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Mid/Late 20's - Student Loan Paydown vs Saving for Retirement

Bogleheads • View forum - Personal Finance (Not Investing) - www.bogleheads.org
Hi everyone,

New to the forum, just wanted to reach out to get some quick advice.

My question centers around my student loans, and my attempt to weigh paying off my student loans quickly against ramping up my retirement. My wife and I are recently married and just bought our first home, so I feel like I'm at a point where I finally have that first big wave of big expenses behind me (engagement ring, wedding/honeymoon, down payment on first house) and now I want to make sure I am allocating my money appropriately between student loans, retirement, and building back up our cash/emergency fund after the aforementioned recent expenses:

I'll provide some background and details below, but the basic idea is that combined we are currently saving about $800/month to our emergency fund, paying $1,000/month to student loans, and saving $875/month for retirement, and we are unsure if we should reallocate these funds based on our situation:

-His age 27, her age 26

-His salary: $70K (plus approx 10% annual bonus)

-Her salary: $47K

-Emergency fund: balance is currently $15K (as mentioned above, this is lower than usual b/c we recently paid several big expenses related to the wedding and our first home). To build this back up we are adding about $800/month to it currently, so at our current pace we would get it up to around $35K or so in 2 years and then stop these savings and allocate the money elsewhere (student loans or retirement)

-His retirement - balance is $15K - currently contributing $500/month to 401(k)

-Her retirement - balance is $12K - currently contributing $375/month combined to employer's pension and Roth IRA

-Her student loans - she is a state teacher so we are under the plan where she pays an income-based amount ($200 currently) for 10 years and then receives forgiveness for the remainder of her outstanding loan balance.

-His student loans - balance is $42K. Currently paying about $800/month towards it to pay it down as quick as possible. This is where my biggest question(s) pops up. FYI out of the $42K total for my loans, $38K of it is at 6.8%, $2K is at 4.5% and $2K is at 3.4% (so almost all at 6.8%). Couple questions I would love advice on:

1) My loans are currently federal loans which give me the flexibility to be on an income-based repayment plan, so because of this my "required" payments are only $274/month. This eases my mind a bit because I know if emergencies ever pop up, I always have the ability to pay way less than I'm capable of in a given month. However, in a typical month I pay this $274 minimum across all my loans and then throw every remaining dollar I can afford that month towards the loan(s) with the highest interest rate (6.8%). This strategy allowed me to already pay off a loan I used to have that was at 7.9% (!) and now I've made my way down to targeting the 6.8% ones.

However, my thought is that I could probably save a lot of money by refinancing to private loans at much lower interest rates since my income is fairly stable and I work in a field where my salary is growing rather steadily ($52K my first year, up to currently $70K in my 4th year, and will be around $100K by my 8th year if I remain in this role). What are the pros/cons of refinancing and do you agree it would make sense for me, since my interest rates are so high (basically the whole balance is at 6.8%)? How much does it typically cost to refinance student loans and what type of rates could I be looking at after the refinance?

2) In general, how much should I be focused on paying off these student loans compared to saving for retirement? With the loans currently at 6.8% I feel like targeting the loans is a good idea because even the expected rate of return from investments in stocks is barely above that, and the payments towards student loans are a "guaranteed return" of 6.8% on the debt I'm eliminating. But, kind of related to question #1, if I am able to refinance and get the rate down to 3% or something, at that point I would lean more towards wanting to throw more money at my retirement and less towards the loan.

I'd be very grateful for any tips/advice you all are willing to give.
Date: Jun 20, 2017   


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