Poll: Pay off debt or Invest in retirement account

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Debt or Investment

Pay off debt--it's a guaranteed, risk-free 6.8% investment
21
27%
401k--If your firm matches, don't leave money on the table
29
38%
Some combination of the two
25
32%
Other (Roth IRAs, indexes, etc.)
2
3%
 
Total votes: 77

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dingbat
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Re: Poll: Pay off debt or Invest in retirement account

Postby dingbat » Sun Feb 17, 2013 8:13 pm

albusdumbledore wrote:
dingbat wrote:
albusdumbledore wrote:Federal loans capitalize (read: compound) until you enter repayment. At which point, they're simple interest, so you won't accrue interest on interest, just interest on the principle.

I don't want to derail, and for all practical purposes this information is fine, but technically, on a declining balance loan (e.g. vanilla mortgage or student loan) there's never interest on interest. However, that doesn't mean it's simple interest (it isn't - student loan interest is calculated daily)

Yeah fair enough. It's not credit card interest though.
yeah, it's why I said that for all practical purposes it's fine.

09042014
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Re: Poll: Pay off debt or Invest in retirement account

Postby 09042014 » Sun Feb 17, 2013 8:52 pm

People on xo have debated how to prepay loans. Some claim that if you prepay, they take that as prepayment of the next month's payments and don't reduce principle. Anyone know if thats true? Sounds fake.

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fatduck
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Re: Poll: Pay off debt or Invest in retirement account

Postby fatduck » Sun Feb 17, 2013 8:53 pm

Desert Fox wrote:People on xo have debated how to prepay loans. Some claim that if you prepay, they take that as prepayment of the next month's payments and don't reduce principle. Anyone know if thats true? Sounds fake.

no, they actually do this. it's fucking retarded. you have to specifically tell them to apply the payment to principal.

09042014
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Re: Poll: Pay off debt or Invest in retirement account

Postby 09042014 » Sun Feb 17, 2013 8:55 pm

fatduck wrote:
Desert Fox wrote:People on xo have debated how to prepay loans. Some claim that if you prepay, they take that as prepayment of the next month's payments and don't reduce principle. Anyone know if thats true? Sounds fake.

no, they actually do this. it's fucking retarded. you have to specifically tell them to apply the payment to principal.


So would the keep charging you interest on amount you paid? That seems awful stupid.

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dingbat
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Re: Poll: Pay off debt or Invest in retirement account

Postby dingbat » Sun Feb 17, 2013 8:56 pm

fatduck wrote:
Desert Fox wrote:People on xo have debated how to prepay loans. Some claim that if you prepay, they take that as prepayment of the next month's payments and don't reduce principle. Anyone know if thats true? Sounds fake.

no, they actually do this. it's fucking retarded. you have to specifically tell them to apply the payment to principal.

That's TTT as fuck. It also doesn't make sense - if you keep making prepayments like that it can't keep going forever

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fatduck
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Re: Poll: Pay off debt or Invest in retirement account

Postby fatduck » Sun Feb 17, 2013 9:00 pm

dingbat wrote:
fatduck wrote:
Desert Fox wrote:People on xo have debated how to prepay loans. Some claim that if you prepay, they take that as prepayment of the next month's payments and don't reduce principle. Anyone know if thats true? Sounds fake.

no, they actually do this. it's fucking retarded. you have to specifically tell them to apply the payment to principal.

That's TTT as fuck. It also doesn't make sense - if you keep making prepayments like that it can't keep going forever

well since your payments are part-interest, part-principal, you are technically paying down principal. but if your monthly payments are $200 and you send them a check for $600, they'll treat it as if you've paid Jan/Feb/Mar. it makes no sense at all, and i spent like an hour on the phone trying to figure it out, and i'm still clueless.

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albusdumbledore
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Re: Poll: Pay off debt or Invest in retirement account

Postby albusdumbledore » Sun Feb 17, 2013 9:01 pm

fatduck wrote:
Desert Fox wrote:People on xo have debated how to prepay loans. Some claim that if you prepay, they take that as prepayment of the next month's payments and don't reduce principle. Anyone know if thats true? Sounds fake.

no, they actually do this. it's fucking retarded. you have to specifically tell them to apply the payment to principal.

Yeah this was the case with federal loans I had from undergrad. I had to specifically click apply payment to principle or they just applied it to the next months. Student loans are a racket.

09042014
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Joined: Wed Oct 14, 2009 10:47 pm

Re: Poll: Pay off debt or Invest in retirement account

Postby 09042014 » Sun Feb 17, 2013 9:03 pm

albusdumbledore wrote:
fatduck wrote:
Desert Fox wrote:People on xo have debated how to prepay loans. Some claim that if you prepay, they take that as prepayment of the next month's payments and don't reduce principle. Anyone know if thats true? Sounds fake.

no, they actually do this. it's fucking retarded. you have to specifically tell them to apply the payment to principal.

Yeah this was the case with federal loans I had from undergrad. I had to specifically click apply payment to principle or they just applied it to the next months. Student loans are a racket.


Would they reduce your interest immediately, or wait until the due date?

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fatduck
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Re: Poll: Pay off debt or Invest in retirement account

Postby fatduck » Sun Feb 17, 2013 9:04 pm

Desert Fox wrote:
albusdumbledore wrote:
fatduck wrote:
Desert Fox wrote:People on xo have debated how to prepay loans. Some claim that if you prepay, they take that as prepayment of the next month's payments and don't reduce principle. Anyone know if thats true? Sounds fake.

no, they actually do this. it's fucking retarded. you have to specifically tell them to apply the payment to principal.

Yeah this was the case with federal loans I had from undergrad. I had to specifically click apply payment to principle or they just applied it to the next months. Student loans are a racket.


Would they reduce your interest immediately, or wait until the due date?

no, they wait until the due date. their default rule is basically to fucking steal your money for a month if you overpay. and they claim it's for your convenience.

09042014
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Joined: Wed Oct 14, 2009 10:47 pm

Re: Poll: Pay off debt or Invest in retirement account

Postby 09042014 » Tue Nov 05, 2013 6:34 pm

Does anyone use 401k loans to sort of split the difference? That way I can earn 7.9 percent interest in my 401k by paying my student loans.

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thesealocust
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Re: Poll: Pay off debt or Invest in retirement account

Postby thesealocust » Tue Nov 05, 2013 6:54 pm

Desert Fox wrote:Does anyone use 401k loans to sort of split the difference? That way I can earn 7.9 percent interest in my 401k by paying my student loans.


There are restrictions and fees on taking the loan, risks related to employment (I think the loan becomes immediately due if you change or leave jobs?) and limits on how quickly you can fund the 401(k). Basically there's a lot of friction in the process which makes it not attractive, but I think the max/tax consequences/legality would otherwise suggest it's doable.

Basically this makes sense: $16,500 pre-tax 401(k) contribution -> $16,500 401(k) loan -> $16,500 student loan payment -> "repay yourself" at some interest rate back into the 401(k)

But you run up against:

(a) limits on how quickly you can fund the 401(k)
(b) fees associated with the loan (I think)
(c) restrictions on the timing and ability to take the loan that the employer/plan can put in place (I think they have to affirmatively establish a 401(k) loan program for you to be able to even take part) and
(d) drama regarding changed employment circumstances (due in full upon changed employment, IIRC)

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Tiago Splitter
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Re: Poll: Pay off debt or Invest in retirement account

Postby Tiago Splitter » Tue Nov 05, 2013 7:07 pm

To add to the above, you can only borrow 50% and only up to a max of 50k.

09042014
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Re: Poll: Pay off debt or Invest in retirement account

Postby 09042014 » Tue Nov 05, 2013 11:37 pm

thesealocust wrote:
Desert Fox wrote:Does anyone use 401k loans to sort of split the difference? That way I can earn 7.9 percent interest in my 401k by paying my student loans.


There are restrictions and fees on taking the loan, risks related to employment (I think the loan becomes immediately due if you change or leave jobs?) and limits on how quickly you can fund the 401(k). Basically there's a lot of friction in the process which makes it not attractive, but I think the max/tax consequences/legality would otherwise suggest it's doable.

Basically this makes sense: $16,500 pre-tax 401(k) contribution -> $16,500 401(k) loan -> $16,500 student loan payment -> "repay yourself" at some interest rate back into the 401(k)

But you run up against:

(a) limits on how quickly you can fund the 401(k)
(b) fees associated with the loan (I think)
(c) restrictions on the timing and ability to take the loan that the employer/plan can put in place (I think they have to affirmatively establish a 401(k) loan program for you to be able to even take part) and
(d) drama regarding changed employment circumstances (due in full upon changed employment, IIRC)


There is a minimal fee (flat dollar not a percent). Less than 50 bucks. The problem I have is I can only loan up to 50% of my 401k. Firm has a system in place.

The only reason I'm thinking of doing it is because my firm forces me to contribute to my 401k.

The danger is 90 day payoff when I leave. Worst case, I just take the 10% hit. 10% sucks, but pushing off the taxes for a two-three years might be worth 10% when I'm paying nearly 8% interest.

FamilyLawEsq
Posts: 110
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Re: Poll: Pay off debt or Invest in retirement account

Postby FamilyLawEsq » Tue Nov 05, 2013 11:54 pm

Typically the loan must be amortized over a 5 year period at prime + 2%. Right now the interest rate is 5.25%. You may only have one loan at a time, so it may be better to accumulate more in your 401 K before you borrow from it.




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