Pay down debt, or invest for future?

Let's say you have well over six figures in government student loan debt, at about 6.8% interest. That's debt that won't be forgiven (I have checked) and won't wash out in bankruptcy, and your income precludes income based repayment.

Would you forgo all investment opportunities in the name of paying down the debt aggressively? Or would you mix investments in to your budget? Things like retirement, college funds for kids, etc?

We are on track to pay it off in about 8 - 10 years, but we aren't being overly aggressive yet. I am of the mind we should kill it ASAP. My thought is that paying debt is essentially risk free, and there isn't an investment that will afford me a 7% return to offset our loan interest.

When I read your post title my immediate reaction was "PAY DOWN DEBT!!!"

After reading your post...I would like to add at least 3 more exclamation marks to that.

Uncle Dave always restates the question as: If you had no debt, would you go to the bank and take out a loan and put that money in whatever investment you're looking at?

I don't know if I 100% agree with everything he says, but he's got a lot more money and radio show than I do...

Kill it with fire. Uh... Nuke from orbit. Uh... pay that sucker off. There's no way you'll get a 7% return on anything anywhere for quite some time.

The only other thing to look at, in my opinion, would be a home mortgage. I disagree with Dave on this. He always says pay the SL off first (or in the mix, smallest to largest, except for the mortage) and then at the end pay off the home. The way I look at it, assume the worst case scenario and you can't afford both student loans and the mortgage. What is reposesable? If you owe, say, 150 on the SL and 150 on the house, why not pay the house off first? Now, if you owe 150 on the SL and 400 on the house, well, that would change it up a bit.

I can't think of any reason for you to invest in anything with less then a guaranteed 6.8% gain.

The interest payments on the loan should be tax deductible, so you will need to adjust that 6.8% accordingly (for comparison purposes).

Mortgages usually have much lower rates, so it makes sense to pay them off last, or invest before paying off the mortgage if you can get a higher return than the mortgage rate.

So long as you have your "oh E36 M3" fund set aside, put everything else you've got toward the debt. Kill it with fire.

Definitely pay off the student loans. If you invest the money and still have the loans you're basically paying money for nothing. You won't get enough of a return from a safe investment to offset the losses on the loan.

Also look at expenses you can cut to help pay the loan off faster.

Kill off the student loans.

If it's with Sally Mae et al, you can negotiate the interest or in emergency get a slight reprieve; but never forgiven.

Start stalling and you will have this debt into retirement!

dculberson wrote: Definitely pay off the student loans. If you invest the money and still have the loans you're basically paying money for nothing. You won't get enough of a return from a safe investment to offset the losses on the loan. Also look at expenses you can cut to help pay the loan off faster.

Exception: Company matched 401k. Immediate 100% return, so get the max match before you get to the loans.

As you have already found out, student loans are an Albatros around your neck. Pay them off as soon as you can.

That said, if you have a reasonably sized emergency fund that allows you to keep paying the SL for your "expected job search time" in case one of you gets laid off, I would put some money into a 401(k), especially if your employer offers a match.

The main reason for retirements investments is that the earlier you start, the more time your money has to grow and provide you with a decent nest egg for retirement. I couldn't do much retirement investment until recently due to an old business failure that left me with a lot of debt to pay back and trust me, you don't want to have to restart your retirement savings in your early fourties from scratch. I'll be working for a looooong time.

BoxheadTim wrote: The main reason for retirements investments is that the earlier you start, the more time your money has to grow and provide you with a decent nest egg for retirement. I couldn't do much retirement investment until recently due to an old business failure that left me with a lot of debt to pay back and trust me, you don't want to have to restart your retirement savings in your early fourties from scratch. I'll be working for a looooong time.

That's the problem here. My wife says the same, and we're making pretty good money right now, so can afford to put some eggs in different baskets - we have a solid rainy day fund. We are each putting about 10% into our 401k. And we're paying down the debt at a reasonably aggressive rate at the same time.

Now, I could certainly forgo my 401k as the match is only 1%, so that would cut down our repayment time on the loans from ~ 10 years to ~ 8 years. My wife could do the same, and maybe drop it further to about 6 years.

But then, in 3-5 years we are also planning on getting a business loan so she can open her own practice with a colleague. And once that happens, money could be pretty tight as far as saving goes for a couple years.

Basically, our worry is that if we get really aggressive now with paying down the student loans, we'll never find the time or money to save for retirement later.

BoxheadTim wrote: As you have already found out, student loans are an Albatros around your neck. Pay them off as soon as you can.

For him, yes.

I was able to consolidate my loans when I graduated at a sub 2% interest rate. I literally paid $350 in interest last year. In my case, paying off early is a poor move.

To me student loans (which I fortunately don't have, but my wife still has some) are bigger than just the interest rate. Not only can they not be discharged in bankruptcy, debt collectors also have far bigger powers when it comes to collect on deliquent student loans compared to other debts and can touch monies that other collectors can't (for example Social Security).

paying off your debt is investing in your future.

Paying down debt is investing in your future.

I would put everything into paying off the debt less company matching 401k.

I know entirely to many people in the situation of >100K in student loan debt. Some of them will literally never be able to pay it off and instead just get to make a $250/mo payment for the rest of their lives.

I couldn't pay off a 100K house loan in 30yrs. A student loan over 60 yrs? Maybe, but then there'd be no money left to buy a house!

Numbers like these are beyond my comprehension.

nocones wrote: I know entirely to many people in the situation of >100K in student loan debt. Some of them will literally never be able to pay it off and instead just get to make a $250/mo payment for the rest of their lives.

I've met people that feel like this, but some of them are people that feel like they can never pay it off yet drive a <2yr old $40K SUV, a 30 mile each way commute, have the latest smartphone, and stop at starbucks for a $5 coffee twice a day.

No these people literally can't pay it off. They work at Best Buy making 14.00/hr because there communications degree from a private school as well as 4 years of booze was funded almost entirely by student loans. The other is an Industrial designer who went to a ~75k/yr school and has nearly 300K in loan debt and can only find work that pays between 50-60k/yr because guess what the world doesn't need a ton of industrial designers. I suppose the 2nd guy could pay it off eventually but he will probably want to retire before then.

I'm in for the contribute to your 401K until you hit the match limit then go after the student loan debt. Think down the road when you want to buy a house, get married, have rug rats wtc. It's all closer than you think, take this from some one who graduated about 6 months ago, except 6 months ago is more like 23 years years ago, time really starts to fly from where you are on. All those things will be easier to do without the student loan debt.

Man all this talk makes me feel a lot less screwed. I'm just spinning my wheels working for the kind of money American companies outsource to pay...but the only debt I have is a low-4-digit amount to a mechanic.

Lesley wrote: Paying down debt is investing in your future.

+1

nocones wrote: No these people literally can't pay it off. They work at Best Buy making 14.00/hr because there communications degree from a private school as well as 4 years of booze was funded almost entirely by student loans. The other is an Industrial designer who went to a ~75k/yr school and has nearly 300K in loan debt and can only find work that pays between 50-60k/yr because guess what the world doesn't need a ton of industrial designers. I suppose the 2nd guy could pay it off eventually but he will probably want to retire before then.

That is sad sad sad but stupid on their behalf as well. I have a niece who did a 4 year liberal arts degree at a private collage and graduated with $60-70k in debt. We (the rest of the family) all told her it was a dumb idea and to go to a local state school and live at home, but no, teenagers know best. Last I heard she was earning minimum wage at Victoria Secrets, she will never shed that debt.

The best rule of thumb I've heard is never get more student loan debt than you can realistically earn in your first year out of school. That way it will be a manageable amount. So if you’re going to be a Doc, then ending up with $100k in debt should be manageable as long as you don't buy a $1m home and brand new Mercedes with your first pay check (It's been done) but if your chosen filed has a real starting salary of $30-40K then make sure as hell you don't graduate with more than $30K in debt. Also be realistic about what your starting salary will be don't assume just because the success story the school is touting is going to be you.

Oh I 100% agree they made horrible decisions. I very much hope that I can manage to prevent my kids from making similar ones in 15 years when they need to make those decisions.