hous wrote:I have 50k in loans. I plan on paying it off within 2 years of now as my house is paid for. My loans have interest rates of 5.8-6.8. Should I consolidate my loans for a lower interest rate and pay it back over a longer period / at the same rate?
I have good credit.
Aggressively paying down debt in this market is so crazy. Conservative investing strategies are yielding 10% a year. Diversify people. Try to cop a 4% rate and spread out payments over 5 years. The market is running right now. Put the rest in the market.
Also if anyone in this thread is a lawyer making 75kish - you should be diversifying by making some after tax retirment contributions. It's likely this will be your lowest tax rate you face in your entire career. If you are below a 30% rate, thats an almost 5% guaranteed savings off the top before you factor in market gains. And could be something like a 20% savings with how liberal our age group is and where the country may be moving.
1. Any decision under MPT or CAPM would be to take the project that generates outsized return relative to risk. Since paying down debt is a risk-free after-tax return of OP's interest rate, even at a low 4% the MPT/CAPM decision is to pay down the debt before investing. However...
2. Anyone that's at $75k should try like hell to max out (or get as close as they can) 401k to get below the student loan interest deduction phaseout beginning at $60k MAGI. That boosts the risk-free after-tax return even higher to somewhere around 5% (still assuming refi). Apples to apples, a risk-free taxable investment would have to yield around 6-7% to shift the decision toward investing. When was the last time a T-bill had a real yield of 6-7%?
3. Once the debt is exhausted though, your after-tax/tax-advantaged tip is spot on.
4. Hous, you should see what the refi options are but still strongly consider aggressively paying down debt. And if you're a bit above the final phaseout for student loan interest deduction (kicks in at $60k, gone at $75k), don't skimp on the 401k contributions just to pay down more debt.