Financial Advice - Pay Loans vs. IRA

Boutros

I recently graduated from college and now I have a pretty stable and decent paying job for the forseeable future.

I also have 90 grand in student loans racked up.

Now I am currently going to grad school part time, so I do not *have* to make payments right now, but I want to. However I also would like to start doing some saving for retirement, because 30 isn't too far off and I have nothing. Now I contribute to my 401(k) to the maximum level that gets matched by my employer, but I want to start an IRA as well. I'm just not sure what the best plan is for un-fucking my net worth.

Basically of my 90k debt, 22k is subsidized and I am paying no interest on it at the moment. The rest of the loans vary from 1.87% to 8%. The weighted average interest rate over the whole 90k is 4.37%.

That is not that bad, right? I want to believe that between the rate of return on a Roth IRA, plus the tax breaks down the road, I could do better in the IRA. But honestly until a month ago I was 100% clueless about money and I still don't fully know how good the tax breaks are on the roth and what kind of return I could really get in the market after fees and whatnot. Until quite recently I basically had my head in the sand, I was afraid to log onto the loan corp website because I didn't want to know how much I owed.

The net income after all usual expenses that I am working with here is about 1k a month, so I could contribute to the max on a Roth, and still have 7k left to pay loans with. But I got a letter from the loans company before they found out I was in grad school and the minimum payments on my loans were going to be about 975 dollars a month! That is what worries me, as that is basically all my disposable income, and that was the minimum! Either way it seems like it is going to take a long fucking time to pay these loans back, even if I get raises and promotions.

So am I a fool for wanting to start an IRA when I am ass deep in debt? Is there any way I could refinance the part of my debt that I am actually accruing interest on while I am going to school, without fucking up what I've got with the subsidized loans? I'm trying to tighten my budget so that I have more money to work with, but what would you financial non-retards do in my situation?

adytum

You're unlikely to make 4.37% y/o/y- much less 8%- in this investment climate and economy. You should make paying off the highest interest loans your priority.

Boutros

I apparently can't pay just the highest interest loan, at least using the web interface. Seems like an all or nothing deal.

adytum

Then make paying off all the loans your priority.

Student loans are non-dischargeable, and you've racked up quite a bit.

If you have $1,000 in disposable income and $1,000 in non-dischargeable debt, you need to be paying that debt down immediately. The longer you put it off the more it's going to grow and the less likely that you're going to be able to make payments.

What happens when you default? Your wages start being garnished.

Start paying the loans off now, while you're a graduate student and don't have a mandatory payment.

Boutros

I guess it's the advice I needed, if not the advice I wanted. I just paid off $1281 (the amount of the permanent fund dividend that I'll receive later this week). Thanks for the help, bro.

Thanatos

You should look into consolidating your loans. Could save you a bunch of money over the long-term, if the money is there (and I'm not sure if it is or not at this point). Also, make sure you get the paperwork to deduct the interest on your student loans from your taxes; $4000 in deductions is a shitload for a struggling graduate student, and even if you're not being taxed, it may get you some money from the EITC.

khain

If his loan interest rate is at 4.37% shouldn't he be investing in a IRA assuming he can make the payments with the job he gets after college which if he can't then he has bigger problems than his student loans? Maybe I'm mistaken, but I find it hard to believe that you can't beat that rate with the stock market and thus investing makes him more money and not only that but IRAs are capped so that's another advantage.

UberFlop

I would strongly suggest paying off the debt. I'm assuming with amounts totaling 90k, you have private loans, and I'm assuming the interest rates are variable. The interest rates are low right now because of the economy, but that's not to say they won't rise in the near future. If you could somehow finagle the numbers to favor putting into an IRA rather than paying off the loans, that won't hold if the rates change, and even if they stay the same, with jobs being much more fluid than they were before 2007, there's a lot less guarantee that your job will have the staying power to keep up with the life of your loans.

Pay off your highest interest loan first or your lowest balance loan first. Mathematically, the former saves you the most money, but the possible mental reward you get from completely paying off a loan amount can help you stick with the plan over the entire course. Pay the minimum on everything else, and just roll it over.

If you want to know more, borrow or pick up a copy of The Total Money Makeover by Dave Ramsey. I'm currently using it to pay off about 101k in student loans, and I'm about 20k into over 1.5 years at an income of about 2.2k a month. I changed up the order of the loans I hit first, but the rest of the process and tips work.

Deebaser

It looks like you're staring down 4,000 a year in interest. It would be silly to think about a Roth if you're already maxing out your 401k. Make a dent in the debt you've accrued.

Thundyrkatz

You said that you are fully funding a 401k already, so you are saving for retirement.

Pay off the student loans first, then look to alternate ways to add to your retirement savings.

Also, you may want to look into consolidating your student loans.

locking in will lock in the current historic low rates for you. I would bet that your current loans are variable rate loans that resent annually.

Also, consolidating will allow you to extend the term of the loans out to 25 years, which should serve to reduce your payments maybe as low as half what you are currently paying. This will raise the amount you pay in interest over the term of the loan, but give you some breathing room right now.

Also there is no penalty for early payment of the student loans once consolidated, so you can still pay them off and save money down the road when you are making more cash.

illig

Boutros wrote: »

I apparently can't pay just the highest interest loan, at least using the web interface. Seems like an all or nothing deal.

My lender gives me that option by calling them or writing them a letter. Most web interfaces are not that sophisticated, but that doesn't mean you can accomplish something the old fashioned way. Worth a call, IMHO

Boutros

A quick update: my electronic payment was rejected due to my in school status. However I called them today and they said I could make payments by mail which will allow me to target a specific loan. Entering early repayment however is an all or nothing deal, so i'm not going to do that and I will maintain my interest subsidies in lieu of refinancing.

The goal now is to knock off my biggest loan, $10908.37 at 8% by the end of 2011 while bolstering my emergency fund in case I get shitcanned. IRA will have to wait.

EggyToast

Since you just graduated, the best way to keep these long-term loans in your mind is that they are all investments. Whether you put $10k into a retirement account or $10k towards a student loan, it's technically a wash since a) you have to pay back the student loans eventually and b) it's all your money in the end (some you've just spent already).

So the best way to compare these things is simply by interest rate. If your student loans have high interest rates, you should focus on paying those off. If your student loans have low interest rates, you can mix & match. If your student loans have low interest rates and the market rate on a potential IRA is high, then focus on the IRA.

What this means, though, is that you can't just set one goal and be done with it. You should focus all of your "investment" money on the 8% loan, but ones under 6% can be paid off more slowly. That low one under 2% I would practically forget about and just pay the minimum. As you pay off student loans, your investment targets will change, and as (if) the economy improves, investing in an IRA will make more sense. As it is now, you're not missing very much by not investing in retirement accounts.

milkcartonjosh

Go see a CPA or a financial planner. A good CPA can do your taxes and knows all about how much of your student loan payments you can write off/ tax breaks. They know about IRA's vs Roth IRA's and can do all the crazy math and stuff. They can answer do the math on paying off student loans faster vs investing in IRA.

You can also tald to a Financial planner but understand that they are going to try to sell you some sort of product. They understand investments and will set up the IRA's do stock market stuff etc. But they will be trying to get you to invest as much as you can.

Ask aroud and see if your family or freinds know any CPA's who you can talk to for free. If you work for a company with a money guy he might know some things or have buddies for you to talk to as well.

Figure out the math or find someone who can. Then you can decide.

Simpsonia

Also remember that you can write off about $2000 a year in interest payments for your taxes, which is a nice little savings.