Pay back loan ASAP or use the money to invest? Forum

[Anonymous User]

Debt: ~100k
Income: 180k (base salary) + 80k (COLA for working overseas)

3L here. I have no spouse or children to support and live a pretty frugal life generally. If I use all my monthly savings to pay back my loan, I can get rid of it within 8 months. Question: should I pay back my loan ASAP? Or should I pay the minimum amount and use the money to make investments? I'm a KJD and know nothing about financial planning though. Any general advice on how lawyers manage their money would be appreciated!

[sparkytrainer]

The general advice is look at the interest rates/rates of return. Example: If your loans are 6% interest, but you would make 3% investing, pay off the loans first. If you are making 10% investing (unlikely) and your loans are 6% interest, then there is an argument for putting more money into the investments.

Given that 99/100 times the scenario is the first, then you should pay off loans first. Save some, but be aggressive with loans.

[PMan99]

With that little debt I think the answer is refinance + pay it down asap. The PAYE + investing route only works if you're double that in debt and without the COLA.

[boredtodeath]

Not sure I agree with the above two posters. What's your interest rate(s) on the loan? If above 5%, look to refinance. If you can refi to around 3% I don't see a problem with paying the minimum and investing the rest of your disposable income. Long-term rate of return in the market averages 6-7%. While that's not a risk-free return like paying down the loan is, I think with a long enough time horizon you can safely assume you'll beat a 3% interest rate in the market.

If you can't refi below 5%, maybe it makes sense to pay the loans down aggressively. That said, in a market like we've had for the past couple of years, you would have blown 5% out of the water had you invested. Clearly there is a risk/reward calculation to be made here, but it all depends on your interest rate. Also unclear why paying the minimum and investing only applies to those on PAYE?

[2013]

Paying the minimum and investing only applies to PAYE because your high (6%+) government interest is slashed by the forgiveness.

[hangingtree]

The other key factor not mentioned here is the psychological weight of carrying a significant amount of debt. This is bound to occupy your thoughts at least occasionally. Depending on your personality, you may think about this quite often even when your debt becomes a fraction of the amount you've saved. May be worth to pay it off first with that in mind.

Another factor to consider/keep on your radar is that investing your money involves a lot of transaction costs and that you'll want to be very, very thoughtful as to how to invest your money. I'm almost to this point now and am still struggling with exactly what to do with my money.

By the way, in case there are any lurkers only reading this thread, the interest rate of the debt vs. rates of return you can expect from investing is the crux of the matter. It's not about the principal amount of debt or the actual dollar amount of returns your investing generates - it's about where one individual dollar can be best spent, towards the fixed rate debt or the variable rate of return you'll have playing the market.

[smoked]

The other key factor not mentioned here is the psychological weight of carrying a significant amount of debt. This is bound to occupy your thoughts at least occasionally. Depending on your personality, you may think about this quite often even when your debt becomes a fraction of the amount you've saved. May be worth to pay it off first with that in mind.

Another factor to consider/keep on your radar is that investing your money involves a lot of transaction costs and that you'll want to be very, very thoughtful as to how to invest your money. I'm almost to this point now and am still struggling with exactly what to do with my money.

By the way, in case there are any lurkers only reading this thread, the interest rate of the debt vs. rates of return you can expect from investing is the crux of the matter. It's not about the principal amount of debt or the actual dollar amount of returns your investing generates - it's about where one individual dollar can be best spent, towards the fixed rate debt or the variable rate of return you'll have playing the market.

Could not agree more with the above post re: the psychological weight of the debt. I don't consider myself a "risk averse" person but the psychological burden of having a significant amount of student debt weighing over me definitely made me want it gone ASAP (I didn't have undergrad debt), and I've paid it down pretty aggressively as a result. I started with about 150k and have paid it down to 80K in about 2.5 years (I refi'd within 6 months of graduating). I just hate the idea of having that much unsecured debt. I fully appreciate that, objectively, the right financial decision (given how the market performed over the last 2.5 years) would have been to invest, but my debt makes me feel very locked into receiving a biglaw paycheck and I feel pressure to stay in biglaw (for the $) as long as that sort of large debt is hanging over my head, and I really look forward to hopefully paying it off fully hopefully within the next two years (will be using a good chunk of bonus to help reach that goal).

[minnbills]

I'm a big proponent of paying off the debt ASAP. Once you get that obligation off your budget, you will have a LOT more flexibility with your career, which is important considering you're going into biglaw. The longer you've got significant student loan debt, the longer you will be tied to that biglaw job. I have seen quite a few people burn out after a year or two.

Also, consider what's going on in the market right now. We are into the longest-lived economic expansion in american history. What do you think the odds are that this bull market will keep going? On the other hand, consider the fact that those loans accrue interest regardless of what's going on in the market.

If you were, say, a doctor and could pretty much count on that high income going forward, then I would totally agree with the other posters advising you differently. But that's just not the way it is in law.

EDIT: I am starting a biglaw job next year - after clerking for a while - and plan to use my bonus and income to get rid of my loans in about 6 months. Once I do that, I could take a huge pay cut and not experience a drop in lifestyle/comfort. This could be important if a) I hate my biglaw job next year, which is probable; b) a good government job opens up (think AUSA/State Solicitor General, etc) or c) I want to get out of my major market and move home, where the firms pay less. None of these would be as easy to swing if I still had my 1000k/mo student loan payment.

[somedude]

The other key factor not mentioned here is the psychological weight of carrying a significant amount of debt. This is bound to occupy your thoughts at least occasionally. Depending on your personality, you may think about this quite often even when your debt becomes a fraction of the amount you've saved. May be worth to pay it off first with that in mind.

Another factor to consider/keep on your radar is that investing your money involves a lot of transaction costs and that you'll want to be very, very thoughtful as to how to invest your money. I'm almost to this point now and am still struggling with exactly what to do with my money.

By the way, in case there are any lurkers only reading this thread, the interest rate of the debt vs. rates of return you can expect from investing is the crux of the matter. It's not about the principal amount of debt or the actual dollar amount of returns your investing generates - it's about where one individual dollar can be best spent, towards the fixed rate debt or the variable rate of return you'll have playing the market.

In your shoes, I would personally have a goal of, first and foremost, maxing out ALL tax deferred space (401k, roth, etc.), second, setting up an emergency fund in a high-yield savings account (returning 1 %-ish) (and shooting for 4 to 6 months expenses by end of the first year), and then, third, aggressively paying down the loans with the remainder (perhaps with a small amount of market investing in a brokerage account to build the habit). It might be true that, once you refinance (which you should do unless losing government forgiveness and more-friendly forbearance periods sound like an issue for you), you would beat the return on paying down the loans by investing in the market. But a guaranteed 3 to 4 % return on paying down the loans is nothing to scoff at, will not result in a huge long-term loss relative to conservatively investing in the market, and might actually beat the market over the short term. As a long term strategy, it would be very costly to systematically lock up 3 to 4 % returns at the expense of 7% in more volatile vehicles. But that is not your situation since you could pay off the loan in full within 2 years (you say one year, but . . .). You can, at that point, go crazy on stock market investing. The psychological benefits of being debt-free, which you might be especially happy to have if you burn out early, are worth something. In my personal experience, the weight of the loan looms large when I think about leaving my current firm for less pay and a better life, and freedom feels more within reach the closer that amount gets to zero. This might result in sub-optimal returns, but it's common psychologically.

It's also true that if, say, you pay down the refi'd loans on a 10-year plan, and just save all of the remainder, you will likely have the ability to pay down the loans in a lump by liquidating all/part of the savings, if you choose. Having more liquidity, for a lot of people, also makes a lot of sense, and many many people take this approach with $100 K loan balances. (Although (i) if you're counting on savings in the stock market to be there to pay off the debt in a lump sum when you quit early, you could be in the middle of a bear market, making liquidating the brokerage account a bad idea. Choosing the "more guaranteed liquidity" option may thus require having a lot of cash put in a high-yield savings account, in turn making loan pay down a better option, relatively speaking. And (ii) a lot of people also don't save as much as they could, and aggressive loan pay down people seem to do better in this regard, but that is just anecdotal.) It might be helpful to imagine that you are going to be completely miserable in 12 months (might not happen, but might) and want to abandon the law altogether....in that scenario, what proportion of loan balance remaining to savings do you think you will prefer? That is close to the worst case scenario, and similar to other bad scenarios, and you then protect yourself if the bad possibilities become actual. Because at the end of the day, it doesn't really matter for virtually everyone with that salary for a few years, as long as you invest a high percentage of what you make (either by paying off your loans or saving it, or both). If you think you're the kind of person who will be very very relieved to have no debt, I would err on the side of over-paying the loans. If you think you can live with the debt not being a burden, and want to try to maximize your returns, do the 10-year-ish plan, and save as much as possible.

[chem]

The other key factor not mentioned here is the psychological weight of carrying a significant amount of debt. This is bound to occupy your thoughts at least occasionally. Depending on your personality, you may think about this quite often even when your debt becomes a fraction of the amount you've saved. May be worth to pay it off first with that in mind.

Another factor to consider/keep on your radar is that investing your money involves a lot of transaction costs and that you'll want to be very, very thoughtful as to how to invest your money. I'm almost to this point now and am still struggling with exactly what to do with my money.

By the way, in case there are any lurkers only reading this thread, the interest rate of the debt vs. rates of return you can expect from investing is the crux of the matter. It's not about the principal amount of debt or the actual dollar amount of returns your investing generates - it's about where one individual dollar can be best spent, towards the fixed rate debt or the variable rate of return you'll have playing the market.

I think another key factor (at least for people working in big law, and at the very least people who work in big law and find it difficult or demanding work) is working for a few years and having no real savings, no advancement in your situation or station, and still having a substantial (but less) amount of debt.

Personally, I've worked in big law for two years. I'm much happier with nearly the same amount of loans (~250k) and buying a house this year, than having 100k in loans and nothing else.

[ughbugchugplug]

Couple things:

The first two years of the loan, your income based repayment on REPAYE looks to years when your income will be 36,000 (from summer assoc and first few months of job) because that’s your adjusted gross for loan purposes. On REPAYE, gov pays interest accumulating over your monthly. So for the first two years, you are paying like 150 a month but getting subsidized like 700 a month on the interest. Loan doesn’t grow, you get free money. Very stupid to pay the loan in full during those years.

Second, the advice above that you should compare interest rates ignores that your student loans do not recapitalize while investments do. So just because you pay 6.8 percent or whatever doesn’t mean an investment that grows at 5% but capitalizes isn’t preferable. One grows by addition, the other by multiplication. You have to take certain steps not to recapitalize (for one, no deferments, but check the law for what else) but this is important to note.

[ughbugchugplug]

Sorry, should have noted that all only applies if you only have fed loans

[Lacepiece23]

Couple things:

The first two years of the loan, your income based repayment on REPAYE looks to years when your income will be 36,000 (from summer assoc and first few months of job) because that’s your adjusted gross for loan purposes. On REPAYE, gov pays interest accumulating over your monthly. So for the first two years, you are paying like 150 a month but getting subsidized like 700 a month on the interest. Loan doesn’t grow, you get free money. Very stupid to pay the loan in full during those years.

Second, the advice above that you should compare interest rates ignores that your student loans do not recapitalize while investments do. So just because you pay 6.8 percent or whatever doesn’t mean an investment that grows at 5% but capitalizes isn’t preferable. One grows by addition, the other by multiplication. You have to take certain steps not to recapitalize (for one, no deferments, but check the law for what else) but this is important to note.

Really wish I had this information 2 years ago. Really kicking myself.

[Dr. Nefario]

Couple things:

The first two years of the loan, your income based repayment on REPAYE looks to years when your income will be 36,000 (from summer assoc and first few months of job) because that’s your adjusted gross for loan purposes. On REPAYE, gov pays interest accumulating over your monthly. So for the first two years, you are paying like 150 a month but getting subsidized like 700 a month on the interest. Loan doesn’t grow, you get free money. Very stupid to pay the loan in full during those years.

Second, the advice above that you should compare interest rates ignores that your student loans do not recapitalize while investments do. So just because you pay 6.8 percent or whatever doesn’t mean an investment that grows at 5% but capitalizes isn’t preferable. One grows by addition, the other by multiplication. You have to take certain steps not to recapitalize (for one, no deferments, but check the law for what else) but this is important to note.

Really wish I had this information 2 years ago. Really kicking myself.

If this is the case, what would ever be the reason to not do REPAYE for 2 years and then refinance after that? If you can get this option even in biglaw, you seem to be best off paying the REPAYE minimum, saving money in short term investments, then refinancing and applying the money you saved up with interest at that point. Am I missing something?

[boredtodeath]

Couple things:

The first two years of the loan, your income based repayment on REPAYE looks to years when your income will be 36,000 (from summer assoc and first few months of job) because that’s your adjusted gross for loan purposes. On REPAYE, gov pays interest accumulating over your monthly. So for the first two years, you are paying like 150 a month but getting subsidized like 700 a month on the interest. Loan doesn’t grow, you get free money. Very stupid to pay the loan in full during those years.

Second, the advice above that you should compare interest rates ignores that your student loans do not recapitalize while investments do. So just because you pay 6.8 percent or whatever doesn’t mean an investment that grows at 5% but capitalizes isn’t preferable. One grows by addition, the other by multiplication. You have to take certain steps not to recapitalize (for one, no deferments, but check the law for what else) but this is important to note.

Really wish I had this information 2 years ago. Really kicking myself.

If this is the case, what would ever be the reason to not do REPAYE for 2 years and then refinance after that? If you can get this option even in biglaw, you seem to be best off paying the REPAYE minimum, saving money in short term investments, then refinancing and applying the money you saved up with interest at that point. Am I missing something?

There's a clarifications to what ughbug said. The govt only covers your interest payments in full on subsidized loans. On unsubsidized loans (i.e. a standard Grad PLUS loan), the govt only covers 50% of your interest payments. So if you have unsubsidized loans they will still grow, just not as quickly as they would on PAYE. But yeah, if you get biglaw, going on REPAYE for two years, banking a shitload of money, and then deciding what you want to do with your life (and whether you want to refinance or stay with govt loans and play the forgiveness game) is definitely the way to go.

[Dr. Nefario]

Couple things:

The first two years of the loan, your income based repayment on REPAYE looks to years when your income will be 36,000 (from summer assoc and first few months of job) because that’s your adjusted gross for loan purposes. On REPAYE, gov pays interest accumulating over your monthly. So for the first two years, you are paying like 150 a month but getting subsidized like 700 a month on the interest. Loan doesn’t grow, you get free money. Very stupid to pay the loan in full during those years.

Second, the advice above that you should compare interest rates ignores that your student loans do not recapitalize while investments do. So just because you pay 6.8 percent or whatever doesn’t mean an investment that grows at 5% but capitalizes isn’t preferable. One grows by addition, the other by multiplication. You have to take certain steps not to recapitalize (for one, no deferments, but check the law for what else) but this is important to note.

Really wish I had this information 2 years ago. Really kicking myself.

If this is the case, what would ever be the reason to not do REPAYE for 2 years and then refinance after that? If you can get this option even in biglaw, you seem to be best off paying the REPAYE minimum, saving money in short term investments, then refinancing and applying the money you saved up with interest at that point. Am I missing something?

There's a clarifications to what ughbug said. The govt only covers your interest payments in full on subsidized loans. On unsubsidized loans (i.e. a standard Grad PLUS loan), the govt only covers 50% of your interest payments. So if you have unsubsidized loans they will still grow, just not as quickly as they would on PAYE. But yeah, if you get biglaw, going on REPAYE for two years, banking a shitload of money, and then deciding what you want to do with your life (and whether you want to refinance or stay with govt loans and play the forgiveness game) is definitely the way to go.

In that case if you have only unsub loans, paid more than the min payment (essentially half the interest payment), then the gov would cover the other half and your loans won’t grow and you are still banking money and getting free money?

That seems pretty sweet

[ughbugchugplug]

Couple things:

The first two years of the loan, your income based repayment on REPAYE looks to years when your income will be 36,000 (from summer assoc and first few months of job) because that’s your adjusted gross for loan purposes. On REPAYE, gov pays interest accumulating over your monthly. So for the first two years, you are paying like 150 a month but getting subsidized like 700 a month on the interest. Loan doesn’t grow, you get free money. Very stupid to pay the loan in full during those years.

Second, the advice above that you should compare interest rates ignores that your student loans do not recapitalize while investments do. So just because you pay 6.8 percent or whatever doesn’t mean an investment that grows at 5% but capitalizes isn’t preferable. One grows by addition, the other by multiplication. You have to take certain steps not to recapitalize (for one, no deferments, but check the law for what else) but this is important to note.

Really wish I had this information 2 years ago. Really kicking myself.

If this is the case, what would ever be the reason to not do REPAYE for 2 years and then refinance after that? If you can get this option even in biglaw, you seem to be best off paying the REPAYE minimum, saving money in short term investments, then refinancing and applying the money you saved up with interest at that point. Am I missing something?

There's a clarifications to what ughbug said. The govt only covers your interest payments in full on subsidized loans. On unsubsidized loans (i.e. a standard Grad PLUS loan), the govt only covers 50% of your interest payments. So if you have unsubsidized loans they will still grow, just not as quickly as they would on PAYE. But yeah, if you get biglaw, going on REPAYE for two years, banking a shitload of money, and then deciding what you want to do with your life (and whether you want to refinance or stay with govt loans and play the forgiveness game) is definitely the way to go.

Good point. Also, if you refinance the loan value would recapitalize (I think) so that’s another thing to consider. Also, staying on fed means you can always go back to REPAYE etc. My plan is 6 years in big law then gov (haha, we’ll see, etc) so I’m never refinancing

[totesTheGoat]

I tend to agree with the psychological approach. I think there's a certain amount of risk that isn't accounted for when doing a pure interest rate analysis and when trying to play with the government forgiveness programs. I'm on an aggressive paydown approach, with the only investments being a bit into my HSA for medical emergencies and getting the match for the 401K. I may be sacrificing a few thousand dollars over the next 3 years in interest, but I'm happy to trade that for the freedom to do whatever the hell I want after the debt is gone at the end of that time period. Beyond that, I'm going to be in a much more stable financial position once that 2nd mortgage of a payment is gone.

[kjolaw]

Target to pay off loan in within 2 years

Invest remaining conservatively until you have 6 month salary saved in liquid.

I would split 50%-25%-25% <--- Replay Loan- invest - savings account. Can readjust every few months or so.

Good problems to have

Debt: ~100k
Income: 180k (base salary) + 80k (COLA for working overseas)

3L here. I have no spouse or children to support and live a pretty frugal life generally. If I use all my monthly savings to pay back my loan, I can get rid of it within 8 months. Question: should I pay back my loan ASAP? Or should I pay the minimum amount and use the money to make investments? I'm a KJD and know nothing about financial planning though. Any general advice on how lawyers manage their money would be appreciated!

[nealric]

I went with the quick debt repayment and don't regret it, even though the markets performed well over the period of repayment. Not having non-dischargable unsecured debt hanging over your head is priceless.

[ughbugchugplug]

Everyone is different, of course, but this to me seems irrational. This is basically like saying you’d rather have 40 dollars than have 150 but owe 100. Remember that money you put away today will compound your entire life - would you rather feel financially comfortable now or be a multi millionaire in your 50s because you put a few thousand away a month as a young adult?

[jd20132013]

I went with the quick debt repayment and don't regret it, even though the markets performed well over the period of repayment. Not having non-dischargable unsecured debt hanging over your head is priceless.

Same

[spyke123]

Everyone is different, of course, but this to me seems irrational. This is basically like saying you’d rather have 40 dollars than have 150 but owe 100. Remember that money you put away today will compound your entire life - would you rather feel financially comfortable now or be a multi millionaire in your 50s because you put a few thousand away a month as a young adult?

thing is you don't actually have 150 though; once invested you should be looking at it long term and shouldn't be touching it anytime soon.

[spyke123]

Everyone is different, of course, but this to me seems irrational. This is basically like saying you’d rather have 40 dollars than have 150 but owe 100. Remember that money you put away today will compound your entire life - would you rather feel financially comfortable now or be a multi millionaire in your 50s because you put a few thousand away a month as a young adult?

thing is you don't actually have 150 though; once invested you should be looking at it long term and shouldn't be touching it anytime soon.

And that 150 can also be 100 given any point in time depending on where the market is. You are giving away liquidity and taking risk

[Anonymous User]

On REPAYE for your first two years the government pays half your interest, bringing your interest down to about 3%. It’s absolutely foolish no to let the loans ride in that circumstance (and invest the money elsewhere to take advantage of capitalized interest). Anyone who tells you otherwise is being absolutely irrational.