To pay them off or not pay them off...... help!
July 25, 2007 4:06 PM Subscribe
Am I being stupid about money?
I have a lot of student loan debt (around $80K). Half of it is government loans at really low interest. The other half is through citibank, and the interest rate is 8.5-8.75% depending on which loan it is.
I have a 401K worth around $40K. My husband has a 401K and a Roth worth around $35K. We are both 30. We make around $100K combined. We own a home that we put 20% down on (but because of emergency repairs we had to take 12% of that 20% out as a home equity loan). We have no debt outside the loans for school and the house. We make one car payment.
We also have around 60K in other stocks. I'd like to sell enough of those stocks to pay off the citibank student loans. The difficulties here are that the stock is my husband's, and the loans are mine (this is my issue, not his -- he will do whatever I think is best when it comes to money), and that we would take a large capital gains hit on the sale of the stock (some of it has been held for almost 30 years).
I've talked to our financial adviser about this. He lays out the varying scenarios, and I understand the risks involved in paying them off or not paying them off.
But, I feel crushed and limited by the debt. The payments on the citibank loans are $550. I would be perfectly willing to put that money right back into our savings and investments. I would rather have that cash flow and the control, though, in case something bad happens again (see emergency repairs, above). Or in case we have kids and one of us wants to quit. Or... for whatever.
Do you have a rational argument for me that continuing to pay the student loans (and all that interest!) is the right thing to do that will make me feel less trapped?
(I realize by typing this that I am really blessed to be in this situation. I am grateful, believe me. I'm just also paralyzed by the choice.)
I have a lot of student loan debt (around $80K). Half of it is government loans at really low interest. The other half is through citibank, and the interest rate is 8.5-8.75% depending on which loan it is.
I have a 401K worth around $40K. My husband has a 401K and a Roth worth around $35K. We are both 30. We make around $100K combined. We own a home that we put 20% down on (but because of emergency repairs we had to take 12% of that 20% out as a home equity loan). We have no debt outside the loans for school and the house. We make one car payment.
We also have around 60K in other stocks. I'd like to sell enough of those stocks to pay off the citibank student loans. The difficulties here are that the stock is my husband's, and the loans are mine (this is my issue, not his -- he will do whatever I think is best when it comes to money), and that we would take a large capital gains hit on the sale of the stock (some of it has been held for almost 30 years).
I've talked to our financial adviser about this. He lays out the varying scenarios, and I understand the risks involved in paying them off or not paying them off.
But, I feel crushed and limited by the debt. The payments on the citibank loans are $550. I would be perfectly willing to put that money right back into our savings and investments. I would rather have that cash flow and the control, though, in case something bad happens again (see emergency repairs, above). Or in case we have kids and one of us wants to quit. Or... for whatever.
Do you have a rational argument for me that continuing to pay the student loans (and all that interest!) is the right thing to do that will make me feel less trapped?
(I realize by typing this that I am really blessed to be in this situation. I am grateful, believe me. I'm just also paralyzed by the choice.)
If the stocks are doing well and pay dividends, then the stocks in and of themselves represent cash flow. Also, who needs cash flow when you have 60k in investments you could liquefy immediately in an emergency? Personally, I would rather have a large amount of a cash equivalent in hand and a manageable monthly payment. From a contingency planning standpoint, it is better to be able to get at a shitload of money quick (to say make bail, deal with job loss, or deal with getting deported) than it is to be debt-free and to be building investments. If the financial pros say your current approach is (with debt) is not a loss in the long-term then go for it.
posted by crazycanuck at 4:17 PM on July 25, 2007
posted by crazycanuck at 4:17 PM on July 25, 2007
I would rather have that cash flow and the control, though, in case something bad happens again
What's that again now? If something bad happens and you need a lot of cash right now, you'd rather have $550/month present cash flow instead of $60K worth of stock that you could immediately liquidate?
That makes no sense whatsoever.
Also, your student loan interest is tax deductible - continuing to pay it is overall a tax win, and depending on your marginal income tax rate could drop the "real" (tax and inflation adjusted) interest on the loan below 0% - whereas selling the appreciated stock deprives you of this benefit and makes you take a serious capital gain tax hit.
Are you able to deduct the interest on your HELOC? (You should be, if the money was used for home repairs. If not, it probably makes more sense to pay that off first.)
I think in your situation I'd keep making the minimum payments and hold onto the appreciated stock. Bird in the hand is worth two in the bush, etc.
posted by ikkyu2 at 4:22 PM on July 25, 2007
What's that again now? If something bad happens and you need a lot of cash right now, you'd rather have $550/month present cash flow instead of $60K worth of stock that you could immediately liquidate?
That makes no sense whatsoever.
Also, your student loan interest is tax deductible - continuing to pay it is overall a tax win, and depending on your marginal income tax rate could drop the "real" (tax and inflation adjusted) interest on the loan below 0% - whereas selling the appreciated stock deprives you of this benefit and makes you take a serious capital gain tax hit.
Are you able to deduct the interest on your HELOC? (You should be, if the money was used for home repairs. If not, it probably makes more sense to pay that off first.)
I think in your situation I'd keep making the minimum payments and hold onto the appreciated stock. Bird in the hand is worth two in the bush, etc.
posted by ikkyu2 at 4:22 PM on July 25, 2007
The difficulties here are that the stock is my husband's, and the loans are mine
Yeah, umm, you're married, so the idea of "yours" and "mine" are a little bit different from when you were dating. This yours and mine thing doesn't factor into the equation all nice and neat.
Do you have a rational argument for me that continuing to pay the student loans (and all that interest!) is the right thing to do that will make me feel less trapped?
Is the interest on the debt you're paying less than the money gained from the stock in the form of dividends? Then keep the stock. Otherwise ... stocks fall, but debt follows. Pay the debt.
posted by Cool Papa Bell at 4:26 PM on July 25, 2007
Yeah, umm, you're married, so the idea of "yours" and "mine" are a little bit different from when you were dating. This yours and mine thing doesn't factor into the equation all nice and neat.
Do you have a rational argument for me that continuing to pay the student loans (and all that interest!) is the right thing to do that will make me feel less trapped?
Is the interest on the debt you're paying less than the money gained from the stock in the form of dividends? Then keep the stock. Otherwise ... stocks fall, but debt follows. Pay the debt.
posted by Cool Papa Bell at 4:26 PM on July 25, 2007
I'm not sure how much money you have at the end of every month. It sounds like you owe on student loans, HELOC and a car. Why not attempt to pay down your highest interest debt (after tax deductions), with the initial goal of eventually getting into a position where your debt and stock are equivalent in value? If your long term gains on the stock are higher than the interest you're paying on the loan, you're ahead. It would also be good if you could eventually get into a position where you only pay cash for cars (unless they're offering an interest-free or very low interest loan).
posted by acoutu at 4:39 PM on July 25, 2007
posted by acoutu at 4:39 PM on July 25, 2007
I'd say that keeping the loans outstanding versus paying them off with sold stock is costing you at most $1,000 a year on a net basis. Whatever stress that is causing you is peanuts compared to the stress you'd have if you drew down your liquid assets to $10,000 and then your roof started to leak in the same week you lost your job...
posted by MattD at 4:40 PM on July 25, 2007
posted by MattD at 4:40 PM on July 25, 2007
Money is not just about logic and reason. Sometimes worries about money can become so stressful that it makes sense to do something that's not necessarily the best logical choice, in order to feel better about your overall situation. When you feel in control of the big picture, you can better manage your day-to-day spending.
For the $40,000 that you're paying 8.5-8.75% on, I think it _does_ make sense to sell some stock -- say $20,000 worth -- in order to cut that portion of the debt in half.
You'll now owe less every month, but keep paying the same amount you've been paying all along. Your balance will shrink much faster, because interest won't be accumulating so fast. To make the balance shrink even faster, pay half of your monthly due every two weeks. You'll make 26 half payments in a year, instead of 12 full payments, so you'll effectively pay a full month extra every year.
If an emergency happens, you can temporarily go back to paying the minimum, you'll have the extra cash on hand. In the mean time, you'll be making your balance disappear.
posted by croutonsupafreak at 4:44 PM on July 25, 2007
For the $40,000 that you're paying 8.5-8.75% on, I think it _does_ make sense to sell some stock -- say $20,000 worth -- in order to cut that portion of the debt in half.
You'll now owe less every month, but keep paying the same amount you've been paying all along. Your balance will shrink much faster, because interest won't be accumulating so fast. To make the balance shrink even faster, pay half of your monthly due every two weeks. You'll make 26 half payments in a year, instead of 12 full payments, so you'll effectively pay a full month extra every year.
If an emergency happens, you can temporarily go back to paying the minimum, you'll have the extra cash on hand. In the mean time, you'll be making your balance disappear.
posted by croutonsupafreak at 4:44 PM on July 25, 2007
I feel crushed and limited by the debt.
I feel the same way about debt. I just hate it. Here's the thing: it's probably a better financial move to keep the stock. But what's the cost of the emotional impact on you to keep the loans? What would it be worth to you to have the feeling of knowing that Citibank loans were paid off? Put that in your analysis, too.
You can liquidate some stock and pay off the loans, and in so doing you'll get an instant 8.5% return on your investment (by not having to pay that 8.5% on the loans.) Yeah, you probably would have done better than that in the stock market, but it's not at all a stupid move to pay off the loans. Think about it this way: would you have gone into debt to finance your stock purchases? Probably not. But every month you make the choice to stay in debt so you can keep your stocks. What's the difference?
Justifiable + helps me sleep better = a good move, IMO.
posted by Pater Aletheias at 4:50 PM on July 25, 2007 [1 favorite]
I feel the same way about debt. I just hate it. Here's the thing: it's probably a better financial move to keep the stock. But what's the cost of the emotional impact on you to keep the loans? What would it be worth to you to have the feeling of knowing that Citibank loans were paid off? Put that in your analysis, too.
You can liquidate some stock and pay off the loans, and in so doing you'll get an instant 8.5% return on your investment (by not having to pay that 8.5% on the loans.) Yeah, you probably would have done better than that in the stock market, but it's not at all a stupid move to pay off the loans. Think about it this way: would you have gone into debt to finance your stock purchases? Probably not. But every month you make the choice to stay in debt so you can keep your stocks. What's the difference?
Justifiable + helps me sleep better = a good move, IMO.
posted by Pater Aletheias at 4:50 PM on July 25, 2007 [1 favorite]
Do you have a rational argument for me that continuing to pay the student loans (and all that interest!) is the right thing to do that will make me feel less trapped?
Are you asking "what is the right/smartest financial move for me?" or "how can I feel less trapped about carrying student loan debt?"
The first question is a financial calculation, which your advisor has probably already been through with you, and you say you understand it, so I won't belabor it. Even though paying interest hurts, it can still be a better financial move for you depending on what you'd have to give up to stop paying it. (Also it helps it feel better if you mentally figure in the student loan interest deduction-- ie 8.5% interest is effectively 6.375% interest if you're in the 25% tax bracket.)
As to the second question-- as others have said, you actually are much less trapped in case of emergency. Paying off the student loans by depleting the stocks means that while you pay $550 less on a monthly basis (which, if you are really going to put that money immediately back into savings, doesn't affect your cash flow) you also have ~$40,000 less at your disposal, and you may be caught without enough money if you have another costly emergency, and have to go take out another loan.
I would rather have that cash flow and the control... in case we have kids and one of us wants to quit.
Okay, understood, but why do you have to cross this bridge now? (Unless this is much more decided-on and impending than you make it sound.) If you decide to have kids and one of you wants to quit, and you can't afford the loan payments anymore, you can always sell your stocks and pay off your debt then. If you are concerned about the value of your stocks falling between now and then, then maybe your issue is getting some of that money into more conservative investments. (Then you or your financial advisor should do the calculations again to figure out if it is still a good financial move to pay the student loans on-schedule.)
All of that being said... if you try to feel less trapped about the debt, but it's still really bothering you, then no one says you have to make the absolute most financially beneficial move. Money is just a tool to help us have the lives we want. If it's worth it to your peace of mind to make the "wrong" decision and pay off the loans, then do it. You just owe it to yourself (and your husband) to really think it through first, or else you may end up financially worse off and feeling just as trapped for the opposite reason.
posted by EmilyClimbs at 5:17 PM on July 25, 2007 [2 favorites]
Are you asking "what is the right/smartest financial move for me?" or "how can I feel less trapped about carrying student loan debt?"
The first question is a financial calculation, which your advisor has probably already been through with you, and you say you understand it, so I won't belabor it. Even though paying interest hurts, it can still be a better financial move for you depending on what you'd have to give up to stop paying it. (Also it helps it feel better if you mentally figure in the student loan interest deduction-- ie 8.5% interest is effectively 6.375% interest if you're in the 25% tax bracket.)
As to the second question-- as others have said, you actually are much less trapped in case of emergency. Paying off the student loans by depleting the stocks means that while you pay $550 less on a monthly basis (which, if you are really going to put that money immediately back into savings, doesn't affect your cash flow) you also have ~$40,000 less at your disposal, and you may be caught without enough money if you have another costly emergency, and have to go take out another loan.
I would rather have that cash flow and the control... in case we have kids and one of us wants to quit.
Okay, understood, but why do you have to cross this bridge now? (Unless this is much more decided-on and impending than you make it sound.) If you decide to have kids and one of you wants to quit, and you can't afford the loan payments anymore, you can always sell your stocks and pay off your debt then. If you are concerned about the value of your stocks falling between now and then, then maybe your issue is getting some of that money into more conservative investments. (Then you or your financial advisor should do the calculations again to figure out if it is still a good financial move to pay the student loans on-schedule.)
All of that being said... if you try to feel less trapped about the debt, but it's still really bothering you, then no one says you have to make the absolute most financially beneficial move. Money is just a tool to help us have the lives we want. If it's worth it to your peace of mind to make the "wrong" decision and pay off the loans, then do it. You just owe it to yourself (and your husband) to really think it through first, or else you may end up financially worse off and feeling just as trapped for the opposite reason.
posted by EmilyClimbs at 5:17 PM on July 25, 2007 [2 favorites]
It all depends on your rate of return. If you are making a higher rate with the stocks than you are paying with the loan, don't sell. Also, have you looked into getting a lower interest rate loan to pay back the higher interest rate one and using the stocks as a loan guarantee?
Also, remember when considering this that interest on student loan payments is a tax deduction. So you'd want to consider that along with captial gains taxes.
posted by Pants! at 5:17 PM on July 25, 2007
Also, remember when considering this that interest on student loan payments is a tax deduction. So you'd want to consider that along with captial gains taxes.
posted by Pants! at 5:17 PM on July 25, 2007
The stock market could tank. Just another factor to consider. My dad luckily sold off a bunch of tech stock to pay off student loans right there in the early parts of 2000.
posted by salvia at 5:22 PM on July 25, 2007
posted by salvia at 5:22 PM on July 25, 2007
Also, don't let people give you too many hassles about still considering some money "his" and some "yours." Use the money if you decide you want to (since he's okay with that), but also, do what feels right to you. Couples handle money all different ways. Don't override your sense of what feels right or wrong over a little bit of interest. If you think you'll go around feeling you should "pay it back," I wouldn't incur the transaction costs.
posted by salvia at 5:27 PM on July 25, 2007 [1 favorite]
posted by salvia at 5:27 PM on July 25, 2007 [1 favorite]
Ignoring the financial advice part... I personally see great value in not having debt, and I completely understand feeling weighed down by debt, even if you easily have the funds to cover it in an emergency.
You need to either adjust your outlook on the loan payments, or pay them off.. there is no sense in letting something bother you in life if you have the means to correct it.
If paying off the debts early from your savings has a financial cost, see what that cost is, and decide if it's worth it. Maybe a few thousand bucks out of the next decade is worth it for you to be free debt.
posted by TravellingDen at 5:31 PM on July 25, 2007
You need to either adjust your outlook on the loan payments, or pay them off.. there is no sense in letting something bother you in life if you have the means to correct it.
If paying off the debts early from your savings has a financial cost, see what that cost is, and decide if it's worth it. Maybe a few thousand bucks out of the next decade is worth it for you to be free debt.
posted by TravellingDen at 5:31 PM on July 25, 2007
Seconding salvia; the economy's still not seen the worst of the housing crash.
posted by nasreddin at 5:33 PM on July 25, 2007
posted by nasreddin at 5:33 PM on July 25, 2007
(Also it helps it feel better if you mentally figure in the student loan interest deduction-- ie 8.5% interest is effectively 6.375% interest if you're in the 25% tax bracket.)
I'm not sure about this math. Isn't the student loan interest deduction capped at $3000 a year? Not all of the debt is benefiting from a tax advantage. (My wife's loan is 50k, and I know we pay quite a bit more in interest than we can deduct, and her is locked in at 7.25%).
posted by Pater Aletheias at 5:37 PM on July 25, 2007
I'm not sure about this math. Isn't the student loan interest deduction capped at $3000 a year? Not all of the debt is benefiting from a tax advantage. (My wife's loan is 50k, and I know we pay quite a bit more in interest than we can deduct, and her is locked in at 7.25%).
posted by Pater Aletheias at 5:37 PM on July 25, 2007
i would leave the government loans untouched - really low interest rates, and it sounds like you've got a handle on this
with the tax write off and the low rates, gosh, i'm sure you're actually paying 3 percent or something on the loans
so (and this is the simple example here for your gov loans) you have 40k in gov loans @ 3 percent interest - leave them!!!! you can invest in even a good CD or some bonds and probably do better, and certainly a lot better in proper equities
now, when it comes to your private student loans (i too have about 40K), you've got to look at what your rate is on those, so like 8.5 percent, and you expense a percent or two at least out of that per year, maybe more. so say, conservatively, you pay like 7 percent on that money
that's a little tricky - but if you're making more on your investments than the percent on those loans, then just leave them be, and deal with what you're payhing, because you're still socking away money for your future a lot later - plus, you'd have to forfeit on capital gains and that's no good
you might consider a compromise, paying down a chunk of those for piece of mind - and then refinancing them to bring payments down - of course this does not make a lot of sense financially because you'll end up paying more over time - but you might get some peace of mind
soooo.....i would leave them be, especially don't worry about the gov loans, and frankly, the best thing might be to try your best to sock away money any way you can to start nibbling away at those private loans.
posted by Salvatorparadise at 6:50 PM on July 25, 2007
with the tax write off and the low rates, gosh, i'm sure you're actually paying 3 percent or something on the loans
so (and this is the simple example here for your gov loans) you have 40k in gov loans @ 3 percent interest - leave them!!!! you can invest in even a good CD or some bonds and probably do better, and certainly a lot better in proper equities
now, when it comes to your private student loans (i too have about 40K), you've got to look at what your rate is on those, so like 8.5 percent, and you expense a percent or two at least out of that per year, maybe more. so say, conservatively, you pay like 7 percent on that money
that's a little tricky - but if you're making more on your investments than the percent on those loans, then just leave them be, and deal with what you're payhing, because you're still socking away money for your future a lot later - plus, you'd have to forfeit on capital gains and that's no good
you might consider a compromise, paying down a chunk of those for piece of mind - and then refinancing them to bring payments down - of course this does not make a lot of sense financially because you'll end up paying more over time - but you might get some peace of mind
soooo.....i would leave them be, especially don't worry about the gov loans, and frankly, the best thing might be to try your best to sock away money any way you can to start nibbling away at those private loans.
posted by Salvatorparadise at 6:50 PM on July 25, 2007
You haven't noted the interest rates on your other debts. What rates are you paying for your car loan, HELOC and mortgage? I'm assuming that, even after deductions, your higher rate student loan has the highest interest rate, since you seem concerned about that debt in particular. However, that may not be the case.
posted by acoutu at 6:57 PM on July 25, 2007
posted by acoutu at 6:57 PM on July 25, 2007
I didn't read what everyone else wrote, but I would send this question to either of the guys at thesimpledollar.com or getrichslowly.com and they'll probably give you great advice, as well as posting this to their blog.
posted by uncballzer at 8:31 PM on July 25, 2007
posted by uncballzer at 8:31 PM on July 25, 2007
You could just post it in the forum at GetRichSlowly.org, too.
posted by acoutu at 10:00 PM on July 25, 2007
posted by acoutu at 10:00 PM on July 25, 2007
I like croutonsupafreak's and salvia's answers.
Also, unless your effective tax bracket is pretty high, tax deductibility should be a secondary consideration. Don't let the tax tail wag the dog.
posted by small_ruminant at 9:31 AM on July 26, 2007
Also, unless your effective tax bracket is pretty high, tax deductibility should be a secondary consideration. Don't let the tax tail wag the dog.
posted by small_ruminant at 9:31 AM on July 26, 2007
We were in a very similar situation recently; we opted to pay off the loans. We had $50K in a 5.1% online account and $30K in student loans. Financially, it was just barely a losing proposition; psychologically, it was a great great decision.
If you have the money now, and you will not get too hurt on the capital gains tax, I think it is worth it. We got a letter that basically said "thanks for paying off your loan. we are done here" and it felt superb. Like you suggest doing, we have been paying ourselves back each month and growing our savings, but we feel free to miss a month if expenses are high and with $20K+ still liquid (and other accessible funds in a 401K in case of a true emergency) we feel comfortable that we have surplus if we need it.
posted by Duluth?! I Hardly Know Her! at 11:19 AM on July 26, 2007 [1 favorite]
If you have the money now, and you will not get too hurt on the capital gains tax, I think it is worth it. We got a letter that basically said "thanks for paying off your loan. we are done here" and it felt superb. Like you suggest doing, we have been paying ourselves back each month and growing our savings, but we feel free to miss a month if expenses are high and with $20K+ still liquid (and other accessible funds in a 401K in case of a true emergency) we feel comfortable that we have surplus if we need it.
posted by Duluth?! I Hardly Know Her! at 11:19 AM on July 26, 2007 [1 favorite]
Money matters can be very emotional and the myriad options can be completely overwhelming.
The good news is that while you have some debt you're making good money and it's manageable.
I'd write down all the scenarios that you can think of and bounce them off of a financial adviser and a tax adviser. Quiz them about any scenarios that you didn't think of. Take lots of notes; you want to know exactly how each option adds up money wise and time wise.
I know you've already discussed the situation with a fin adviser but working out concrete scenarios will empower you.
I suggest a CPA too because, in my experience, financial advisers sometimes miss tax gotchas. I believe that not all student loans are tax deductions. Plus you make enough money that selling stock could trigger AMT, which might hurt.
In any case, after you have your scenarios nailed down and you have insight into what each one costs you financially. Sleep on it for a few days; you need to absorb the options and get a gut check. After a bit you'll know which option is the right one for you.
Last thought, not much mention of your home equity loan. Frequently those are adjustable rate and interest only. Maybe with an option to lock the rate. Don't exclude it from your calculations; ignoring it and paying just the interest can cost more than your think. Paying it off or just locking the rate should be considered in your options.
posted by deanj at 11:24 AM on July 26, 2007
The good news is that while you have some debt you're making good money and it's manageable.
I'd write down all the scenarios that you can think of and bounce them off of a financial adviser and a tax adviser. Quiz them about any scenarios that you didn't think of. Take lots of notes; you want to know exactly how each option adds up money wise and time wise.
I know you've already discussed the situation with a fin adviser but working out concrete scenarios will empower you.
I suggest a CPA too because, in my experience, financial advisers sometimes miss tax gotchas. I believe that not all student loans are tax deductions. Plus you make enough money that selling stock could trigger AMT, which might hurt.
In any case, after you have your scenarios nailed down and you have insight into what each one costs you financially. Sleep on it for a few days; you need to absorb the options and get a gut check. After a bit you'll know which option is the right one for you.
Last thought, not much mention of your home equity loan. Frequently those are adjustable rate and interest only. Maybe with an option to lock the rate. Don't exclude it from your calculations; ignoring it and paying just the interest can cost more than your think. Paying it off or just locking the rate should be considered in your options.
posted by deanj at 11:24 AM on July 26, 2007
This thread is closed to new comments.
You should also be able to write that interest off only sweetening the pot. Yes? I think its beneficial to save the extra money and make normal payments on the student loans.
posted by SirStan at 4:12 PM on July 25, 2007