3… 2… 1… WE’RE STILL IN DEBT!

My official graduation from my PhD program is this month, which means that my subsidized student loans from undergrad are coming out of deferment. Kyle and I at long last had to come to a decision about what to do with the loans. We have had the money set aside to pay them off since we got married in 2010, and our original plan was to pay them off right before they came out of deferment. In the meantime, we invested the payoff money to make a bit of a return. However, when the variable interest rate on three of my four loans reset below 2%, we started thinking of keeping the debt so that we could keep the payoff money invested.

 

I went back and forth over the decision. Emotionally, it would be more gratifying to be rid of the debt so we can move forward in our life with a clean, debt-free slate. Mathematically, it’s quite likely to be more advantageous for our net worth to keep the low-interest debt and investments.

 

Kyle is more risk-averse than I am and always wanted to avoid paying any interest on the debt. While I felt conflicted over this decision, I thought that Kyle would still want to pay off the debt and that would settle the matter. So I was surprised to find that Kyle had changed his mind and wants to keep the payoff money invested. No small part of this change of mind came from a conversation with a Personal Capital advisor; we have been considering using their investment management services. When we asked what he would recommend to do with this low-interest debt, he said that he considers any debt below 3% to be “free money” and that we should keep the money invested. This conversation changed Kyle’s mind, which clinched for me that we should keep the debt.

 

we are still in debt

 

We have a plan that we will enact starting this month, and I’ll discuss a few aspects of it in a series of posts here on the blog.

 

As I said, three of my loans are at < 2%, so we are going to make the minimum payment on those going forward, which will be about $100 per month. We are going to pay off the fourth loan this month, as it is at 6.8%. We’ll use cash flow to pay the debt so we can keep the full balance of the payoff money invested. Once the interest rate resets above a certain level, we will sell the fraction of the investment necessary to pay off the remaining balance.

 

I have two posts planned to share with you on this matter: 1) what we learned from the short-term investment experiment we’ve conducted over the last 3.5 years and 2) what those investments were and how they performed. We are going to sell our taxable investments this month so we can lock in our long-term capital gains at our 0% federal + 5.8% state tax rates.

 

We also have a new mid-term taxable investment plan, which we will implement this month and I’ll share with you. We had an idea 3.5 years ago for a certain method of investing, but it wasn’t cost-effective at that time. The technology has advanced since then, so we now can invest the way we want for very low cost.

 

I’m going to publish a two-part review of Personal Capital as well. The first portion will be about the free dashboard that the company offers for investment visualization (think Mint, but better in the investment section). The second portion will cover our takeaways from our interview process with Personal Capital to decide whether we would turn our investments over to them to manage.

 

Finally, we are going to make some changes to our current retirement investing strategy. For the last 7.5 years we have been in Vanguard’s Target Retirement 2050 Fund. While I think that was a fine start for our retirement accounts, there is one major aspect that I’m not happy with, and I will discuss how we are correcting it.

 

So it will be an investing-heavy month or two here on EPF! Investing is a subject I’ve neglected relative to its importance, so I’m happy to discuss it now.

 

I have so much peace of mind now that we have a finalized decision and Kyle and I are in agreement on our strategy! Yes, we will still be in debt and making payments (for the first time in over six years!) but our investments will we hope be growing at the same time.

 

When was the last time you re-evaluated your investment strategy? Do you and your spouse have a similar risk tolerance? Do you have investments with different time horizons and if so how do you distinguish among them?

 

photo modified from James

 

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22 Responses to "3… 2… 1… WE’RE STILL IN DEBT!"

  1. Leigh says:

    I haven’t re-evaluated my investment strategy in a while now. I’ve had the same job and nothing has really changed with my financial situation since I bought my condo, other than some increases/decreases in income. I’m working on some different plans as I’m starting a new job soon and the mortgage will be paid off in the next few years, bringing some more changes. I predict that the next four years will bring many more financial changes than the last four years have.

    I just treat all investments as one portfolio. My boyfriend has a much higher % of his portfolio in stock index funds than I do. I think his % would unnerve me a bit!
    Leigh recently posted..2015 Mortgage Payoff Plan

    1. Emily says:

      Nothing has really changed for us either, except these loans coming out of deferment (barely), but we’ve learned more about investing over the past few years and now realize we should make a change.

      What do you think you’ll do differently with your investments when the mortgage is paid off? When you say you treat everything as one portfolio, does that mean it all has a long-term time horizon?

      1. Leigh says:

        I’m curious to see how you guys plan to change things!

        When the mortgage is paid off, I plan to throw the money I had been throwing at the mortgage (and the mortgage payment!) into taxable investments instead. Or saving towards a down payment if my boyfriend and I decide to buy a place together.

        I just treat everything as having a long-term time horizon and am also somewhat more conservative with my investments than other people might be. Right now I’m 27% fixed income / 73% stocks, with all of the fixed income in tax-deferred accounts and the taxable and Roth IRA accounts having only stocks. If I needed to sell some of the taxable investments, I would just re-balance with what remains of my portfolio. And if I end up retiring early, I will probably still have around 30-35% in fixed income for quite a while and then will withdraw from the account that makes the most sense for withdrawals at any given time. I’m not sure if that helped answer your question?
        Leigh recently posted..2015 Mortgage Payoff Plan

        1. Emily says:

          It does answer it, yes. That all makes sense to me except that your fixed income is it tax-deferred and stocks are in taxable. Why do you have it set up that way? I thought the general principle was to put the highest-growth investments in the most tax-protected structures… unless it doesn’t matter for traditional accounts and I’m only thinking of Roths?

          1. Leigh says:

            My general principle is to put the highest-growth investments in the least taxed structures and the lowest-growth investments in the highest taxed structures. So my Roth is 100% stocks, Traditional has all of my fixed-income and some stocks, and taxable has 100% stocks. Capital gains tax rates with our current tax code are more favorable than regular income tax rates, which is why stocks are in taxable

  2. This is also timely, since I’m just starting to learn about investing. I find it difficult to imagine a world in which I have enough spare cash to invest in a taxable account — I can’t even get close to maxing out my retirement funds — but I’m basically happy with the index fund I own through Vanguard (in a Roth). I’m not so sure I’m equally happy having my 403(b) in a Vanguard Target Date fund, though; in 18 months when I leave this job and roll it over, I’ll need to have a plan for what to do with that, so I look forward to hearing what you have to say about that.
    [email protected] recently posted..How I’m Paying For It: Eye Doctor Edition

    1. Emily says:

      We aren’t maxing out the tax-deferred accounts available to us, either, but since this money has a different purpose we want it to be accessible. Our retirement money will still be in index funds at Vanguard for sure, just in a slightly different allocation. That’s great that you’re already thinking of what to do with your rolled 403(b). How we invest the taxable money will be a bit different but it’s sort of play money anyway. 🙂 I think whatever is left of it after the loans are paid off will become down payment money.

  3. Great strategy Emily. Addressing the problem earlier is better than never. And, having a well-planned decision will surely come a long way. Good luck!
    Jayson @ Monster Piggy Bank recently posted..The reason why kids today have no idea how to manage money

    1. Emily says:

      Thanks! We were really under a deadline to make this decision so we just squeaked it in!

  4. Mrs. Maroon says:

    We are constantly talking about ideas to optimize our investing strategy. It leads to healthy debates about whether to send more to the mortgage vs other investments or more to tax advantaged accounts vs taxable ones. I enjoy having the discussions with Mr. Maroon. It keeps us on our toes. And we love learning what other people are doing. Though I have no financial credentials to put after my name, I think your choice to keep the student loans is a great one. We would do the same. I’m look go forward to learning more about your overall strategy!!
    Mrs. Maroon recently posted..Best Gift Ever

    1. Emily says:

      That is awesome that you are both so engaged about your investments and enjoy talking about them. Kyle and I are also fairly ‘evenly matched’ on this subject. It gives me a lot of confidence in the final decision if we have talked over the options in detail.

  5. Myles Money says:

    As always, it comes down to planning and understanding: not all debt is bad.
    Myles Money recently posted..War!

    1. Emily says:

      The only aspect that pushes this debt toward the ‘worse’ side of the spectrum is that it’s not bankruptable, but we are not anticipating declaring bankruptcy. Other than that it’s on the ‘better’ side. I even called the servicer yesterday and got really good customer service!

  6. ervinshiznit says:

    Consider that the Personal Capital advisor probably would like you to have more money invested with them, so he’s biased in telling you anything less than 3% interest is “free money.” However, I too agree that I’d probably do the same in your situation.
    But you should keep in mind taxes in your analysis. You need to compare your after tax [expected] investment return versus your after tax student loan rate (student loan interest is deductible, but only if your MAGI is below a certain amount).

    1. ervinshiznit says:

      Oh and I look forward to your thoughts on investing!

    2. Emily says:

      I realize he is biased. It was kind of a test to see if he would give reasonable advice even if it wasn’t in his own best interest – for instance, he agreed the 6.8% loan should be paid off.

      We are not doing a detailed calculation here. Yes, we could take into account taxes, but before doing that we should account for risk, which I think would be a bigger factor, and I don’t know how to do that mathematically. Plus, expected return is difficult for short time horizons, which this might be.

  7. […] side, we did pay off the 6.8% student loan that we planned to. Minus side, the interest rate on the rest of the loans reset to […]

  8. […] brokerage firms and Mint. It will be even more useful to us over the next months and years as we change our investing strategy and add workplace-based retirement accounts. For that reason, I think it’s definitely worth […]

  9. […] us about anything about our finances, not just the money we have invested with them. For instance, I asked Brian if he thought we should pay off my lower-interest student loans, and he gave his recommendation. I like that our account will be handed by two people because of […]

  10. […] We had some cash on hand and then of course accessible investments (our house down payment and student loan payoff money), but I figured age-30-with-a-Real-Job was time enough to work on that personal finance 101 advice […]

  11. […] Student Loan $99.67 ($100 budgeted): This payment went up a tiny amount; it looks like our interest rates increased by a few tenths of a percent. It’s still a low enough interest rate that we’re happy to keep the debt around. […]

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