Should I pay on my debt or wait?
October 17, 2021 1:04 PM Subscribe
I've come into some money. Should I use it to pay on student loans and other debt now or wait?
I’ve been accruing student loan debt since my enrollment in a graduate program a few years ago. As I’m nearing completion of my degree program next year, I begun thinking more about repayment of my loans. I’m fortunate that my employer does provide partial tuition reimbursement, and I’ve applied most of those funds to the principal, but I still owe a significant amount. My total debt will be around $50K.
I’ve recently come into a lump sum of slightly more than $10K, and I anticipate receiving possibly another ~$10-15K soon. Originally, I considered putting this towards either my student loan debt or paying off the loan I took from my retirement account to purchase my home (I’m about $12K away). Besides reoccurring monthly bills, these are my only debts.
What stopped me was having a conversation with a person who mentioned they were holding off on repaying their student loan debt because they expect (or hope) the Biden administration will implement a plan for student loan forgiveness for higher education debt.
Questions:
Should I put the entire ~$20K+ toward my student loan debt now?
Should I pay off my retirement loan and put the remaining funds toward the student loan debt?
Should I wait to see if the US enacts a student loan forgiveness program for higher education debt?
If your advice is to wait, how would you save the money? And for how long?
I’m in a stable job and able to support myself financially. I am not a financial wizard. You are not a/my financial advisor, etc., etc.
I’ve been accruing student loan debt since my enrollment in a graduate program a few years ago. As I’m nearing completion of my degree program next year, I begun thinking more about repayment of my loans. I’m fortunate that my employer does provide partial tuition reimbursement, and I’ve applied most of those funds to the principal, but I still owe a significant amount. My total debt will be around $50K.
I’ve recently come into a lump sum of slightly more than $10K, and I anticipate receiving possibly another ~$10-15K soon. Originally, I considered putting this towards either my student loan debt or paying off the loan I took from my retirement account to purchase my home (I’m about $12K away). Besides reoccurring monthly bills, these are my only debts.
What stopped me was having a conversation with a person who mentioned they were holding off on repaying their student loan debt because they expect (or hope) the Biden administration will implement a plan for student loan forgiveness for higher education debt.
Questions:
Should I put the entire ~$20K+ toward my student loan debt now?
Should I pay off my retirement loan and put the remaining funds toward the student loan debt?
Should I wait to see if the US enacts a student loan forgiveness program for higher education debt?
If your advice is to wait, how would you save the money? And for how long?
I’m in a stable job and able to support myself financially. I am not a financial wizard. You are not a/my financial advisor, etc., etc.
What are the interest rates and repayment schedules for your loans?
It may come down to a balance of what the loans cost you over their full terms, against what you save by early repayment and what else you might prioritize spending the money on (either putting the money towards a rainy-day fund, or other purposes).
Federally-backed student loans typically carry a low, fixed interest rate. However, bankruptcy does not forgive that type of loan, so there may be a benefit to getting it out of the way early.
On the other hand, higher rate loans cost more, and interest can accrue to balance. So early repayment there can potentially save you a lot of money.
A repayment spreadsheet for your loans may help with deciding what saves you the most money, if you were to repay one or another of them.
posted by They sucked his brains out! at 1:29 PM on October 17, 2021 [3 favorites]
It may come down to a balance of what the loans cost you over their full terms, against what you save by early repayment and what else you might prioritize spending the money on (either putting the money towards a rainy-day fund, or other purposes).
Federally-backed student loans typically carry a low, fixed interest rate. However, bankruptcy does not forgive that type of loan, so there may be a benefit to getting it out of the way early.
On the other hand, higher rate loans cost more, and interest can accrue to balance. So early repayment there can potentially save you a lot of money.
A repayment spreadsheet for your loans may help with deciding what saves you the most money, if you were to repay one or another of them.
posted by They sucked his brains out! at 1:29 PM on October 17, 2021 [3 favorites]
I am skeptical that the Biden administration is going to do much around student loan forgiveness, but if you don't need to make payments right away there's not much harm in holding on to see one way or the other.
One thing that isn't covered here is the interest rate you're paying + whether you're accruing interest yet -- if it's low and/or you're not accruing interest yet then there's no urgent need to pay down the debt.
If you have $12K that you've borrowed from your retirement account, I'd repay that first.
Another thing - you say you're in a stable job + able to support yourself. That's good. But what's your "rainy day" fund look like? How many months / years can you support yourself if you were to be unemployed, or what's your cushion like if you had a major expense?
Paying down debt is great - but unless you're looking at really high interest rates, consider keeping a buffer of at least 6-12 months expenses. Put the money into an index fund or something that is low-risk and gives some interest but that you can get to quickly if needed.
posted by jzb at 1:30 PM on October 17, 2021 [10 favorites]
One thing that isn't covered here is the interest rate you're paying + whether you're accruing interest yet -- if it's low and/or you're not accruing interest yet then there's no urgent need to pay down the debt.
If you have $12K that you've borrowed from your retirement account, I'd repay that first.
Another thing - you say you're in a stable job + able to support yourself. That's good. But what's your "rainy day" fund look like? How many months / years can you support yourself if you were to be unemployed, or what's your cushion like if you had a major expense?
Paying down debt is great - but unless you're looking at really high interest rates, consider keeping a buffer of at least 6-12 months expenses. Put the money into an index fund or something that is low-risk and gives some interest but that you can get to quickly if needed.
posted by jzb at 1:30 PM on October 17, 2021 [10 favorites]
If you don't have an emergency fund, and can generally afford the repayments on the debt, then I would create an emergency fund first. This will stop you needing to take out an expensive loan/credit if an emergency does happen. Otherwise, you'll probably get the most psychological benefit from paying off one loan completely (eg the retirement account loan). Strictly speaking, the highest interest rate debt is the most beneficial but I think the psychological benefit is better for most people.
I am also skeptical about the student loan forgiveness happening, I suspect that Biden would not get the vote in the Senate to pass something really substantial.
posted by plonkee at 1:37 PM on October 17, 2021 [3 favorites]
I am also skeptical about the student loan forgiveness happening, I suspect that Biden would not get the vote in the Senate to pass something really substantial.
posted by plonkee at 1:37 PM on October 17, 2021 [3 favorites]
Most 401(k) loans are callable in entirety upon termination or change of job - ie, if you need to change your job or are at any risk of being terminated, you will need $12K in cash really quickly. If you were put in that spot, you'd probably have to get a (very!) high interest personal loan, which is not a great spot to be in.
If you think there's any chance you will want to change your job or could be fired, I would pay off the 401(k) loan.
If not, I would pay off whatever loan is highest interest and >2-3% interest. Lower interest loans are usually not worth paying off any faster, because your money is better saved on higher yielding assets.
If all of your loans are <2-3% and you don't think you will need to change your job/can't be fired, I would keep the money as an emergency fund for unexpected expenses. Having debt isn't bad, in general, so long as it is cheap debt. Having an emergency fund has utility to avoid needing very expensive loans for emergencies (same thing as your 401(k) loan).
If all of your loans are <2-3%, you don't think you will need to change your job/can't be fired, and you have a sufficient emergency fund, then I would start funding any long-term/retirement savings you have.
posted by saeculorum at 2:02 PM on October 17, 2021 [4 favorites]
If you think there's any chance you will want to change your job or could be fired, I would pay off the 401(k) loan.
If not, I would pay off whatever loan is highest interest and >2-3% interest. Lower interest loans are usually not worth paying off any faster, because your money is better saved on higher yielding assets.
If all of your loans are <2-3% and you don't think you will need to change your job/can't be fired, I would keep the money as an emergency fund for unexpected expenses. Having debt isn't bad, in general, so long as it is cheap debt. Having an emergency fund has utility to avoid needing very expensive loans for emergencies (same thing as your 401(k) loan).
If all of your loans are <2-3%, you don't think you will need to change your job/can't be fired, and you have a sufficient emergency fund, then I would start funding any long-term/retirement savings you have.
posted by saeculorum at 2:02 PM on October 17, 2021 [4 favorites]
What’s your current cash on hand? If you don’t have 4-6 months of living expenses socked away, I would start there.
posted by rockindata at 3:49 PM on October 17, 2021 [1 favorite]
posted by rockindata at 3:49 PM on October 17, 2021 [1 favorite]
If not, I would pay off whatever loan is highest interest and >2-3% interest. Lower interest loans are usually not worth paying off any faster, because your money is better saved on higher yielding assets.
Keep in mind that interest paid on your retirement fund loan is being paid back into your own pocket. The major loss here is that you're paying after-tax money into an account that you could otherwise pay pre-tax money into, but it's still much better than a loan in which you're paying interest to someone else.
It definitely changes the calculation. It might turn out that you're better off continuing to pay interest (to yourself) on a 5-6% retirement fund loan while closing out a 2-3% interest student loan.
posted by mr_roboto at 4:30 PM on October 17, 2021
Keep in mind that interest paid on your retirement fund loan is being paid back into your own pocket. The major loss here is that you're paying after-tax money into an account that you could otherwise pay pre-tax money into, but it's still much better than a loan in which you're paying interest to someone else.
It definitely changes the calculation. It might turn out that you're better off continuing to pay interest (to yourself) on a 5-6% retirement fund loan while closing out a 2-3% interest student loan.
posted by mr_roboto at 4:30 PM on October 17, 2021
I’d pay back the retirement loan - you’ll have to pay taxes and penalties if you separate from your job. Credit cards next if you have any. Then emergency fund. Student loan last.
posted by matildaben at 7:05 PM on October 17, 2021
posted by matildaben at 7:05 PM on October 17, 2021
Pay back your retirement loan and put the rest into an emergency fund. Although I don’t subscribe to the idea that student loan debt is “good” debt (having accrued nearly $500K in student loans myself), it is stable debt and it’s not yet clear what kind of action may be taken for relief on a federal level.
posted by honeybee413 at 7:59 PM on October 17, 2021
posted by honeybee413 at 7:59 PM on October 17, 2021
A general rule--but not the only consideration--is could you get a larger return from investing the money than you're paying in interest rates on the loan? If yes, don't pay off the loan.
There are other considerations, many already written about like, penalties, emergency savings, etc.
posted by tmdonahue at 5:32 AM on October 18, 2021
There are other considerations, many already written about like, penalties, emergency savings, etc.
posted by tmdonahue at 5:32 AM on October 18, 2021
tmdonahue has it. It really depends on what you're going to do with the money. If the choices are between paying off loans and spending the money, the clear choice is to pay off loans. If the choices are between paying off loans and investing the money, it really depends on whether the returns on the investment would be more than the ongoing costs of the loans (and by how much). If investing pays you significantly more than you lose by not paying off loans, there's your answer. If it's only a little more, I'd probably pay off loans just to have it out of my hair. It seems unlikely you would lose money by investing rather than paying off loans, but obviously if this is the case you should pay off the loans.
posted by slkinsey at 6:58 AM on October 18, 2021
posted by slkinsey at 6:58 AM on October 18, 2021
It can be hard to give advice about questions like this without having a broader understanding of your financial picture.
The r/personalfinance subreddit has a really useful tool for thinking about the building blocks of financial stability, the flow chart. It might help to look at that, trace where you are generally, and think about your windfall in that context.
If there are contingencies that still make things unclear (your interest rates aren’t that high, you want to wait and see about student loan forgiveness) then park the money for a year in a CD and revisit a year from now.
posted by Sublimity at 7:39 AM on October 18, 2021
The r/personalfinance subreddit has a really useful tool for thinking about the building blocks of financial stability, the flow chart. It might help to look at that, trace where you are generally, and think about your windfall in that context.
If there are contingencies that still make things unclear (your interest rates aren’t that high, you want to wait and see about student loan forgiveness) then park the money for a year in a CD and revisit a year from now.
posted by Sublimity at 7:39 AM on October 18, 2021
Generally speaking, you allocate your money where it would do the most good. Which may NOT be debt reduction.
The usual advice is to pay off the loans with the highest interest first, and historically speaking, mortgages and student loans have relatively low interest rates.
Do keep in mind that NOT spending the money (keep it in an account), means it is losing value due to normal inflation, unless you have it in an investment account and it is making enough gains. But also keep in mind the money you gained are counted as income, and THAT is often taxed as well. So don't be TOO eager to spend it, only to realize you haven't paid the taxes on it.
This is not a bad time to think about using the money to go back to school to improve your income, or get a degree, or buy a small house and use that as down payment) to reduce your living expenses. If the amount is big enough, you may even want to talk to a CPA.
I'd suggest you make an internal list on what debts do you have to pay down, and what projects you'd like to engage in, keeping in mind your tax burdens as well. THEN decide on which deserves your capital allocation. THEN consult with a financial professional and see if s/he agrees with your plan.
posted by kschang at 7:52 AM on October 18, 2021
The usual advice is to pay off the loans with the highest interest first, and historically speaking, mortgages and student loans have relatively low interest rates.
Do keep in mind that NOT spending the money (keep it in an account), means it is losing value due to normal inflation, unless you have it in an investment account and it is making enough gains. But also keep in mind the money you gained are counted as income, and THAT is often taxed as well. So don't be TOO eager to spend it, only to realize you haven't paid the taxes on it.
This is not a bad time to think about using the money to go back to school to improve your income, or get a degree, or buy a small house and use that as down payment) to reduce your living expenses. If the amount is big enough, you may even want to talk to a CPA.
I'd suggest you make an internal list on what debts do you have to pay down, and what projects you'd like to engage in, keeping in mind your tax burdens as well. THEN decide on which deserves your capital allocation. THEN consult with a financial professional and see if s/he agrees with your plan.
posted by kschang at 7:52 AM on October 18, 2021
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Are the loans federal or private? If federal, what repayment plan are you on? And most importantly, what are the interest rate(s)?
posted by caek at 1:28 PM on October 17, 2021 [1 favorite]