what some say will be the next bubble - the higher education bubble.

http://www.economist.com/blogs/schumpeter/2011/04/higher-education_bubble_0

33   Vicente   2012 Feb 23, 6:05am  

I return to a hoary old quote told to me, by a rich guy:

Poor people PAY interest
Rich people EARN interest

First focus for me out of college was eliminating debt. That said it all depends on the terms of the loans and what the tradeoffs are. You cannot bankrupt your way out of student loans so eliminating that obligation to me would come before all other debts which in worst case I could skate out of.

34   PockyClipsNow   2012 Feb 23, 6:26am  

Heres my advice:

1. keep paying bare minimum on all loans to keep credit good

2. buy as many properties as you can with mortgages (put as little down as possible). crappy, run down SFR in older gentrified area where every other home is a remodeled McMansion and the original homes are crappy rentals is perfect.
2. You might get 8 homes easily before the FHA says 'no more loans'.
3. A year after buying them all extract max HELOC money on all 8 homes. you only need to average 22k per property which should easily be doable- the key is you need to put a fresh paint job and cheap landscaping in to get them the highest appraisal. You might pull 50k out average and end up very well off!
4. Pay off student loans with HELOC cash.
5. Sell homes since they probably will not cash flow as rentals anymore with all that HELOC cash pulled out.
6. If real estate goes down in price you short sell all the homes and/or declare BK.

So in 2 years you got paid off loans, and fat stacks of cash in the bank! Remember your intent is NOT to default on the mortgages -(thats illegal) your intent is to make money in real estate to pay off your student loans (totally legal).

I tell people this and it blows they mind. Only a chump pays off student loans with hard earned cash IMO.

Remember 'if real estate prices go down' its not your fault that those loans are all dischargeable in BK but Student loans are not. Lucky for you, you paid off all student loans and the feds will be happy.

35   xlr8   2012 Feb 23, 2:15pm  

PockyClipsNow,

This sounds just a tad bit fishy, but thanks for the advice! :)

36   New Renter   2012 Feb 23, 3:27pm  

xlr8 says

2 professionals and neither of our parents had money to put us through doctoral level degrees.

What are your professions if you don't mind me asking?

37   theoakman   2012 Feb 24, 12:16am  

Clara says

Another reason why I think PHD is so overrated. From a totally financial point of view, you can't afford the degree. Why spend a lifetime paying for it... "Y U No smart enough to figure that out to begin with??!"

Most PhD's in the sciences are fully paid for by grants. That being said, despite all my friends in Chemistry & Chemical Engineering the past 2 years have graduated with Doctorates debt free, it wasn't worth it. No one is willing to hire them because they don't want to pay them a measly $70K and they are forced to accept entry level jobs paying below what my colleagues who went straight into industry out of undergrad at age 21 made 7 years ago.

38   freak80   2012 Feb 24, 1:55am  

RentingForHalfTheCost says

Funny how everyone thinks 180K is a huge amount to invest in someones education and the increase in life quality that comes with it, but look at a $1million dollar cottage in agreement. Good schools, short commute, safe neighborhood, etc. You are still buying a run down PIS people!

Who the f*** pays a million bucks for a cottage? That cottage better be constructed of pure gold...

My goodness, I'm in the wrong business. I should get into money lending.

39   AJ1201   2012 Feb 24, 4:53am  

PockyClipsNow says

So in 2 years you got paid off loans, and fat stacks of cash in the bank! Remember your intent is NOT to default on the mortgages -(thats illegal) your intent is to make money in real estate to pay off your student loans (totally legal).
I tell people this and it blows they mind. Only a chump pays off student loans with hard earned cash IMO.
Remember 'if real estate prices go down' its not your fault that those loans are all dischargeable in BK but Student loans are not. Lucky for you, you paid off all student loans and the feds will be happy.

This is too good but if you have the instestinal fortitude....moving to Europe might be a better option after a few years........

40   PockyClipsNow   2012 Feb 24, 7:24am  

I say my plan is PLAN A. If it fails you can ALWAYS move to europe, it will still be there.

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