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Start taxable vs pay off <1.5% variable student loans in CoronaBear market

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  • Start taxable vs pay off <1.5% variable student loans in CoronaBear market

    Apologies if this is a repetitive question, but COVID-19 has changed circumstances enough to where I'm questioning my original plan to pay off all student loans before starting a taxable account.

    Stats:
    Married, early career dual-physican surgical subspecialists (32 yo and 37 yo), no children, no house (rent is 2K month), owned cars
    Salary: ~515K yearly combined (jobs are safe for now as employee physicians, despite severely reduced workload)
    Loans: ~395K total, ~8K monthly payment, all in 5 year variable private re-financed loans tied to LIBOR index, average interest rate currently is 1.3%
    Retirement: ~100K total in retirement accounts (Roth 401k, TSP, Roth IRAs, HSAs); 100% stock all in cheap index funds
    E-fund: 25K in Ally savings
    Taxable investing account: Zero

    Our initial plan was to hammer down the student loans with our excess cash flow, but the very low interest rates and the current recession is forcing me to rethink our plan. We will max our retirement protected space in a month or so. We don't love work and early/partial retirement is definitely in our plans, earlier the better. As you can see, we are fairly aggressive with our allocation and I believe we have a high-risk tolerance considering our earnings potential. The loss in retirement accounts with CoronaBear has not bothered us at all, although it helps that it's a small amount. Planning on kids and a house in the next few years, pending what the world looks like in the next 6-12 months.

    It makes mathematical sense to just pay the minimum on loans and starting DCA'ing our excess cash flow into a taxable account. I will probably build the E-fund up a bit more considering the COVID world. I'd love some opinions regarding what others would do with the excess cash flow if you were in our situation. Probably makes best sense to build up cash reserves now and wait to see what happens with COVID. What do you guys think?

    thanks for any replies!

  • #2
    Are you at 20%+ Retirement Savings? Not counting HSA. You are at $100k, that’s short of one year.
    Gross-taxes-Retirement =spending
    Spending includes loan payments and surplus savings. No impact on wealth. Taxable vs loan? You do know the taxable could go down more. Or up or stay even. Making that choice based on covid is not really investing, but you can rationalize it, or not.

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    • #3
      The nice things ng about paying extra to your student loans is that if you get into trouble you can pause payment without consequence. As opposed to a mortgage where it does not matter if your head you still owe the same amount every month until the balance is gone.

      I would still try to have your loans paid off by 5 years. But you don't necessarily need to be more aggressive than that.

      You have a good salary and minimal expenses at this time. You really could do both.

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      • #4
        Originally posted by Tim View Post
        Are you at 20%+ Retirement Savings? Not counting HSA. You are at $100k, that’s short of one year.
        Gross-taxes-Retirement =spending
        Spending includes loan payments and surplus savings. No impact on wealth. Taxable vs loan? You do know the taxable could go down more. Or up or stay even. Making that choice based on covid is not really investing, but you can rationalize it, or not.
        We are definitely not at 20% retirement savings considering we are currently only using our tax-protected space now, which is well short of 20%. But I consider excess student loan payments as essentially the same as "retirement savings" as it is all going to increase our net worth. Obviously, the taxable can go down in the short/medium term, but with a retirement horizon of ~ 15years or more, I expect a significant rebound in the market as it has shown over history. I'm not really basing my choice based on COVID per se, just the market circumstances we find ourselves in due to COVID (low interest rates and bear market). I guess that could be considered trying to "time the market" but we would be DCA'ing monthly instead of paying excess student loan payments per month.

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        • #5
          Since you're both employees, I would hoard cash for the next several months and then see what the landscape looks like then.

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          • #6
            Maintain or expand emergency funds.

            I've been paying the minimum on my 1.6% fixed loan for 16 years and have 14 years to go. Yours are variable though so I like the 5 year plan. Beyond that, I’d invest it.

            I disagree with stating that your loans count as retirement savings.

            Retirement savings come off the top. Loans get paid from discretionary funds. When loans are gone, lifestyle improves.
            Last edited by Molar Mechanic; 04-05-2020, 01:55 PM.

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            • #7
              Originally posted by Molar Mechanic View Post
              Maintain our expand emergency funds.

              I've been paying the minimum on my 1.6% fixed loan for 16 years and have 14 years to go. Yours are variable though so I like the 5 year plan. Beyond that, if invest it.

              I disagree with starting that your loans count as retirement savings.

              Retirement savings come off the top. Loans get paid from discretionary funds. When loans are gone, lifestyle improves.
              Yes I agree with this. If you do choose to pay your loans off more slowly due to it being a low interest rate you should be putting me equivalent or much more into your taxable account. The problem with most people is that it is hard to be disciplined for 30 years and not grow into that money.

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