paying back loans

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ToTransferOrNot
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Re: paying back loans

Postby ToTransferOrNot » Sat Oct 22, 2011 12:26 pm

IrwinM.Fletcher wrote:
legends159 wrote:I don't think buying is such a good idea given OP's geographic locations: NY/LA/SF/SV. RE in those areas are way overpriced and most places in such locations are well over $1MM.

See the nytimes interactive algorithm to see if buying or renting makes sense: http://www.nytimes.com/interactive/busi ... lator.html

See: http://www.nytimes.com/2011/05/11/busin ... hardt.html for an argument that it doesn't make sense to buy in NY and most parts of CA, which are places OP plans to live.


Yeah, it definitely depends on the market you're in. Maybe not as feasible in NY, but LA has actually cratered to the point where buying is very favorable vs. renting. Even the article you linked suggests as much. Also, by focusing on things like raw cost outlay, the calculations in that article and online calculators ignore VERY important factors like the deductibility of mortgage interest (especially with tax rates on biglaw salaries set to go from six to midnight around the time we graduate).


Except that the online calculators do take account of deductions and the like.

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IrwinM.Fletcher
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Re: paying back loans

Postby IrwinM.Fletcher » Sat Oct 22, 2011 12:52 pm

ToTransferOrNot wrote:Except that the online calculators do take account of deductions and the like.


Errrr, except that they don't. Few if any of these things have an input option for your annual income. The ones that say they 'factor it in' are typically using an average tax bracket of 15-20%, which will be wildly inaccurate.

ToTransferOrNot
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Re: paying back loans

Postby ToTransferOrNot » Sat Oct 22, 2011 1:15 pm

IrwinM.Fletcher wrote:
ToTransferOrNot wrote:Except that the online calculators do take account of deductions and the like.


Errrr, except that they don't. Few if any of these things have an input option for your annual income. The ones that say they 'factor it in' are typically using an average tax bracket of 15-20%, which will be wildly inaccurate.


The NYT one lets you input your marginal tax bracket. Yes, that requires you to figure out what your marginal rate is, but that isn't exactly difficult.

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IrwinM.Fletcher
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Re: paying back loans

Postby IrwinM.Fletcher » Sat Oct 22, 2011 1:26 pm

ToTransferOrNot wrote:
IrwinM.Fletcher wrote:
ToTransferOrNot wrote:Except that the online calculators do take account of deductions and the like.


Errrr, except that they don't. Few if any of these things have an input option for your annual income. The ones that say they 'factor it in' are typically using an average tax bracket of 15-20%, which will be wildly inaccurate.


The NYT one lets you input your marginal tax bracket. Yes, that requires you to figure out what your marginal rate is, but that isn't exactly difficult.


You're right- I didn't see it hidden under the third tab in advanced settings. Its default setting, however, is 20%.

ToTransferOrNot
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Re: paying back loans

Postby ToTransferOrNot » Sat Oct 22, 2011 1:29 pm

IrwinM.Fletcher wrote:
ToTransferOrNot wrote:
IrwinM.Fletcher wrote:
ToTransferOrNot wrote:Except that the online calculators do take account of deductions and the like.


Errrr, except that they don't. Few if any of these things have an input option for your annual income. The ones that say they 'factor it in' are typically using an average tax bracket of 15-20%, which will be wildly inaccurate.


The NYT one lets you input your marginal tax bracket. Yes, that requires you to figure out what your marginal rate is, but that isn't exactly difficult.


You're right- I didn't see it hidden under the third tab in advanced settings. Its default setting, however, is 20%.


Well, yeah, the defaults are going to be set in a way that makes the calculator useful for the majority of people, and they should probably put more explanation on the main page that the calculator underestimates the benefits of home ownership for high-income people, but still, the calculator lets you account for anything you need to account for.

The calculator also presumes a higher rate of increase for home values than rental rates and so on. You have to change a lot of the settings to make it reflect market realities.

Brassica7
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Re: paying back loans

Postby Brassica7 » Sat Oct 22, 2011 2:37 pm

lionelmessi wrote:
Anonymous User wrote:Seems like employment forum is the right place, but feel free to move:
Interested in a discussion about how to pay off loans assuming biglaw salary. Pay down just minimums or try for 5K/month?
Basic info:
-200k debt
-market pay (160)
-COL = SF/SV/LA/NYC
-anticipated household income ~250k
-no kids atm
All loans fed, none private.
Not sure whether to start saving for down payment on a house, or just pay off loans as quickly as possible...



I am a little bit older (early 30's) and have made some $$$ and lost some $$$.

My advice to everyone on this subject is to pay the smallest minimum you can until you have a real cash nest egg. I'm thinking 100k+. Or more. Or way more. And that's not $ for a house or investments, that is just your cash, your get out of jail free card. Then focus on debt, saving for a house, or whatever other financial goal you have. You can always use cash to pay down debt, but once you don't have cash, you just don't have it.

Best case scenario is no debt and lots of cash.

Next best is debt but lots of cash.

Second worst case is no debt but no cash.

Worst case is lots of debt and no cash.

Just my two cents, but it is informed from my own experience as well as working with many multi-milllionaire investors in my work the last few years. Many of them have seven figures in zero interest checking accounts and have various debts as well as investments, but always keep "their zero" as high above zero as possible.



I strongly disagree with this advice. Putting as much money as possible in zero interest checking accounts so that it gets reduced by inflation while 200k of non-dischargeable debt incurs 7.5% interest is ridiculous. Cash is not great; cash is terrible, unless you are doing a lot of buying and selling of assets for some reason and need the liquidity (which you don't from what you said in your OP).

Having no debt and no cash is way better than having lots of debt and lots of cash because each year you pay interest to have the debt and the cash is worth less because of inflation. I am not saying that having enough in savings to cover living expense for 6-9 months is bad--I think it is actually a good idea. But the advice to save up over 100k in cash without paying down the debt is insane. Student loan debt is now arguably the worst type of debt to have because of the high interest rates and because you cannot get rid of it through bankruptcy. This level of debt can therefore trap you in a lifestyle that may make you miserable. Or, you might get cut from Biglaw, and have to take a lower salary while still shouldering the debt.

For most people, the BIGLAW lifestyle will not last forever. Sure, some will stay long-term, but most will leave. When they leave, they may take a large cut in pay. I am not saying that this will necessarily be you, OP, but it could be. Sure, you might be one of the 5-10% that makes partner at a big firm, or if you leave, you might go into a high-paying job in-house, or make partner at a smaller firm and still earn very good money. But even if you are very successful in law, having that debt will limit your options. You will need to pay 15k a year just to keep up with interest. Even if high-paying jobs are available to you in he long-term, you may not want them because they often dominate one's life. If you end up leaving Biglaw after a few years, as most do, being out of debt will leave you with the most career/life options.

I do not know enough about tax structures to comment on whether it is good to buy a house now and pull liquidity out of it to pay the student loans. I just wanted to way in and say that after building up an emergency fund, I think you should focus on student loans. Think of it this way: paying off student loans ahead of schedule is the same financially as getting that 7.5% interest rate on an investment. It is impossible to get a safe investment that pays 7.5%. Paying off the debt early is a guaranteed return of 7.5%. This beats any investment on the planet that I can think of. Pay off the loans.

One final suggestion is to max the 5k you can pay each year into a Roth IRA. This has fantastic tax advantages when you retire, and if you do not contribute to the IRA each year you miss the opportunity to do so. This means that you could invest 5k in year 1 in the Roth IRA and 5k in year 2, but if you pay nothing in year 1, you can still only invest 5k in year 2. If you are married, your spouse should also max out her/his Roth IRA.


Note: spelling edit.

Anonymous User
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Re: paying back loans

Postby Anonymous User » Sat Oct 22, 2011 3:24 pm

OP here -- thanks for all the replies. I know the safe bet is to pay off ASAP but I'm not going to base my decision on leaving biglaw or w/e. Our household income shouldn't fall below 200k regardless due to sig-o's stable and already advanced career plus call me optimistic but I would only leave biglaw for more money in a startup/business venture. Not ever intending to go in-house for "calmer" lifestyle and less pay. Kindof a workaholic here. Outside of the "you will strike out of biglaw replies," (understand where the sentiment comes from but it's just not really relevant) I think there's a lot to think on here.

edit: might also try to get a rich uncle or something to buy the entire loan balance at low or no-interest. have a few friends who pulled this off and then had much calmer repayment schedules since there was no question of interest

dixiecupdrinking
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Re: paying back loans

Postby dixiecupdrinking » Sat Oct 22, 2011 3:50 pm

Anonymous User wrote:Outside of the "you will strike out of biglaw replies," (understand where the sentiment comes from but it's just not really relevant)

I wish you all the best, but it is not necessarily your decision whether this is relevant. Economic conditions and pure office politics will play a huge role. If your SO has a stable income that can pay your loans, that's one thing, but I really do not think it's smart to condition your ability to pay your loans on being employed in biglaw for more than 3-4 years. All these financial decisions are ultimately risk/reward calculations, so perhaps you just don't mind the risk, but I don't see the upside. Just my two cents.

(I will say though that there are a lot of false dichotomies in this thread. It doesn't make a ton of sense to save or invest NOTHING and pay down your loans as quickly as possible, but I think it makes equally little sense to make minimum student loan payments, as some are suggesting.)
Last edited by dixiecupdrinking on Sat Oct 22, 2011 3:52 pm, edited 1 time in total.

ToTransferOrNot
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Re: paying back loans

Postby ToTransferOrNot » Sat Oct 22, 2011 3:52 pm

Anonymous User wrote:OP here -- thanks for all the replies. I know the safe bet is to pay off ASAP but I'm not going to base my decision on leaving biglaw or w/e. Our household income shouldn't fall below 200k regardless due to sig-o's stable and already advanced career plus call me optimistic but I would only leave biglaw for more money in a startup/business venture. Not ever intending to go in-house for "calmer" lifestyle and less pay. Kindof a workaholic here. Outside of the "you will strike out of biglaw replies," (understand where the sentiment comes from but it's just not really relevant) I think there's a lot to think on here.

edit: might also try to get a rich uncle or something to buy the entire loan balance at low or no-interest. have a few friends who pulled this off and then had much calmer repayment schedules since there was no question of interest


Oh well if you can just have your rich family give you an under-market loan, then by all means :roll:

FYI, legally speaking, if you have an under-market loan, whatever interest you're not having to pay is considered income by IRS (though it can also be recharacterized as a gift under some circumstances - that ends up implicating gift tax issues, though). Chances of getting caught "cheating" on that are obviously low, but if you do get caught, bye-bye license.

(not legal advice)

Also, you don't necessarily need to bet on leaving biglaw after 3-4 years like many people do, but it would be incredibly foolish not to plan on not making partner, because you're just betting against statistics at that point. Doesn't matter how much of a workaholic you are, partnership chances in biglaw are incredibly low.

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Re: paying back loans

Postby Tiago Splitter » Sat Oct 22, 2011 3:53 pm

Brassica7 wrote: One final suggestion is to max the 5k you can pay each year into a Roth IRA. This has fantastic tax advantages when you retire, and if you do not contribute to the IRA each year you miss the opportunity to do so. This means that you could invest 5k in year 1 in the Roth IRA and 5k in year 2, but if you pay nothing in year 1, you can still only invest 5k in year 2. If you are married, your spouse should also max out her/his Roth IRA.


Except that income limits will prevent that Roth contribution, so you'll have to backdoor your way in through a non-deductible IRA contribution and then convert. Getting money into the Roth this way has only been possible since 2010 and could be stopped by Congress at any time.

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Re: paying back loans

Postby Anonymous User » Sat Oct 22, 2011 4:15 pm

ToTransferOrNot wrote:
Anonymous User wrote:OP here -- thanks for all the replies. I know the safe bet is to pay off ASAP but I'm not going to base my decision on leaving biglaw or w/e. Our household income shouldn't fall below 200k regardless due to sig-o's stable and already advanced career plus call me optimistic but I would only leave biglaw for more money in a startup/business venture. Not ever intending to go in-house for "calmer" lifestyle and less pay. Kindof a workaholic here. Outside of the "you will strike out of biglaw replies," (understand where the sentiment comes from but it's just not really relevant) I think there's a lot to think on here.

edit: might also try to get a rich uncle or something to buy the entire loan balance at low or no-interest. have a few friends who pulled this off and then had much calmer repayment schedules since there was no question of interest


Oh well if you can just have your rich family give you an under-market loan, then by all means :roll:

FYI, legally speaking, if you have an under-market loan, whatever interest you're not having to pay is considered income by IRS (though it can also be recharacterized as a gift under some circumstances - that ends up implicating gift tax issues, though). Chances of getting caught "cheating" on that are obviously low, but if you do get caught, bye-bye license.

(not legal advice)

Also, you don't necessarily need to bet on leaving biglaw after 3-4 years like many people do, but it would be incredibly foolish not to plan on not making partner, because you're just betting against statistics at that point. Doesn't matter how much of a workaholic you are, partnership chances in biglaw are incredibly low.



Well of course you pay whatever taxes are owed! Random concern...

Also, if people only went with statistics, nobody would go to below T14 aiming at biglaw... Many do even though the odds are heavily stacked against. It's just classic TLS to respond to a "how to pay off loans assuming biglaw salary" thread with: assume you will wash out within 4 years.
Last edited by Anonymous User on Sat Oct 22, 2011 4:55 pm, edited 1 time in total.

ToTransferOrNot
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Re: paying back loans

Postby ToTransferOrNot » Sat Oct 22, 2011 4:19 pm

"Assuming biglaw salary" incorporates the normal biglaw time-horizon. If what you're looking for is a financial plan that assumes partner, the plan is "who gives a damn" because you're going to have more than enough money that what you did the first few years out of LS are going to be basically irrelevant.

If you want to "assume partnership" then TCR is "go get lots of hookers and blow and really expensive booze".

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quakeroats
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Re: paying back loans

Postby quakeroats » Sat Oct 22, 2011 4:50 pm

Brassica7 wrote: It is impossible to get a safe investment that pays 7.5%. Paying off the debt early is a guaranteed return of 7.5%. This beats any investment on the planet that I can think of. Pay off the loans.


No it isn't. Unless by "safe" you mean 28-day t-bills, there's a lot you can do, particularly if you live in a high-tax state. You can find muni funds that return 4-5% over 10 years tax free. That's enough to get you really close to 7.5% when you exclude Federal, State, and City taxes.

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Re: paying back loans

Postby ToTransferOrNot » Sat Oct 22, 2011 4:54 pm

quakeroats wrote:
Brassica7 wrote: It is impossible to get a safe investment that pays 7.5%. Paying off the debt early is a guaranteed return of 7.5%. This beats any investment on the planet that I can think of. Pay off the loans.


No it isn't. Unless by "safe" you mean 28-day t-bills, there's a lot you can do, particularly if you live in a high-tax state. You can find muni funds that return 4-5% over 10 years tax free. That's enough to get you really close to 7.5% when you exclude Federal, State, and City taxes.


4-5% is "close" to 7.5%? In what world? The return on paying off loans is tax-free too, afterall.

At the end of the day, if you know for certain that you're going to live in the same house for 5+ years and you can lock in a mortgage at the current-ish rates, then putting down for a house is probably worth it (according to all of the reasonable tweaking one can do with the NYT calculator). Otherwise, pay down the loans.

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Re: paying back loans

Postby quakeroats » Sat Oct 22, 2011 5:07 pm

ToTransferOrNot wrote:
quakeroats wrote:
Brassica7 wrote: It is impossible to get a safe investment that pays 7.5%. Paying off the debt early is a guaranteed return of 7.5%. This beats any investment on the planet that I can think of. Pay off the loans.


No it isn't. Unless by "safe" you mean 28-day t-bills, there's a lot you can do, particularly if you live in a high-tax state. You can find muni funds that return 4-5% over 10 years tax free. That's enough to get you really close to 7.5% when you exclude Federal, State, and City taxes.


4-5% is "close" to 7.5%? In what world? The return on paying off loans is tax-free too, afterall.

At the end of the day, if you know for certain that you're going to live in the same house for 5+ years and you can lock in a mortgage at the current-ish rates, then putting down for a house is probably worth it (according to all of the reasonable tweaking one can do with the NYT calculator). Otherwise, pay down the loans.


In the world in which it isn't taxed by the federal, state, or local government as would normally be the case. Also, loan interest is (partially) deductible.

ToTransferOrNot
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Re: paying back loans

Postby ToTransferOrNot » Sat Oct 22, 2011 5:10 pm

quakeroats wrote:
ToTransferOrNot wrote:
quakeroats wrote:
Brassica7 wrote: It is impossible to get a safe investment that pays 7.5%. Paying off the debt early is a guaranteed return of 7.5%. This beats any investment on the planet that I can think of. Pay off the loans.


No it isn't. Unless by "safe" you mean 28-day t-bills, there's a lot you can do, particularly if you live in a high-tax state. You can find muni funds that return 4-5% over 10 years tax free. That's enough to get you really close to 7.5% when you exclude Federal, State, and City taxes.


4-5% is "close" to 7.5%? In what world? The return on paying off loans is tax-free too, afterall.

At the end of the day, if you know for certain that you're going to live in the same house for 5+ years and you can lock in a mortgage at the current-ish rates, then putting down for a house is probably worth it (according to all of the reasonable tweaking one can do with the NYT calculator). Otherwise, pay down the loans.


In the world in which it isn't taxed by the federal, state, or local government as would normally be the case. Also, loan interest is (partially) deductible.


um, 4-5% is not close to 7.5%. You're talking about a 33%+ difference. Pointing to "tax-free-ness" is irrelevant when you are comparing to another tax-free 'investment'.

And no, student loan interest is not even partially deductible for a biglaw person: The $3,000 cap has a 100% phaseout that kicks in long before biglaw-level salary. The only time a biglaw person will see any deduction for SL interest is during the stub year.

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A'nold
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Re: paying back loans

Postby A'nold » Sat Oct 22, 2011 6:47 pm

OP coming from a wealthy family explains a lot.

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Re: paying back loans

Postby Anonymous User » Sat Oct 22, 2011 6:59 pm

Serious question:

After law school, is there someone I can hire at reasonable price to (based on education and sound principles) figure out and/or handle the best course of financial action in terms of paying off loans and building capital for the future?

I mean, people come to us with their legal problems... can't we rely on others who study these things to take all these numbers and just put forth in layman's terms the way forward?

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A'nold
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Re: paying back loans

Postby A'nold » Sat Oct 22, 2011 7:01 pm

Anonymous User wrote:Serious question:

After law school, is there someone I can hire at reasonable price to (based on education and sound principles) figure out and/or handle the best course of financial action in terms of paying off loans and building capital for the future?

I mean, people come to us with their legal problems... can't we rely on others who study these things to take all these numbers and just put forth in layman's terms the way forward?

Um.........yeah?

keg411
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Re: paying back loans

Postby keg411 » Sat Oct 22, 2011 7:09 pm

Anonymous User wrote:Serious question:

After law school, is there someone I can hire at reasonable price to (based on education and sound principles) figure out and/or handle the best course of financial action in terms of paying off loans and building capital for the future?

I mean, people come to us with their legal problems... can't we rely on others who study these things to take all these numbers and just put forth in layman's terms the way forward?


Yeah. A lot of people have financial planners/accountants.

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A'nold
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Re: paying back loans

Postby A'nold » Sat Oct 22, 2011 7:18 pm

quakeroats wrote:
Brassica7 wrote: It is impossible to get a safe investment that pays 7.5%. Paying off the debt early is a guaranteed return of 7.5%. This beats any investment on the planet that I can think of. Pay off the loans.


No it isn't. Unless by "safe" you mean 28-day t-bills, there's a lot you can do, particularly if you live in a high-tax state. You can find muni funds that return 4-5% over 10 years tax free. That's enough to get you really close to 7.5% when you exclude Federal, State, and City taxes.

I'm sorry but this is REALLY untrue.

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Old Gregg
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Re: paying back loans

Postby Old Gregg » Sat Oct 22, 2011 7:34 pm

keg411 wrote:
Anonymous User wrote:Serious question:

After law school, is there someone I can hire at reasonable price to (based on education and sound principles) figure out and/or handle the best course of financial action in terms of paying off loans and building capital for the future?

I mean, people come to us with their legal problems... can't we rely on others who study these things to take all these numbers and just put forth in layman's terms the way forward?


Yeah. A lot of people have financial planners/accountants.


There actually are financial advisors that provide services tailored to the needs of students deep in student debt. They did a presentation at my law school. Most of the services they offered were free.

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Re: paying back loans

Postby Brassica7 » Sat Oct 22, 2011 8:13 pm

No it isn't. Unless by "safe" you mean 28-day t-bills, there's a lot you can do, particularly if you live in a high-tax state. You can find muni funds that return 4-5% over 10 years tax free. That's enough to get you really close to 7.5% when you exclude Federal, State, and City taxes.[/quote]

4-5% is "close" to 7.5%? In what world? The return on paying off loans is tax-free too, afterall.

At the end of the day, if you know for certain that you're going to live in the same house for 5+ years and you can lock in a mortgage at the current-ish rates, then putting down for a house is probably worth it (according to all of the reasonable tweaking one can do with the NYT calculator). Otherwise, pay down the loans.[/quote]

In the world in which it isn't taxed by the federal, state, or local government as would normally be the case. Also, loan interest is (partially) deductible.[/quote]

um, 4-5% is not close to 7.5%. You're talking about a 33%+ difference. Pointing to "tax-free-ness" is irrelevant when you are comparing to another tax-free 'investment'.

And no, student loan interest is not even partially deductible for a biglaw person: The $3,000 cap has a 100% phaseout that kicks in long before biglaw-level salary. The only time a biglaw person will see any deduction for SL interest is during the stub year.[/quote]

This. I think the tax deduction on student loan interest starts to phase out with the first 65k of income for a single person and is gone by 75k. It will be a bit higher for married filing jointly, but not close to 250k, which is what the OP says his household income would be.

It is possible on some investments to make over 7.5% interest (just look at the stock market over the past 80ish years), but it is impossible to predict what will pay that amount. Paying off student loans is a guaranteed, and tax free, 7.5 percent returns. Cannot be beat.

I agree with TToN, purchasing a home may be a solid move now, but I do not know much about the real estate market.

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Re: paying back loans

Postby quakeroats » Sat Oct 22, 2011 9:45 pm

ToTransferOrNot wrote:
ToTransferOrNot wrote:
quakeroats wrote:
Brassica7 wrote: It is impossible to get a safe investment that pays 7.5%. Paying off the debt early is a guaranteed return of 7.5%. This beats any investment on the planet that I can think of. Pay off the loans.


No it isn't. Unless by "safe" you mean 28-day t-bills, there's a lot you can do, particularly if you live in a high-tax state. You can find muni funds that return 4-5% over 10 years tax free. That's enough to get you really close to 7.5% when you exclude Federal, State, and City taxes.


4-5% is "close" to 7.5%? In what world? The return on paying off loans is tax-free too, afterall.

At the end of the day, if you know for certain that you're going to live in the same house for 5+ years and you can lock in a mortgage at the current-ish rates, then putting down for a house is probably worth it (according to all of the reasonable tweaking one can do with the NYT calculator). Otherwise, pay down the loans.


In the world in which it isn't taxed by the federal, state, or local government as would normally be the case. Also, loan interest is (partially) deductible.

um, 4-5% is not close to 7.5%. You're talking about a 33%+ difference. Pointing to "tax-free-ness" is irrelevant when you are comparing to another tax-free 'investment'.

And no, student loan interest is not even partially deductible for a biglaw person: The $3,000 cap has a 100% phaseout that kicks in long before biglaw-level salary. The only time a biglaw person will see any deduction for SL interest is during the stub year.


I'll concede the second point. As for the first, a 33% difference is somewhat deceptive here--in the way that the difference between .5% and 1% is 100%. Ignoring beneficial tax treatment leaves you with a loan at 2.5%. That's about as good as it gets.

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Re: paying back loans

Postby ToTransferOrNot » Sat Oct 22, 2011 10:21 pm

Assuming no transaction costs on the muni bonds (terrible assumption, by the way, especially since you would be buying small amounts at any given time), I guess you could say that you have a 2.5% "loan" by purchasing muni bonds instead of paying off your loans. But what are you getting for that 2.5%? Liquidity I suppose, but liquidity to what end? You wouldn't want your emergency funds tied up in bonds, so you're talking funds beyond your "crap I need cash immediately" needs. I suppose you could flip it into a house downpayment if the need arose, but due to the incrimental nature with which you'd have to buy the bonds, that doesn't make sense either.




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