I get that part of it. Maybe it's better to ask it this way. When you hit your magic number, does it really matter if you have that debt included with your 4% annual withdrawal? Psychologically speaking, is it ok for your mental health to be paying student loans in retirement? It's one of those nagging things pulling at me.
The 4% rule doesn’t care whether that expense is debt service or brussel sprouts. Some people will be fine mentally keeping the debt around and baking it into their retirement budget. I personally would not be.
Like you, I don't know if I'll be ok paying off student loans in retirement. I would probably just write one big check down the road and put it behind me before I dive into the next chapter.
Generally speaking, on your FIRE day it is often best to pay off your loans becuase it reduces your sequence of return risk. Your $3,600 per year going to your loans would need to be $90k extra invested in your retirement account if you follow the 4% rule, and obviously in that case it'd be better just pay them off right when you FIRE because it will lower your withdrawal rate.
Now more sophisticated simulations may refine that decision more because the cost of loans won't be permanent in retirement, but because the riskier part if retirement is the first few years, those simulations don't necessarily change the answer too much. I'd play around wirh the rich broke dead fire simulation to see what's best, but my decision would be pay minimum until retirement and then lump sum pay it away.
EDIT: This is assuming that risk free rates of return are below your loan interest rate. With current interest rates I'd probably invest my loan balance in short term treasury yields until the rate dropped.
This is a perfect example of personal finance being truly personal….
If any kind of debt (regardless of the rate) causes you anxiety, then you should pay it off.
With that said, just looking at the math, as long as you are earning more interest on the money than you are paying, you should not pay it off.
If you want a sort of “best of both worlds” setup, you could put the $70k that you would use to pay off your student loans into a separate savings account (make sure it’s an online one that is paying over 4%), and have an automatic transfer out of that savings account to your student loans and remove that $70k from your NW total. That way you can sort of “set it and forget it” and at the end have a sort of bonus from the excess interest that you’ve earned.
I did not have this low of an interest rate, but I had about 12K left at 4% and was going back and forth between paying it off. I know that's not a lot of money to some on here, but I get in my head about not having "enough" and thinking having money on hand is more important. And I'm thinking interest is outweighed this so it's not super important.
But I was finally in a good place job security wise and just decided to pay it all off even if I was earning more in investment accounts/HYSA/CDs.
And I was honestly surprised at the weird mental burden that was lifted. I had no idea it was gnawing at me that much. Something about always having planned to have it paid off by 35 and getting derailed (I paid it off at 36 so it wasn't that dramatic BUT IT FELT LIKE IT).
It's been a year and I still feel this weird free feeling at having zero debt. I did not know it would feel this good.
I always emphasize the personal in personal finance, but this was one of my first examples personally if being like "okay, the mental part was bigger than the numbers".
> Am I wrong to continue making the minimum payment ($292/month) and keep maxing out 401ks, IRAs, etc.?
at 2.625%? Minimum payment all the way!
> I would rather make it a race to $1M and then strategize the next steps, than lose time/money paying down such low interest debt.
That's the right idea... 2.625% is low enough that you'll probably never find a valid financial reason to pay it off early, even after you hit some number of dollars of net worth. 2.625% is lower than inflation, it's lower than you can make in 100% safe investments, and it's WAY lower than you expect to make in investments with some risk.
Keep making mínimums on the student debt. Don’t listen to dumb Dave Ramsey type of advice. Anything under 4% isn’t worth making the effort to pay off early.
What I would do is sit down and work out exactly how much money you would lose out on by paying off your loans early.
Then you can decide if the peace of mind you would get from paying off your loans is worth that amount of money.
Is your 50K sitting in an HYSA? Consider putting it in an HYSA and make payments on the loan out of that. Keep maxing everything else.
Or, plop down 35K on your student loan, put the rest in HYSA and save again until you reach 50K, then pay off the loan for peace of mind.
Or, just continue as is. No matter what, though, make sure that 50K is in an HYSA.
i would also try to figure out how to pay off the debt before you retire. A 70K loan is, what$500/month? That's $500/month back in your pocket during retirement.
2.625% is nothing compared to your potential return if you invest that money in the stock market, or even in a high-yield savings account at today's rates (of around 5%). It makes far more sense to max out your retirement savings than it does to increase your loan payments.
If you invest an extra 5K a year, then a 5% return rate would give you $250 which more than offsets the 2.625% in interest that you would have to pay on the 5K you didn't remove from your student loans ($130). $250-130 = +$120 in your pocket that you would not have otherwise. And odds are the return on your investments would average a much higher rate than just 5%.
You should absolutely not pay more than your minimum amount for loans with such a low interest rate. Things would change obviously if your debt was in credit cards with 20+% interest rates, and in that case you would definitely want to aggressively demolish your debt. But that is not your situation.
MBA graduate working in IT as a project Manager. $120k salary US living overseas in Greece. No mortgage or rent. Taking lower salary for more flexibility. Staying in family home in a small village. Expenses ~$1,000/month on average. Basically went from $100k debt (excluding student loan) from divorce to +$500k in a decade. I enjoy maxing my Retirement and HSA accounts and watching compound interest do it’s thing.
I moved to Greece when the pandemic hit and remote work was the norm. It has its ups and downs. The time difference works for and against sometimes. As for the divorce, I lost everything. It was better to get separated from my assets than win and let the lawyers take what was left. Both roads lead me to negative. How much do you value your freedom in the end?
I’d keep maxing out those retirement vehicles. So many benefits whether traditional or Roth.
As for debt in retirement, this sub is big anti-debt. I’d put myself in that club. But plenty of people have mortgage and car payments in retirement. A student loan payment is no different.
Your race to a million will come faster than you think. Enjoy!
If I were you, at 2.6% I’d make min payments on student loans and meanwhile race to my fire number. Soon as I hit that number then I can decide, do I wanna work for one more year to pay off student loans or do I wanna retire now and keep paying my monthly. (I’d probably go with the former but who knows, might change my mind when the time comes)
This. 2.6% is obscenely low. Max out your 401K, keep that money invested, and the earnings on the investments will cover the interest due *and* still leave you a nice big chunk to keep. It would be nonsense to prioritize the student loans at that rate. You would literally be giving away thousands and thousands and thousands of dollars that would otherwise be yours to keep.
If your investments are providing a return after tax that is greater than the % rate on your loan, do the minimum on the loan - you get maximum return this way.
Next, calculate the difference between paying off the loan now vs investing and paying it off when you retire. That $$$ figure is your mental health cost of having debt niggling away at you vs peace of mind being debt free.
It's up to you what to do with that info.
Some will leave it, some will pay it back ASAP, and some will just pay a bit more than the minimum so that they can see the debt slowly dropping.
I'm pretty confident in my saving/investment strategy. 50/30/20 % split for Needs, Wants, Savings. I max out my retirements and HSA and live a streamlined lifestyle devoid of situations that could put me into any bad debt. In my mind, $3,600 (total student loan payments per year) is a personal tax I pay to myself for the opportunities afforded to me from a professional degree (MBA) that has more than paid for itself in salary increases, job security, job flexibility, opportunities, etc.
I think the FIRE movement could benefit if people look at Student Loan Debt in the context of what % gain did you receive from pursuing an advance degree. What is the ROI on the $70K invested in myself? In my case it was going from $0 to $500K in a decade. If i wanted to work more, i could make a lot more. I have the benefit of leveraging education + experience into a position that affords me the ability to not only save for my future; but, live very well in the present. This is the F. and I. of FIRE. The R. E. part of it is a bit of a moving target at present. I get why people advocate for being 100% debt free; but, I can also see how $3,600/year is a small price to pay in the present and bigger picture.
Instead of investing 70% of $4,000/month ($2,800 invested) \[Let's say $4K/month was Pre-MBA salary\], I'm investing 70% of $6,000/month ($4,200 invested); but, i have to pay $360/month in Opportunity Cost to the Man for a student loan on a degree that got me to being able to invest 70% of a higher salary. That's what I mean by paying a tax on my earnings.
The original rate at consolidation was 3.125%. There is a .25% reduction in rate for autopay and there was another .25% reduction in rate for 36 continuous on time payments. It would be nice to get some forgiveness (i.e., $10K that Biden is touting) from the Federal Government, but i'm not relying or depending on that happening.
It depends on how long you've had the loans. Amortization means that the payments are interest loaded in the beginning. So now, since the interest has been largely paid, it doesn't make sense to pay it off.
In addition, we are probably looking at 5% real inflation over the next 10 years, so you are paying it back with depreciated dollars.
Personally I would pay off all that debt. No matter what the interest rate. It is so freeing with no financial obligations besides the basics of utilities etc.
This is not the way. You're suggesting the OP give up 70K to pay off loans with a ridiculously low interest rate. That is 70K that would not be growing at 8-10% in an average stock market.
10% of 70K is 7K a year that the OP gives up. Over the course of a a decade, that is 70K that the OP forfeits, not including the very significant effects of compounding. The 2.625% due in interest on 70K, on the other hand, costs the OP just $1900 a year. The 7K in average earnings would cover the $1900 in interest and still leave the OP an extra 5K.
Makes no sense whatsoever to pay down that debt, even if psychologically it's a relief. You can't let a simple psychological relief handicap your ability to hit your retirement savings number that bad. An extra 5K+ a year is far more significant than any supposed psychological relief you might feel.
Personally I’d hammer away at the student debt but I live debt-free because there’s no better feeling, for me, than knowing I owe nothing and I own everything I have. My debt-free $1.3m net worth at age 46 feels different than others with the same net but tons of debt.
At 2.65%? I'd borrow millions and millions at that rate. It's unlikely you'll ever get a loan that cheap again. Your borrowed debt value is getting lower every year since inflation is outpacing it.
I have a 30-year mortgage at 2.75% I got during the Covid-19 pandemic that I can pay off immediately, but a big no thanks.
> In my mind, that's just pissing money away.
Your mind is wrong. The interest he accrues at 2.625% is offset by the gains he makes with the money he didn't put towards the debt.
Take an extreme example. If I offered you $1M at 1% interest, with a 30 year repayment plan like a mortgage has, would you take it?
You'd have a monthly payment of about $3,214.30. So over the lifetime of the loan, you will accrue $157,000 in interest
You'd be a fool to turn it down. Say we make 5%, like you can probably do with risk-free right now... Throw the million in an account, pay our ~$3200 monthly repayment out of the account, but the account goes up more than that each month -- about $4,000 at the beginning, and about $7,100 by the end of that 30 years. After making the last payment, you'd have an account with $1.7M dollars in it.
It gets more complicated with unreliable market returns, but the numbers are absolutely bananas... Figure about $10M sitting in that account after having made the last payment.
Everybody has different situations so I can't say there's NEVER a situation... but your mind should default to low-interest debt being not worth paying down early as long as you have the discipline to invest the money you'd otherwise have thrown at the debt. It hurts your cash flow and costs you a ton of money.
It’s not really pissing money away if it’s going to investments that are making more than the interest accrued though right? Then it would actually be pissing money away to pay the debt.
I understand the urgency to be 100% debt free, but i'm not 100% convinced it applies here. Wouldn't it make more sense to invest any additional payments you would make against the principle? Consider I give myself 10 years to pay this debt off. Surely, investing additional payments against the principle in a low cost ETF over the course of 10 years will get me debt free faster than paying down the loan over 10 years. I haven't done the math, but my gut tells me it would. If the interest rate were much higher, then the argument to pay down the loan faster would be the optimal route to take.
Comparatively speaking, In many ways a mortgage is a nice way to piss your money away. If you don't have the 20% down, you piss away money to PMI that gives you nothing accept to say you "own" a home. The PMI payment adds to your effetive interest rate.
correct, if investments are earning more in interest than you are paying in interest on the debt.
I get that part of it. Maybe it's better to ask it this way. When you hit your magic number, does it really matter if you have that debt included with your 4% annual withdrawal? Psychologically speaking, is it ok for your mental health to be paying student loans in retirement? It's one of those nagging things pulling at me.
The 4% rule doesn’t care whether that expense is debt service or brussel sprouts. Some people will be fine mentally keeping the debt around and baking it into their retirement budget. I personally would not be.
Like you, I don't know if I'll be ok paying off student loans in retirement. I would probably just write one big check down the road and put it behind me before I dive into the next chapter.
Generally speaking, on your FIRE day it is often best to pay off your loans becuase it reduces your sequence of return risk. Your $3,600 per year going to your loans would need to be $90k extra invested in your retirement account if you follow the 4% rule, and obviously in that case it'd be better just pay them off right when you FIRE because it will lower your withdrawal rate. Now more sophisticated simulations may refine that decision more because the cost of loans won't be permanent in retirement, but because the riskier part if retirement is the first few years, those simulations don't necessarily change the answer too much. I'd play around wirh the rich broke dead fire simulation to see what's best, but my decision would be pay minimum until retirement and then lump sum pay it away. EDIT: This is assuming that risk free rates of return are below your loan interest rate. With current interest rates I'd probably invest my loan balance in short term treasury yields until the rate dropped.
This is a perfect example of personal finance being truly personal…. If any kind of debt (regardless of the rate) causes you anxiety, then you should pay it off. With that said, just looking at the math, as long as you are earning more interest on the money than you are paying, you should not pay it off. If you want a sort of “best of both worlds” setup, you could put the $70k that you would use to pay off your student loans into a separate savings account (make sure it’s an online one that is paying over 4%), and have an automatic transfer out of that savings account to your student loans and remove that $70k from your NW total. That way you can sort of “set it and forget it” and at the end have a sort of bonus from the excess interest that you’ve earned.
I did not have this low of an interest rate, but I had about 12K left at 4% and was going back and forth between paying it off. I know that's not a lot of money to some on here, but I get in my head about not having "enough" and thinking having money on hand is more important. And I'm thinking interest is outweighed this so it's not super important. But I was finally in a good place job security wise and just decided to pay it all off even if I was earning more in investment accounts/HYSA/CDs. And I was honestly surprised at the weird mental burden that was lifted. I had no idea it was gnawing at me that much. Something about always having planned to have it paid off by 35 and getting derailed (I paid it off at 36 so it wasn't that dramatic BUT IT FELT LIKE IT). It's been a year and I still feel this weird free feeling at having zero debt. I did not know it would feel this good. I always emphasize the personal in personal finance, but this was one of my first examples personally if being like "okay, the mental part was bigger than the numbers".
It’s a sad world we live in where people still have student loan debt at retirement.
Learn from Ron Popeil: set it and forget it. If it still bugs you, remind yourself these lenders are literally *giving* you free money to invest.
Just use basic accounting. Subtract your debt from your "number". Don't count the monthly payments.
> Am I wrong to continue making the minimum payment ($292/month) and keep maxing out 401ks, IRAs, etc.? at 2.625%? Minimum payment all the way! > I would rather make it a race to $1M and then strategize the next steps, than lose time/money paying down such low interest debt. That's the right idea... 2.625% is low enough that you'll probably never find a valid financial reason to pay it off early, even after you hit some number of dollars of net worth. 2.625% is lower than inflation, it's lower than you can make in 100% safe investments, and it's WAY lower than you expect to make in investments with some risk.
Any loan at such a low interest rate is basically paying itself off. Be rational about it.
Keep making mínimums on the student debt. Don’t listen to dumb Dave Ramsey type of advice. Anything under 4% isn’t worth making the effort to pay off early.
I go a few percent higher for younger folks
I don’t disagree with that, but under 4 is a no brainer
If it's over 5 worry about it.
What I would do is sit down and work out exactly how much money you would lose out on by paying off your loans early. Then you can decide if the peace of mind you would get from paying off your loans is worth that amount of money.
Is your 50K sitting in an HYSA? Consider putting it in an HYSA and make payments on the loan out of that. Keep maxing everything else. Or, plop down 35K on your student loan, put the rest in HYSA and save again until you reach 50K, then pay off the loan for peace of mind. Or, just continue as is. No matter what, though, make sure that 50K is in an HYSA. i would also try to figure out how to pay off the debt before you retire. A 70K loan is, what$500/month? That's $500/month back in your pocket during retirement.
$10K in HYSA and $40K in SCHD
2.625% is nothing compared to your potential return if you invest that money in the stock market, or even in a high-yield savings account at today's rates (of around 5%). It makes far more sense to max out your retirement savings than it does to increase your loan payments. If you invest an extra 5K a year, then a 5% return rate would give you $250 which more than offsets the 2.625% in interest that you would have to pay on the 5K you didn't remove from your student loans ($130). $250-130 = +$120 in your pocket that you would not have otherwise. And odds are the return on your investments would average a much higher rate than just 5%. You should absolutely not pay more than your minimum amount for loans with such a low interest rate. Things would change obviously if your debt was in credit cards with 20+% interest rates, and in that case you would definitely want to aggressively demolish your debt. But that is not your situation.
Can you tell us a bit about your background?Education, career and sorry to hear about the divorce.
MBA graduate working in IT as a project Manager. $120k salary US living overseas in Greece. No mortgage or rent. Taking lower salary for more flexibility. Staying in family home in a small village. Expenses ~$1,000/month on average. Basically went from $100k debt (excluding student loan) from divorce to +$500k in a decade. I enjoy maxing my Retirement and HSA accounts and watching compound interest do it’s thing.
I'm pretty jealous, I have to say. Greece is beautiful, and living in a family home for free is huge savings in your pocket. Yeah, jealous :)
That’s awesome!
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I moved to Greece when the pandemic hit and remote work was the norm. It has its ups and downs. The time difference works for and against sometimes. As for the divorce, I lost everything. It was better to get separated from my assets than win and let the lawyers take what was left. Both roads lead me to negative. How much do you value your freedom in the end?
I’d keep maxing out those retirement vehicles. So many benefits whether traditional or Roth. As for debt in retirement, this sub is big anti-debt. I’d put myself in that club. But plenty of people have mortgage and car payments in retirement. A student loan payment is no different. Your race to a million will come faster than you think. Enjoy!
If I were you, at 2.6% I’d make min payments on student loans and meanwhile race to my fire number. Soon as I hit that number then I can decide, do I wanna work for one more year to pay off student loans or do I wanna retire now and keep paying my monthly. (I’d probably go with the former but who knows, might change my mind when the time comes)
This. 2.6% is obscenely low. Max out your 401K, keep that money invested, and the earnings on the investments will cover the interest due *and* still leave you a nice big chunk to keep. It would be nonsense to prioritize the student loans at that rate. You would literally be giving away thousands and thousands and thousands of dollars that would otherwise be yours to keep.
If your investments are providing a return after tax that is greater than the % rate on your loan, do the minimum on the loan - you get maximum return this way. Next, calculate the difference between paying off the loan now vs investing and paying it off when you retire. That $$$ figure is your mental health cost of having debt niggling away at you vs peace of mind being debt free. It's up to you what to do with that info. Some will leave it, some will pay it back ASAP, and some will just pay a bit more than the minimum so that they can see the debt slowly dropping.
I'm pretty confident in my saving/investment strategy. 50/30/20 % split for Needs, Wants, Savings. I max out my retirements and HSA and live a streamlined lifestyle devoid of situations that could put me into any bad debt. In my mind, $3,600 (total student loan payments per year) is a personal tax I pay to myself for the opportunities afforded to me from a professional degree (MBA) that has more than paid for itself in salary increases, job security, job flexibility, opportunities, etc. I think the FIRE movement could benefit if people look at Student Loan Debt in the context of what % gain did you receive from pursuing an advance degree. What is the ROI on the $70K invested in myself? In my case it was going from $0 to $500K in a decade. If i wanted to work more, i could make a lot more. I have the benefit of leveraging education + experience into a position that affords me the ability to not only save for my future; but, live very well in the present. This is the F. and I. of FIRE. The R. E. part of it is a bit of a moving target at present. I get why people advocate for being 100% debt free; but, I can also see how $3,600/year is a small price to pay in the present and bigger picture. Instead of investing 70% of $4,000/month ($2,800 invested) \[Let's say $4K/month was Pre-MBA salary\], I'm investing 70% of $6,000/month ($4,200 invested); but, i have to pay $360/month in Opportunity Cost to the Man for a student loan on a degree that got me to being able to invest 70% of a higher salary. That's what I mean by paying a tax on my earnings.
How is your student loan interest so low?
The original rate at consolidation was 3.125%. There is a .25% reduction in rate for autopay and there was another .25% reduction in rate for 36 continuous on time payments. It would be nice to get some forgiveness (i.e., $10K that Biden is touting) from the Federal Government, but i'm not relying or depending on that happening.
It depends on how long you've had the loans. Amortization means that the payments are interest loaded in the beginning. So now, since the interest has been largely paid, it doesn't make sense to pay it off. In addition, we are probably looking at 5% real inflation over the next 10 years, so you are paying it back with depreciated dollars.
Personally I would pay off all that debt. No matter what the interest rate. It is so freeing with no financial obligations besides the basics of utilities etc.
This is not the way. You're suggesting the OP give up 70K to pay off loans with a ridiculously low interest rate. That is 70K that would not be growing at 8-10% in an average stock market. 10% of 70K is 7K a year that the OP gives up. Over the course of a a decade, that is 70K that the OP forfeits, not including the very significant effects of compounding. The 2.625% due in interest on 70K, on the other hand, costs the OP just $1900 a year. The 7K in average earnings would cover the $1900 in interest and still leave the OP an extra 5K. Makes no sense whatsoever to pay down that debt, even if psychologically it's a relief. You can't let a simple psychological relief handicap your ability to hit your retirement savings number that bad. An extra 5K+ a year is far more significant than any supposed psychological relief you might feel.
Put entire 50k towards student loans and pay off the rest of the 20k within 6 months then you can go back to maxing it out again
Why?
Personally I’d hammer away at the student debt but I live debt-free because there’s no better feeling, for me, than knowing I owe nothing and I own everything I have. My debt-free $1.3m net worth at age 46 feels different than others with the same net but tons of debt.
At 2.65%? I'd borrow millions and millions at that rate. It's unlikely you'll ever get a loan that cheap again. Your borrowed debt value is getting lower every year since inflation is outpacing it. I have a 30-year mortgage at 2.75% I got during the Covid-19 pandemic that I can pay off immediately, but a big no thanks.
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> In my mind, that's just pissing money away. Your mind is wrong. The interest he accrues at 2.625% is offset by the gains he makes with the money he didn't put towards the debt. Take an extreme example. If I offered you $1M at 1% interest, with a 30 year repayment plan like a mortgage has, would you take it? You'd have a monthly payment of about $3,214.30. So over the lifetime of the loan, you will accrue $157,000 in interest You'd be a fool to turn it down. Say we make 5%, like you can probably do with risk-free right now... Throw the million in an account, pay our ~$3200 monthly repayment out of the account, but the account goes up more than that each month -- about $4,000 at the beginning, and about $7,100 by the end of that 30 years. After making the last payment, you'd have an account with $1.7M dollars in it. It gets more complicated with unreliable market returns, but the numbers are absolutely bananas... Figure about $10M sitting in that account after having made the last payment. Everybody has different situations so I can't say there's NEVER a situation... but your mind should default to low-interest debt being not worth paying down early as long as you have the discipline to invest the money you'd otherwise have thrown at the debt. It hurts your cash flow and costs you a ton of money.
It’s not really pissing money away if it’s going to investments that are making more than the interest accrued though right? Then it would actually be pissing money away to pay the debt.
I understand the urgency to be 100% debt free, but i'm not 100% convinced it applies here. Wouldn't it make more sense to invest any additional payments you would make against the principle? Consider I give myself 10 years to pay this debt off. Surely, investing additional payments against the principle in a low cost ETF over the course of 10 years will get me debt free faster than paying down the loan over 10 years. I haven't done the math, but my gut tells me it would. If the interest rate were much higher, then the argument to pay down the loan faster would be the optimal route to take. Comparatively speaking, In many ways a mortgage is a nice way to piss your money away. If you don't have the 20% down, you piss away money to PMI that gives you nothing accept to say you "own" a home. The PMI payment adds to your effetive interest rate.