JohannDeMann wrote:I have never seen a more phony number than that $60k. You're just assuming that they aren't doing anything with their money. Not paying that $8k a month in student loans would give them a nest egg of 100k to invest. 60k in 5-6 years on that 100k is a negative investment compared to historical averages. This ignores time value of moeny and inflating debt away and the fact that committing 8k a month to loans is 100% of discretionary income when you could pay way less % of discretionary income down the road.
- $60,400 is not a made up number. If they have $500,000 in loans at 7% interest, that's $35,000 in interest per year. Multiply that by two years and it's $70,000. Pay $400 per month toward their loans for 24 months (as you suggested) and that's $9,600. $70,000 in interest accrued minus $9,600 in payments equals $60,400.
So let's go through their options. They can pay $8,500 per month and have the principal down to (roughly) $355,000 after two years. And monthly interest accrues in a compound manner (i.e., the more one pays towards his loans, the less interest accrues), interest is now accruing at $2070 per month instead of nearly $3,000 per month.
Or they can build up a "nest egg" of $100,000 and let the student loan balance grow to $560,400 after two years. If they are now sick of their debt and decide to start paying off their loans, then it would take 12 months of $8,000 payments just to get back to the $500,000 principal.
Point is: deferring your loans for just a couple of years to build up a "nest egg" can cost you hundreds of thousands. Yes, the market returns 7% on average over the long term, but you can't project that over a short time period of 1-2 years. Thus, if you think you want to eventually pay off your loans, quit dicking around and just pay them off.
- BUT TIME VALUE OF MONEY AND NEST EGGS. Stop. TVM is a bullshit argument when they can pay off their loans in 4-5 years. Having a "nest egg" of $100k to invest is pointless when they are 100% guaranteed to make a 7% return with every dollar that goes towards their loans.
- Yes, $8,5000 is a large portion of discretionary income. But they are in a unique circumstance and have significant discretionary income. I conservatively budgeted $7,000 in living expenses. Assume they're in NYC and $3,500 for apartment (rent plus utilities). $500 for groceries. $500 for cars (if they have them). $1,000 for entertainment/dining out. $500 for cell phones and shopping per month. And they still
have $1,500 left over to do whatever they want to do--while investing $47,000 per year towards retirement.
- Oh, they can pay down the road. Why would they want to if they don't have to?
Again, if they choose to max out retirement accounts and pay off their loans ASAP, by the time they are done with their loans they will have almost $300,000 saved up. They can continue to max out their retirement accounts throughout their careers and have more than $2M in the bank by the time they are 45...and no debt. And if they take the money they were paying towards their loans and shift it to investing, then they will probably have closer to $3.5-4M by the time they are 45.