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Student Loan Payoff vs. Invest Calculator: thoughts?

Home Student Loan Management Student Loan Payoff vs. Invest Calculator: thoughts?

  •  newdoc2016 
    Participant
    Status: Physician
    Posts: 7
    Joined: 08/26/2018

    I don’t mean to bring up the age old question of whether to payoff student loans before investing, but I came across this calculator on studentloanhero.com, and wanted to know if it was reliable? https://studentloanhero.com/calculators/student-loan-payoff-vs-invest-calculator/

    For example:

    Step One:
    Loan amount: $300k
    Avg interest rate: 4%
    Current monthly payment: $5525
    Loan term: 5 years

    Step Two:
    Current investment savings: $6000
    Annual rate of return: 3%
    Current monthly contribution: $3166 (assuming 403b and 457b access, and maxing at $19000 per year each)
    Years of contributions: 20 years

    Step Three:
    Monthly extra payment(to either loan or investment) : $2000

    With the above example, if you payed off your loan with the $2000, you would shorten your loan term to 3. 6 years and save $9066 in interest payments.

    However if you instead invested that same $2000 for the same 3. 6 years, you will have increased the final balance of your investments by $148,287 at the end of 20 years. The interest earned by the end of 20 years is $62287.

    So with all of that said, why would anyone want to payoff their loans sooner than needed? I understand that markets go up and down, but according to the calculator, even a 1% return on investments over 20 years earns you $17130.

    Am I simply understanding the calculator wrong??

    #180209 Reply
    Craigy Craigy 
    Participant
    Status: Spouse
    Posts: 1700
    Joined: 09/16/2016

    Because student loans are a plague, a huge weight on your psyche and stress on your lifestyle, career, etc.  Impacts your ability to borrow, enslaves you to your work, puts pressure on your marriage, I could go on.  Literally one of the worst debts that you can have, right behind credit cards and loan sharks.

    LEVEL 1 WCI FORUM MEMBER.

    #180276 Reply
    Liked by CordMcNally
     Panscan 
    Participant
    Status: Resident
    Posts: 481
    Joined: 03/18/2017

    why are your investments earning you 3 %

    #180277 Reply
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 5224
    Joined: 01/12/2016

    I don’t mean to bring up the age old question of whether to payoff student loans before investing, but I came across this calculator on studentloanhero.com, and wanted to know if it was reliable? https://studentloanhero.com/calculators/student-loan-payoff-vs-invest-calculator/

    For example:

    Step One:
    Loan amount: $300k
    Avg interest rate: 4%
    Current monthly payment: $5525
    Loan term: 5 years

    Step Two:
    Current investment savings: $6000
    Annual rate of return: 3%
    Current monthly contribution: $3166 (assuming 403b and 457b access, and maxing at $19000 per year each)
    Years of contributions: 20 years

    Step Three:
    Monthly extra payment(to either loan or investment) : $2000

    With the above example, if you payed off your loan with the $2000, you would shorten your loan term to 3. 6 years and save $9066 in interest payments.

    However if you instead invested that same $2000 for the same 3. 6 years, you will have increased the final balance of your investments by $148,287 at the end of 20 years. The interest earned by the end of 20 years is $62287.

    So with all of that said, why would anyone want to payoff their loans sooner than needed? I understand that markets go up and down, but according to the calculator, even a 1% return on investments over 20 years earns you $17130.

    Am I simply understanding the calculator wrong??

    Click to expand…

    You are not, and this rather simple fact (compound vs. simple interest, and a bounded vs. open term) is powerful.

    Other reasons to pay off loans, flexibility (not need a steady paycheck), take more risks, etc…but more money is not one of them.

    Same applies to mortgages only its much worse since you likely wont stay 30 years, transaction costs, lower hurdle rate etc…

     

    #180284 Reply
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 5224
    Joined: 01/12/2016

    Because student loans are a plague, a huge weight on your psyche and stress on your lifestyle, career, etc.  Impacts your ability to borrow, enslaves you to your work, puts pressure on your marriage, I could go on.  Literally one of the worst debts that you can have, right behind credit cards and loan sharks.

    Click to expand…

    I had near 600k when I came out, I havent aggressively paid mine down as I chose investing instead. Have had zero difficulty getting loans, I bought two houses within 18 months even.

    The stress on your psyche is self made. Make a plan, do it. Shouldnt put stress on your marriage if you have a plan and such.

    There are lots of good reasons. It is a terrible form of debt in that it has no tax or legal benefits.

    #180285 Reply
     Frugal Beard MD 
    Participant
    Status: Physician
    Posts: 9
    Joined: 05/02/2018

    Because student loans are a plague, a huge weight on your psyche and stress on your lifestyle, career, etc.  Impacts your ability to borrow, enslaves you to your work, puts pressure on your marriage, I could go on.  Literally one of the worst debts that you can have, right behind credit cards and loan sharks.

    Click to expand…

    I had near 600k when I came out, I havent aggressively paid mine down as I chose investing instead. Have had zero difficulty getting loans, I bought two houses within 18 months even.

    The stress on your psyche is self made. Make a plan, do it. Shouldnt put stress on your marriage if you have a plan and such.

    There are lots of good reasons. It is a terrible form of debt in that it has no tax or legal benefits.

    Click to expand…

    Out of pure curiosity, what made you decide to focus more on investing than paying down the debt?

    #180381 Reply
     jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1676
    Joined: 03/01/2018

    So with all of that said, why would anyone want to payoff their loans sooner than needed? I understand that markets go up and down, but according to the calculator, even a 1% return on investments over 20 years earns you $17130.

    The next logical question is obvious. Why not borrow more money, to invest?

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #180384 Reply
    Liked by Tim, Craigy, Peds
    ChadCFP ChadCFP 
    Participant
    Status: Financial Advisor, Website Sponsor, Small Business Owner
    Posts: 60
    Joined: 10/04/2017

    I don’t mean to bring up the age old question of whether to payoff student loans before investing, but I came across this calculator on studentloanhero.com, and wanted to know if it was reliable? https://studentloanhero.com/calculators/student-loan-payoff-vs-invest-calculator/

    For example:

    Step One:
    Loan amount: $300k
    Avg interest rate: 4%
    Current monthly payment: $5525
    Loan term: 5 years

    Step Two:
    Current investment savings: $6000
    Annual rate of return: 3%
    Current monthly contribution: $3166 (assuming 403b and 457b access, and maxing at $19000 per year each)
    Years of contributions: 20 years

    Step Three:
    Monthly extra payment(to either loan or investment) : $2000

    With the above example, if you payed off your loan with the $2000, you would shorten your loan term to 3. 6 years and save $9066 in interest payments.

    However if you instead invested that same $2000 for the same 3. 6 years, you will have increased the final balance of your investments by $148,287 at the end of 20 years. The interest earned by the end of 20 years is $62287.

    So with all of that said, why would anyone want to payoff their loans sooner than needed? I understand that markets go up and down, but according to the calculator, even a 1% return on investments over 20 years earns you $17130.

    Am I simply understanding the calculator wrong??

    Click to expand…

    I plugged in your numbers to the calculator and things seem to check out. The only thing I would change for a better comparison would be instead of 20 years, change it to 4 years. It is still a large difference +$91.8k. It just seemed a little off to compare 3.6 years to 20 years.

    Aside from the math, the biggest factor is compounding interest which others have noted. I would also argue that 3% market return is pretty low, heck you can get an Ally savings account for 2% right now. A market return over 4% would lead to a little arbitrage that would also favor you.

    Based on your notes it seems like you have made up your mind which is half the battle. If you came to me today with this scenario (assuming I have no other facts), I would also lean towards investing. For starters, 4% interest rate on your loans is pretty good, and you are already on a solid path with a 5-year payoff. Based on your username, I assume you are a younger physician so the next two big tailwinds are time in the market and compounding interest. With just those notes alone, extra savings makes sense. The $2,000 extra per month is probably going to a taxable account I assume since the other $3,166 is maxing out the 403b & 457b (great job!). If the funds are in a taxable account and one day you decide you hate student loans, you can pay them off with a lump sum, if needed. Probably not a bad idea to max out a back door Roth IRA each year with a portion of the extra savings.

    Seems like you are doing a great job with everything! $300k in loans paid off in 5 years, maxing out retirement accounts, and still have $2k to allocate, well done!

    Chad Chubb, CFP ® | WealthKeel LLC
    https://wealthkeel.com/wci | Gen X & Gen Y Physicians

    #180399 Reply
    Liked by newdoc2016
    Molar Mechanic Molar Mechanic 
    Participant
    Status: Dentist, Small Business Owner
    Posts: 287
    Joined: 10/29/2017

    If you are investing at 3% and borrowing at 4%, then drop all investing and pay off the loans.

    If the loans are a stressor, then pay them off sooner.  If they are a mild annoyance and the rate is reasonable, then pay them off in a reasonable time frame.  5 years is reasonable.

    If your choice is between spending more on luxuries vs paying off the loans, then pay off the loans.

    My student loans are 1.625% and less than half a months average pay.  I’m 15 years into a 30 year payoff and that $362 a month is the least of my concerns.  15 more years or so and they’ll be gone.

    #180401 Reply
    Liked by Zaphod
     Jack_Sparrow 
    Participant
    Status: Physician
    Posts: 6
    Joined: 01/09/2019

    I’ve elected to invest over paying off student loans. One of the ways I see it, is with Student loan you always have the flexibility to change that monthly payment by refinancing them to a longer duration if life throws you a curve ball. I know there is a balance but I would much rather have 100k in investments and 100k student loan debt than 0K in investments and no student loan debt. Give me a buffer in life at least in the short term.

    #180406 Reply
    Liked by Zaphod
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 5224
    Joined: 01/12/2016

    So with all of that said, why would anyone want to payoff their loans sooner than needed? I understand that markets go up and down, but according to the calculator, even a 1% return on investments over 20 years earns you $17130.

    The next logical question is obvious. Why not borrow more money, to invest?

    Click to expand…

    It is and people do this and there is nothing inherently wrong with it.

    Obviously there is a point on either side of debt or investing, and a whole confluence of other factors, such as human capital and job stability which are absolutely massive for physicians, that make a very big difference as compared to the average person working an average job. Balance is the key, if you live to service debt thats unsustainable and makes your position fragile to minor fluctuations in life. No one espouses to live like that.

    For the next round in non sequiturs, yes, I absolutely would take a giant lump sum at a reasonable rate today, instead of invest over my lifetime. However, no one is offering that for the precise reason I would take it. Its basically a more complexly arranged form of the question “lump sum or DCA?”. Which of course we mostly only do DCA because we have no other choice.

    #180419 Reply
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 5224
    Joined: 01/12/2016

    If you are investing at 3% and borrowing at 4%, then drop all investing and pay off the loans.

    If the loans are a stressor, then pay them off sooner.  If they are a mild annoyance and the rate is reasonable, then pay them off in a reasonable time frame.  5 years is reasonable.

    If your choice is between spending more on luxuries vs paying off the loans, then pay off the loans.

    My student loans are 1.625% and less than half a months average pay.  I’m 15 years into a 30 year payoff and that $362 a month is the least of my concerns.  15 more years or so and they’ll be gone.

    Click to expand…

    Plus the inflation working on that for you in both the debt and investing. 1.625!

    #180421 Reply
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 5224
    Joined: 01/12/2016

    I’ve elected to invest over paying off student loans. One of the ways I see it, is with Student loan you always have the flexibility to change that monthly payment by refinancing them to a longer duration if life throws you a curve ball. I know there is a balance but I would much rather have 100k in investments and 100k student loan debt than 0K in investments and no student loan debt. Give me a buffer in life at least in the short term.

    Click to expand…

    I think this is reasonable and important as well. In the short term, it makes sense to prioritize one over the other. In the medium term you will likely not feel so behind or like you have zero buffer, long term it wont matter at all and you may one day write a check.

    A lot of this is simply where you are in your career/life and what priorities are for each stage.

    #180423 Reply
    CordMcNally CordMcNally 
    Participant
    Status: Physician
    Posts: 1420
    Joined: 01/03/2017

    It depends how much your student loans bother you. Mine bothered me so I paid them off quickly. No regrets and I’d do it again. If you’re looking into this and running numbers with regards to pay off loans vs. investing, you’re going to be in good shape no matter what you decide.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #180424 Reply
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 5224
    Joined: 01/12/2016

    It depends how much your student loans bother you. Mine bothered me so I paid them off quickly. No regrets and I’d do it again. If you’re looking into this and running numbers with regards to pay off loans vs. investing, you’re going to be in good shape no matter what you decide.

    Click to expand…

    There are definitely situations where paying off student loans allows you to do things you cant as well. Take certain jobs, move to certain places, be totally free, etc…join a startup or anything of that nature. These are not small things.

    I think we harp on the psyche/emotional part of it while we we’d admonish it anywhere else. For example, I have never been within several magnitudes of psychological pain in regards to student loans as I have to seeing positions tank, and I assure you capitulating probably would feel amazing. But you shouldnt do it.

    Examine your goals and such for the next 5-10 years and get started. Great thing about building up a large taxable is if you change your mind you just cash out and end the loan, or change your priority of new money, cant do it the other way.

    #180444 Reply
    Liked by CordMcNally

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