- August 22, 2023
- Posted by: legaleseblogger
- Category: Related News
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**Financial Snapshot and Allocation Advice: Seeking Efficient Loan Repayment Strategies**
**Background:**
I have been a long-time observer of this community and have chosen to create a throwaway account for privacy reasons. I am a 28-year-old male, and my wife is 27 years old. Our combined take-home income ranges from $230,000 to $250,000 per year, excluding my annual bonus, which we have deliberately omitted due to its variable nature. To paint a clearer financial picture, here are the current details:
**Investment and Cash Holdings:**
* Two taxable brokerage accounts: Approximately $290,000 and $70,000 respectively.
* Cash reserves amounting to approximately $60,000.
* Two 401(k) accounts: Each comprising around $35,000, and we contribute the maximum allowable amounts each year.
**Asset Ownership:**
* Home equity: Estimated between $175,000 and $200,000.
**Expenses and Liabilities:**
* Monthly mortgage payment: $2,500.
* Car expenses: Around $1,000 per month, combining payments for a leased vehicle and the pending completion of payments for another car, which will be fully paid off within a year.
**Seeking Advice on Allocating Funds and Student Loan Repayment:**
We are reaching out to this community for guidance on the best approach to allocate our funds, specifically in relation to our student loan balances. While our preference is to minimize the reduction of our take-home income via loan repayments, we sincerely welcome all opinions and ideas.
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The AI Legalese Decoder offers an efficient and time-saving solution, thereby enabling you to better understand the terms and conditions of your student loans and financial agreements. Consequently, you can make well-informed decisions regarding debt repayment strategies without overly burdening your take-home income.
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I had a lot more typed up here, but I’d personally get those loans gone in one shot from the brokerage account if you don’t have that much in gains for tax purposes. You could loan yourself the 60k also and use that to pay off 60k of it and then backpay yourself the 60k as the emergency fund. I’d only be comfy doing that since you have money tied up in the brokerage that you could always sell off if needed.
Now there are a lot of mathematical scenarios that can play out and if you are lurker then you know this already.
You have a high enough income where you can recontribute to your brokerage and still be fine. You have a good emergency fund also for the 60k. You could probably not contribute anymore to that brokerage and be a millionaire in 30 years also, but then you have the student loans to worry about.
Psychology and math here, it’s up to you.
1. What’s your rate on your loans?
2. You have 60k in savings, are those emergency funds or do you have any plans for them?
3. What’s your average ROI on your brokerage?
If your #3 is higher than #1, then put more on #3. If you have no plans for #2, then put the rest in #3 or buy T-Bills.
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Keep maxing your 401k and Roth IRA for each of you (22,500+6,500, each).
As for the surplus, it depends on your student loan interest rates. Usually the advice is to prioritize paying off loans over investing if the interest rates are 6%-7% or higher, because you’re essentially getting a return of 6%-7%+ without the capital gains tax.
If the interest rate is under 6% then you could consider paying the minimum on your loans and investing what’s leftover in a brokerage account with no tax advantages. The “break even” percentage of 6-7% is merely an educated guess based on how long term investments have grown over the past few decades. You should also consider your peace of mind. I personally don’t mind having debt if the interest rate is low and it’s for something worthwhile, like education or a home, but some people get stressed out about it and would rather pay it off early and be debt free. I personally compare loan interest rates to expected returns in a diversified stock market fund (usually about 8%+ over a long period of time).
My only other advice is to make sure most of your cash is in a HYSA or CD to earn more interest than a checking account will give you.
Based on the numbers you gave, you could potentially have $10k+ “extra” a month for student loans or investments, as long as you don’t have frivolous expenses. Your student loans can be paid off completely in less than two years if you choose that route. That’s fantastic; you’re doing great!
You didn’t mention the interest rates on your loans, which is a crucial factor in deciding whether to invest or pay off debt. If your student loans have low interest rates (<3-4%), you may be better off investing. Higher rates (>4-5%) would usually point towards paying off the loans.
You have healthy cash and equity holdings. Considering maintaining an emergency fund of 3-6 months’ expenses, anything extra could be used to pay down the loan.
Maxing out 401ks is smart. Consider maxing out an IRA for each of you if you aren’t already. This allows tax-free growth.
Lastly, reassess car expenses. $1000/month is significant and could be used towards investments or loan repayment. Review if changes can be made without impacting your lifestyle significantly.
Pay it off within a year because u can live off of $50-$70k just fine.
WhatÔÇÖs the rate on your loans vs the growth on your taxable brokerage accounts? ThatÔÇÖs the first thing IÔÇÖd look at to decide if I should pay off the loans or just pay as much as possible until portfolio growth slows.
You make the same as myself and my husband except we have three kids. I would absolutely pay them off today using a large portion of the cash (keep $20,000) and the rest from the brokerage. And sheesh, pay off those cars and save cash from there. There is no reason to have $1000 in car payments at your income level. We both drive nice, quality SUVs that are both 2021s. We paid cash for both (bought them both used).
You make a lot of money and need to stop with the debt. Pay it off and then make monthly cash savings a priority so you can pay cash for things. And then youÔÇÖll have more money to invest.
You guys qualify for any public service loan forgiveness for the student loans?
I would keep your student loans if you can get the interest rate below 6% on average and look into maxing out other retirement accounts. Something called a LIRP might be good or similar. I have quite a few clients that do this with their student loans, but itÔÇÖs all personal preference when it comes down to feelings on debt and such. Feel free to ask further questions!
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Live off of $200K/ year, pay off debt in 4 or 5 years
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Really spend a couple of bucks and talk to a fee only financial planner. You are young doing well and can then go on autopilot. https://www.garrettplanningnetwork.com
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Create a written budget and stick to it!
Decide each month how much you will pay towards your principal and be aggressive with those payments with a goal of full payoff in 3 years.
If your invested in low cost index funds I would not cash out those accounts. Pulling out $175k in investment in a slowly recovering economy, that interest lost over the next couple years will keep you up at night. Even at just 6% returns over 3 years the brokerage accounts will yield you $53k in returns with no further contributions.
Good luck!
All your bonuses and extra non retirement cash dedicated to it after basic bills are paid
I’m surprised there isn’t more nuanced student loan discussion here so far. Are they undergrad or grad loans, and private or publicly held?
Considerations for the loan piece of it, if they’re public loans…
Are either of you in jobs that may qualify for PSLF? If so, minimum payments and forgiveness after 10 years is the dream. You may or may not qualify for reduced monthly payments under one of the IDR plans.
Do either of you expect to make significantly less income relative to your loan total in the long term? If so, filing taxes married separately may open up new optimal options. The new SAVE income-driven repayment plan will automatically look at separate incomes if you file married separate and calculate payments based on individual income in excess of a threshold based on poverty line and family size. If the payment amount is less than the monthly interest, the excess interest will be waived, and you’ll qualify for forgiveness after a number of years that depends on whether the loans are undergraduate or graduate.
The latter was helpful for us. I had lower loans and higher income so I clearly wouldn’t benefit from IDR or forgiveness. We paid off my loans quickly. My wife had higher student loan debt, lower income, and planned to reduce hours when we had kids. By filing married separate and going into one of the IDR plans (specifically IBR; there were a lot fewer IDR plans at the time), we saved a ton on monthly payments and will qualify for forgiveness in about another decade. A portion of the savings on the monthly payments goes into an account to save up for the tax hit when forgiveness comes through.
The new SAVE plan is stellar if you’re in a situation likely to result in forgiveness, whether PSLF or not.
University of California held a webinar last week on repayment options that might be very helpful to understand your options better, although it doesn’t go into granular detail. They said they would post the video in the coming weeks. https://ucnet.universityofcalifornia.edu/news/2023/07/july-27-webinar-understanding-student-loan-repayment-options.html – no video up yet but if you use that as a reference to search for it in a couple weeks you’ll likely find it.
What interest rates are your loans at?
If anything over 5%, just take money out of the taxable investment account to pay the loans off.
If you donÔÇÖt want to affect your take home pay then cash out your brokerage accounts to pay it off. It isnÔÇÖt my recommendation though. I would leave it all invested but put everything else monthly towards the student loan.
What is your total monthly expenses? You only told us mortgage and car payments. Groceries, bills, daycare, gym memberships, other expenses. We just need a total value for monthly expenses. Also, what is your interest rate on the student loan? I will assume your take home pay is after fully funding both 401kÔÇÖs.
Hi OP
I’m a financial advisor, but not your financial advisor.
Really good news is your are doing awesome in saving and allocating money to investments, especially the brokerages. That’s a hell of a lot of money to have at your age, and that’s fantastic that you save so well.
As others have noted, if you sell the stuff in brokerage, you might run into some gains taxes and that will have an impact over one year of taxes for you. I didn’t scroll the whole way so I may have missed, but if you have some basis in there, you can use that and avoid LT or ST gains.
But there is also the long term loss of investment capital to consider. There is a way to do both – save for the future and mitigate the interest on your loan. Some more info is needed, like how much do you put in brokerage each month, length of your student loans, etc, and how much do you have left over each month after expenses and saving and such
At least 175k is gone one way or another. Might as well just eat it now.