Should we prepay our private student loans, given our particular profile?
See my recent answer to a similar question on prepaying a mortgage versus investing in IRA. The issue here is similar: you want to compare the relative rates of funding your retirement account versus paying down your debt. If you can invest at a better rate than you are paying on your debt, with similar risk, then you should invest. Otherwise, pay down your debt. The big difference with your situation is that you have a variable rate loan, so there's a significant risk that the rate on it will go up. If I was in your shoes, I would do the following: But that's me. If you're more debt-averse, you may decide to prepay that fixed rate loan too. "You're in good shape as long as your income stays. Your only variable-rate debt now is your private student loan.  I think you'd be wise to pay that down first, and you sense that already. Worst-case, in the event of a bankruptcy, student loans usually cannot be discharged, so that isn't a way out. Once that loan is gone, apply what you were paying to your other student loan to knock that out. You might investigate refinancing your home (to another 30-year fixed).  You may be able to shave a half-percent off if your credit is stellar.  Given the size of the mortgage, this could be several thousand out of pocket, so consider that when figuring out potential payback time. Consider using any ""free time"" to starting up a side business (I'm assuming you both have day jobs but that may not be a correct assumption).  Start with what you know well.  You and your wife are experts in something, and have passion about something.  Go with that.  Use the extra income from that to either pay down your debts faster, or just reinvest in the business so that you can offset the income on your taxes. Again, you're in good shape.  Just do what you can to protect and grow your income streams." You're doing great.  I'd suggest trying get putting 5-10% towards your retirement and the balance to the student loans. You are a little weak in retirement savings, but you have $550k house with 20% equity that you bought at the bottom of the market. That's a smart investment IMO, and in my mind compensates somewhat for your low 401k balance. If I were you, I would retire the student loans ASAP to reduce the money that you have to shell out each month. That way, you have the option of scaling back you or your wife's work somewhat to avoid paying thousands for child care. In my mind, less debt == more options, and I like options. Based on your numbers, it sounds like you've got 12 years left in the private student loan, which just seems to be an annoyance to me.  You have the cash to pay it off, but that may not be the optimal solution. You've got $85k in cash!  That's way too much. So your options are:  -Invest 40k -Pay 2.25% loan off -Prepay mortgage 40k Play around with this link: mortgage calculator Paying the student loan, and applying the $315 to the monthly mortgage reduces your mortgage by 8 years. It also reduces the nag factor of the student loan. Prepaying the mortgage (one time) reduces it by 6 years. (But, that reduces the total cost of the mortgage over it's lifetime the most) Prepaying the mortgage and re-amortizing it over thirty years (at the same rate) reduces your mortgage payment by $210, which you could apply to the student loan, but you'd need to come up with an extra $105 a month. Just for another opinion, radio host Clark Howard would suggest killing the private student loans as quickly as possible.  The only reason is the industry around private student loans has fewer rules as to how they interact with you, and they have historically been very unpleasant if you have to deal with them in bad financial times. As a safety net, get rid of the private student loans as your main focus while you have the money and rates are low.  Not for financial reasons per se, but for peace of mind. The other advice in this question are great, but nobody mentioned the potential dark side of private student loans. Don't frett to much about your retirement savings just put something towards it each year. You could be dead in ten years. You should always try to clear out debt when you can. But don't wipe yourself out! Expedite the repayment process.
"Let me run some simplistic numbers, ignoring inflation. You have the opportunity to borrow up to 51K. What matters (and varies) is your postgraduation salary. Case 1 - you make 22K after graduation. You pay back 90 a year for 30 years, paying off at most 2700 of the loan. In this case, whether you borrow 2,800 or 28,000 makes no difference to the paying-off. You would do best to borrow as much as you possibly can, treating it as a grant. Case 2 - you make 100K after graduation. You pay back over 7K a year. If you borrowed the full 51, after 7 or 8 years it would be paid off (yeah, yeah, inflation, interest, but maybe that might make it 9 years.) In this case, the more you borrow the more you have to pay back, but you can easily pay it back, so you don't care. Invest your sponsorships and savings into something long term since you know you won't be needing to draw on them. Case 3 - you make 30K after graduation. Here, the payments you have to make actually impact how much disposable income you have. You pay back 810 a year, and over 30 years that's about 25K of principal. It will be less if you account for some (even most) of the payment going to interest, not principal. Anything you borrow above 25K (or the lower, more accurate amount) is ""free"". If you borrow substantially less than that (by using your sponsorship, savings, and summer job) you may be able to stop paying sooner than 30 years. But even if you borrow only 12K (or half the more accurate number), it will still be 15 years of payments. Running slightly more realistic versions of these calculations where your salary goes up, and you take interest into account, I think you will discover, for each possible salary path, a number that represents how much of your loan is really loan: everything above that is actually a grant you do not pay back. The less you are likely to make, the more of it is really grant. On top of that, it seems to me that no matter the loan/grant ratio,  ""borrow as much as you can from this rather bizarre source"" appears to be the correct answer. In the cases where it's all loan, you have a lot of income and don't care much about this loan payment. Borrowing the whole 51K lets you invest all the money you get while you're a student, and you can use the returns on those investments to make the loan payments." Is there anything here I should be deathly concerned about? I don't see anything you should be deathly concerned about unless your career outlook is very poor and you are making minimum wage. If that is the case you may struggle for the next 10 years. Are these rates considered super high or manageable? The rates for the federal loans are around twice as high as your private loans but that is the going rate and there is nothing you can do about it now. 6.5% isn't bad on what is essentially a personal loan. 2-3% are very manageable assuming you pay them and don't let the interest build up.  What is a good mode of attack here? I am by no means a financial adviser and don't know the rest of your financial situation, but the most general advice I can give you is pay down your highest interest rate loans first and always try to pay more than the minimum. In your case, I would put as much as you reasonably can towards the federal loans because that will save you money in the long run. What are the main takeaways I should understand about these loans? The main takeaway is that these are student loans and they cannot be discharged if you were to ever declare bankruptcy. Pay them off but don't be too concerned about them. If you do apply for loans in the future, most lenders won't be too concerned about student loans assuming you are paying them on time and especially if you are paying more than the minimum payment.  What are the payoff dates for the other loans? The payoff dates for the other loans are a little hard to easily calculate, but it appears they all have different payoff dates between 8 and 12 years from now. This part might be easier for someone who is better at financial calculations than me. Why do my Citi loans have a higher balance than the original payoff amounts? Your citi loans have a higher balance probably because you have not payed anything towards them yet so the interest has been accruing since you got them. Does that justify the purpose? That is for individual Banks to decide. No bank would pay for daily expenditure if you are saying primary salary you are spending on eduction. So your declaration is right. You are looking at funding your eduction via loan and you are earning enough for living and paying of the loan. I noticed that a lot of lenders do not lend to applicants whose purpose is to finance the tuition for post-secondary education This could be because the lenders have seen larger percentage defaults when people opt for such loans. It could be due to mix of factors like the the drag this would cause to an individual who may not benefit enough in terms of higher salary to repay the loan, or moves out of country getting a better job. If it is education loan, have you looked at getting scholarships or student loans. Nope.  If there is no prepayment penalty go for it.  Find another credit source to use (like a credit card you pay off every month) if you want to get a long history. Saving money on interest is more important to me than minutia in a credit score. It used to be much more common, particularly for sub-prime loans. If you do run into someone offering a loan with a prepayment penalty, you should certainly consider other options. "I think you're right that from a pure ""expected future value"" perspective, it makes sense to pay this loan off as quickly as possible (including not taking the next year's loan). The new student loans with the higher interest rates have changed the balance enough that it's no longer automatically better to keep it going as long as possible. The crucial point in your case, which isn't true for many people, is that you will likely have to pay it off eventually anyway and so in terms of net costs over your lifetime you will do best by paying it off quickly. A few points to set against that, that you might want to consider: Not paying it off is a good hedge against your career not going as well as you expect, e.g. if the economy does badly, you have health problems, you take a career break for any reason. If that happens, you would end up not being forced to pay it off, so will end up gaining from not having done so voluntarily. The money you save in that case could be more valuable to you that the money you would lose if your career does go well. Not paying it off will increase your net cash earlier in life when you are more likely to need it, e.g. for a house deposit. Having more free cash could increase your options, making it possible to buy a house earlier in life. Or it could mean you have a higher deposit when you do buy, reducing the interest rate on the entire mortgage balance. The savings from that could end up being more than the 6% interest on the loan even though when you look at the loan in isolation it seems like a very bad rate." Welcome to Money.SE. As Dheer notes, we can come up with pretty good advice with more details.  Absent any more information, I'd offer this - money withdrawn today, from a traditional IRA, is subject to tax and 10% penalty. The day you turn 59-1/2, that 10% penalty evaporates.  Withdrawals at that time are still subject to ordinary tax at your marginal rate. If you happen to be in the 15% bracket, it may make sense (at 59.5) to withdraw enough to top off that bracket and use the extra money to supplement those payments. If you are already a 25%er, you have to decide whether this money is better spent paying the loans early. Much of that decision is based on the rates involved.  More important, in my opinion. what is the child doing? You borrowed money (I assume) to send a kid to college, and now he's out. Is he not able to chip in? $715K in retirement is pretty great, in the higher end of what pre-retirees have. It translates to just under $30K/yr in withdrawals at retirement. A decent number, really, but not a number that has you comfortably paying for this debt. 3 years ago I wrote Student Loans and Your First Mortgage in response to this exact question by a fellow blogger in my state.  What I focused on was the way banks qualify you for a loan, a percentage for the housing cost, and a higher number that also comprises all other debt. If the goal is speed-to-purchase, you make minimum payments on the student loan, and save for the $100K downpayment as fast as you can.  The question back to you is whether the purchase is your priority, and how debt averse you are. I'd caution, if you work for a company with a matched 401(k), I'd still deposit to the match, but no more.  Personal finance is just that, personal. We don't know your entire situation, your current rental expenses vs your total condo cost when you buy. If you are in a location where renting costs far more than your cost of ownership, Ben might change his mind a bit. If the reverse is true, you're living a college student's lifestyle with a room costing $400/mo sharing a house with friends, I'll back off and say to pay the loan and save until you can't tolerate the situation. You'll find there are few situations that have a perfect answer without having all the details. "Money is a token that you can trade to other people for favors. Debt is a tool that allows you to ask for favors earlier than you might otherwise. What you have currently is: If the very worst were to happen, such as: You would owe $23,000 favors, and your ""salary"" wouldn't make a difference. What is a responsible amount to put toward a car? This is a tricky question to answer. Statistically speaking the very worst isn't worth your consideration. Only the ""very bad"", or ""kinda annoying"" circumstances are worth worrying about. The things that have a >5% chance of actually happening to you. Some of the ""very bad"" things that could happen (10k+ favors): Some of the ""kinda annoying"" things that could happen (~5k favors): So now that these issues are identified, we can settle on a time frame. This is very important. Your $30,000 in favors owed are not due in the next year. If your student loans have a typical 10-year payoff, then your risk management strategy only requires that you keep $3,000 in favors (approx) because that's how many are due in the next year. Except you have more than student loans for favors owed to others. You have rent. You eat food. You need to socialize. You need to meet your various needs. Each of these things will cost a certain number of favors in the next year. Add all of them up. Pretending that this data was correct (it obviously isn't) you'd owe $27,500 in favors if you made no money. Up until this point, I've been treating the data as though there's no income. So how does your income work with all of this? Simple, until you've saved 6-12 months of your expenses (not salary) in an FDIC or NCUSIF insured savings account, you have no free income. If you don't have savings to save yourself when bad things happen, you will start having more stress (what if something breaks? how will I survive till my next paycheck? etc.). Stress reduces your life expectancy. If you have no free income, and you need to buy a car, you need to buy the cheapest car that will meet your most basic needs. Consider carpooling. Consider walking or biking or public transit. You listed your salary at ""$95k"", but that isn't really $95k. It's more like $63k after taxes have been taken out. If you only needed to save ~$35k in favors, and the previous data was accurate (it isn't, do your own math): Per month you owe $2,875 in favors (34,500 / 12) Per month you gain $5,250 in favors (63,000 / 12) You have $7,000 in initial capital--I mean--favors You net $2,375 each month (5,250 - 2,875)   To get $34,500 in favors will take you 12 months ( ⌈(34,500 - 7,000) / 2,375⌉ ) After 12 months you will have $2,375 in free income each month. You no longer need to save all of it (Although you may still need to save some of it. Be sure recalculate your expenses regularly to reevaluate if you need additional savings). What you do with your free income is up to you. You've got a safety net in saved earnings to get you through rough times, so if you want to buy a $100,000 sports car, all you have to do is account for it in your savings and expenses in all further calculations as you pay it off. To come up with a reasonable number, decide on how much you want to spend per month on a car. $500 is a nice round number that's less than $2,375. How many years do you want to save for the car? OR How many years do you want to pay off a car loan? 4 is a nice even number. $500 * 12 * 4 = $24,000 Now reduce that number 10% for taxes and fees $24,000 * 0.9 = $21,600 If you're getting a loan, deduct the cost of interest (using 5% as a ballpark here) $21,600 * 0.95 = $20,520 So according to my napkin math you can afford a car that costs ~$20k if you're willing to save/owe $500/month, but only after you've saved enough to be financially secure." If your plan permits loans, deposit enough through the year to maximize the match and then take a loan from the plan. Use the loan portion to pay your student loan. Essentially you have refinanced your debt at a (presumably) lower rate and recieved the match. You pay yourself back (with interest) through your payroll. The rates are typically the prime rate + 1%. The loans are subject to a lesser of 50% vested account balance or $50,000 provision. "The article said $65,000 (rounds numbers imply an estimate) was the original amount she borrowed. However she isn't on the hook for only $65,000. Her loans have interest and ***one*** of the loans had an 8% interest rate.   Let's ASSUME (for the purposes of this exercise to illustrate what compound interest can do to ""good debt"") that all of her loans are at 8% interest over a 30 year repayment period. Her total payments over the course of the 30 years will amount to $172,000. Yes that's a big number. $107,000 going to INTEREST and $65,000 going towards the original loan balance.   More realistically her loans are probably in the 6-8% interest range (since interest rates were higher 20 years ago) so the amount is a little smaller, but the bulk of her payments will be for paying interest not paying down her loan balance. She really couldn't afford to borrow for a master's degree to make so little in a high cost of living area." "This sounds like an accounting nightmare to be 100% precise.  With each payment you're going to have to track: If you can account for those, then the fair thing to do is for one person to stop paying after they have paid the amount of principal they had at the beginning of the process, or possibly after they have paid an amount equivalent to the total principal and accrued interest they would have paid if they paid their loans individually.   The problem is, one of you is likely going to pay more interest than you would have under the individual plan.  In the example you gave, if your brother pays off any of your loans, he is going to be paying more in interest than if he paid on his 5% loans. If you pay the highest rate loans first, whoever has the lower total balance is going to pay more interest since they'll be paying on the higher rates until they've paid their ""fair share"".   I don't see a clean way for you to divvy up the interest savings appropriately unless you trueup at the very end of the process.   Math aside, these types of agreements can be dangerous to relationships. What if one of you decides that they don't want to participate anymore? What if one of you gets all of their loans paid off much earlier - they get the joy of being debt free while the other still has all of the debt left? What if they then don't feel obligates to pay the other's remaining debt? Are you both equally committed to cutting lifestyle in order to attack these debts? In my opinion, the complexity and risk to the relationship don't justify the interest savings." Just to be clear, private *student* loans fall in the same category.  The only meaningful difference is that they do not qualify for the federal forgiveness program (described above) and usually don't have subsidized interest rates which generally makes them even worse.  They similarly follow you for life.  There is no way out.    If you're referring to *regular, private loans*, then that's kind of a non-sequitur since the topic is student loans.  Not trying to be pedantic, just want to make sure anyone hoping to learn more understands how horrible student loans are if you can't pay them back. When you borrow from a bank, there are secured loans, as with a mortgage, or unsecured lines of credit, usually a more reasonable amount of money, but also based on income.  You just asked about a private loan. It depends on the person and your relationship. If you need money to pay the rent, you might not be the best person to lend money to. If you ask a friend or relative, they may lend you money without asking its purpose. "An index annuity is almost the same as Indexed Universal Life, except the equity-index annuity is an investment with a guaranteed minimum return, with sometimes a higher return that is a function of the gain in the stock market, but is not associated with a life insurance policy.  After a time, you can convert the EIA to a lifetime income (the annuity part) or just cash it out.  They often are very complicated, but are constructed by combining bonds with index options (puts) just like indexed universal life. Unfortunately these tend to have high fees and/or commissions, and high (early) surrender charges, which can make them a poor investment.  Of course you could just ""roll your own"" by buying bonds and puts FINRAS bulletin on EIAs, pdf warning. Here's a description of one of these securities: pdf."