Four Reasons I Haven’t Paid Off My Student Loans Yet

studentloansSpecial note: Much of the information discussed in this post refers to my personal experience with student loans. Furthermore, it should be noted that I have federal Direct Loans. Private loans could possibly differ substantially in regards to terms, interest rates, and taxes. 

I had a few choices early on in my journey where I found myself digging out from a negative net worth and putting myself on the path to financial independence: I could either aggressively pay off any debt I had, aggressively invest savings into appreciating assets, or some combination of the two.

It’s important to note that when I found myself worth less than a baby back in 2010 (read: negative net worth) I didn’t have any rampant credit card debt. Luckily, I’ve been pretty good for most of my life at not racking up ridiculous high-interest credit card balances. I also had no mortgage, as I’ve been a happy lifelong renter.

However, I did owe money on a 2006 Pontiac G6 that required a loan for me to afford, and I also had about $26,000 in student loan debt.

So I had some tough choices to make. What do I do with this debt? How fast should I get rid of it? And what’s the best way to allocate my limited resources? I absolutely abhor debt, so I had to think fast.

Well, I decided to sell the car. That was easy. Completely eliminated the loan and forced me to adapt to my surroundings.

But I was still left with a hefty student loan bill. I ultimately decided to continue paying the minimum on these loans only, which left me with a ~$200 bill every month all along the way. I continue to pay the minimum to this day, and I’ll tell you why.

Return On Investment

I consider myself someone who allocates capital to the best of my ability, with the intent goal of becoming financially independent by 40 years old whereby my passive dividend income exceeds my expenses. Therefore, the higher I can get my dividend income while simultaneously getting my expenses as low as possible gives me the greatest chance at attaining my goal.

So it would make sense to pay off the loans as early as possible in this regard, as the $200 expense would vanish from the books and I’d automatically leap forward toward financial independence.

However, every opportunity competes with every other available opportunity. Thus, every dollar I could spend on paying off student loans early competes with the possibility of investing that same dollar and possibly seeing a better return. This is the opportunity cost of paying off these loans early, and I decided to forgo the opportunity to pay them off any earlier than absolutely necessary. Instead, I invested every spare dollar I could into high-quality dividend growth stocks.

This decision was made primarily due to the interest rates on my loans. I have a total of four loans, two of which share a 2.330% interest rate, while the other two have a 3.125% interest rate.

I figured that every dollar I invested instead, if invested wisely enough, could fetch a greater rate of return than that blended average interest rate of 2.73%. Luckily, I’ve been correct, as I’ve far outpaced a total return of 2.73% on the money I’ve invested thus far.

Look, I hate debt. I’ve never invested in a margin account, and every single equity position I own is mine free and clear. However, if the debt is so low in interest that you almost can’t avoid doing better elsewhere, it might make sense to think twice about aggressively paying off debt. Of course, this also depends on your personality. If you’d just sleep better at night knowing the debt is gone then you’re probably better off getting rid of it as soon as possible, even if that means forgoing some additional returns. Nothing is worth your peace of mind, in my opinion. This line of thinking also works the same for mortgage debt.

I look at my balance sheet like the balance sheet of a really high-quality company. If the debt is manageable, and the leverage is purposely there to maximize return, then I applaud the logic. However, this must be kept in check. I currently have ~$18,000 in student loans on my balance sheet, which is the only debt to my name. But if my overall long-term debt position were to increase dramatically from here I’d probably lose my rather nonchalant attitude on it pretty quickly.

So I could easily sell off $18,000 worth of stock, pay capital gains (if a gain is registered), and lose the corresponding dividend income. And I could then take that capital and pay off the student loans. Paying off the student loans would free up future investment capital due to the elimination of payments going forward. However, I view this as a move that would not be beneficial to my long-term wealth. The stock market has returned somewhere around 9% annually over the long haul, while the student loan debt is a guaranteed sub-3% gain. Of course, how this would actually turn out would largely depend on how the stocks I would hypothetically sell would have otherwise performed over the period it would have otherwise taken me to pay off the student loans. So you can see where there is a lot of theory involved. At the end of the day, however, I look to the ability of whether or not a high-quality company can perform at a rate that will compound my wealth above 3% over the long haul. And if I can’t assume that, my money would be best off elsewhere.

Tax-Deductible Interest

Adding to the appeal of not paying the loans off early is the fact that the interest on student loan debt is tax-deductible, assuming it’s a qualified student loan and your income meets certain criteria. The deduction is essentially an adjustment to income, up to $2,500. If you’re interested in how that works, I would recommend reading about it directly with the IRS, as tax situations can become quite complicated.

I’ve giddily claimed this deduction yearly, as there is no need to itemize deductions since it’s a straight adjustment to income. This debt is a bit unique in that regard. While you can also deduct mortgage interest, depending on your circumstances, that requires itemization.

When you factor in an already low interest rate and then add in the fact that the interest is tax-deductible, I figured from the outset that I almost couldn’t lose by aggressively investing that capital instead. I identified bargains across the stock market back in 2010 that were attractive, and focused solely on investing excess capital, rather than trying to rid myself of student loan debt that was manageable with tax-deductible low interest. And if I could go back in time, I’d do it the same all over again.

Flexible Repayment Terms

Federal Direct Loans offer a number of repayment terms, which I find pretty attractive. This offers a lot of flexibility in terms of how you pay, how long you pay, and how much you pay.

Some of the repayment plans include:

  • Standard Repayment: Fixed payment until loan is paid in full. You typically have up to 10 years to repay.
  • Extended Repayment: You have up to 25 years to pay your loans. Eligibility varies. Must have more than $30,000 in Direct Loan debt.
  • Graduated Repayment: Payments start out low and increase every two years. Designed to mimic a career arc, where you earn more as you go. You typically have up to 10 years to repay. This is the plan I’m using.
  • Income Contingent Repayment: Payments will be based on AGI, family size, and total amount of loans. Certain loans do not quality. You typically have up to 25 years to repay. Must have financial hardship, as defined by U.S. Department of Education.
  • Income-based Repayment: Similar to Income Contingent Repayment. Based on income.
  • Pay As You Earn Repayment: Payments can increase and decrease based on income. Very flexible terms. Must be a new borrower as of Oct. 1, 2007.

As you can see, the plans are quite varied and flexible. And I kind of like that. Just in case my income takes a serious hit, I can throttle back on the payments, assuming I’m eligible per certain criteria. You can read more about these plans directly from the Direct Loans repayment page.

In addition, there are forbearance and deferment options. I personally applied for and received a two-month forbearance on my student loans because I was transitioning from a traditional, full-time job to writing for a living. I didn’t know what my cash flow would look like, and this forbearance allowed me to remain flexible and liquid while I transitioned into this new role. This kind of flexibility, in my opinion, eases the repayment process.

Liquidity

Liquidity is hugely important to me, especially now that I’m no longer working in the traditional capacity of a employer-employee relationship. I’m currently working for myself, and as such I view liquidity very favorably.

And I’m extremely liquid right now with a stock portfolio well into the six figures and cash in the bank.

However, if I were to take $18,000 of liquid assets and convert those to cash to pay off my student loans, I’m no longer as liquid. I have the $18,000 debt paid off, but the cash is gone forever.

It was my decision to remain liquid over the past four or so years that allowed me the flexibility to do some of the things I’ve done. I was able to take advantage of a once-in-a-lifetime car deal. I was able to buy stocks when the opportunities presented themselves. And I was able to move across the country to be closer to family and pursue writing.

Now, I’m not saying I wouldn’t have been able to do these things had I paid off my student loans completely at an earlier date. But I am saying that my opportunities likely would have decreased commensurately, as my liquidity would have. And there’s something psychologically beneficial about having that flexibility to take advantage of opportunities. Especially when you know that you’re probably doing better with the capital in a liquid investment over paying off the debt earlier due to return potential and opportunity costs.

Conclusion

While I still have student loan debt, I have paid off all other debt. I have no credit card debt, auto loan debt, mortgage debt, personal loan debt, or anything else. And if the student loans had a higher interest rate or the tax deduction disappeared I’d probably change my tune. So for anyone else out there that might be just starting off on their journey and contemplating what to do with debt, my advice is usually to pay it off first before investing unless the interest rate or tax situation make it disadvantageous to do so.

I hope this was a coherent explanation as to why I haven’t paid off my student loans in full yet. I’m sure there are some that will still disagree with my logic, and that’s okay. I can understand both sides of the issue, and ultimately you must do what’s best for you and your situation. I long felt that I was better off investing my capital in high-quality businesses that regularly and reliably pay and raise dividends. And thus far, that intuition has served me mightily. But if the loans had a much higher interest rate my whole strategy heretofore would have likely been very different with an aggressive payoff plan.

However, as the stock market relentlessly rises, opportunities become limited. As such, I may revisit my thoughts on this matter at some point in the future if I feel my capital would be best allocated to paying off low-interest student loan debt instead. In addition, I may at some point decide to aggressively pay off the student loans simply to get rid of them and reduce my monthly outlay. That would just be a simplification of my finances and lifestyle, at the expense of giving up potential gains elsewhere.

What do you think? Should all debt be paid off as fast as possible, or does this plan make sense to you? 

Thanks for reading.

Photo Credit: ddpavumba/FreeDigitalPhotos.net

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130 Comments

  1. Hi Jason,

    I graduated with $56 000 student loan and around $8000 credit card debts in April 2011. I was kind of broke until I landed in a decent job after 5 months.

    I managed to pay-off around $20 000 in student loan, then I stopped over paying into students loan and started to invest in dividend stocks in March 2012. It was a really good move for me and I was able to build almost 6 figures portfolio with blue-chip dividend stocks.

    Here in Canada, I pay 5.5% for student loan, and am in the 30% tax margin. So, I am actually paying around 3.85% interest pay for the loan.

    You mentioned that you hate debts, but I am little opposite. I love good debts and take advantage if I see any opportunities. I know it is not suitable for everyone 😀

    Best wishes !

  2. At 2.75% thats a pretty cheap debt. Even cheaper than most mortgage rates even. Short term0-10 years I see no problem with it but however in the long term you eventually have to take care of it at some point like a long mortgage.

    Its not a large amount but you can almost treat it as a low rate margin account for your stocks.Many student loan rates are above 4-5% and at that point it makes sense to take care of them asap. Anything at around 3-4% is a wash and at sub 3 its cheap money!

  3. I feel the same way about my mortgage, at 3.4% I’m pretty sure I can invest my money and make a better return than that. So far I have been right.

    But at the same time I’m starting to feel a little too rooted and I kind of want to be able to take off to some cheap country for a year and not have to pay my mortgage or manage tenants from a foreign country. One day I have a feeling that will change but I’m not sure when yet.

  4. I completely agree with your strategy. With such a low interest rate I think it would still even make sense to pay the minimum even if there weren’t such great tax benefits. My student loans were fixed at 6.8%, so I made sure to pay that down as quickly as I could. However, finding high quality dividend stocks that pay enough to cover the 2.75% interest rate shouldn’t be a problem.

  5. Dividend Mantra, when I graduated in 2000, the interest on my student loans was 10%. That was right in the middle of the dot com craze and the dot com bubble started a few months earlier. Like the States, it was tax deductable in Canada as well. Unfortunately I could not take advantage of it as I needed to gross $2200 a month to be able to make the payments of $330 a month. So I was rewarded interest relief.

  6. Finance Journey,

    Well, we have different takes on debt. But if you can use it to your advantage without getting burned then I say more power to you. 🙂

    You took a very aggressive approach and that works for some. For others, it doesn’t. Really depends on circumstances and certainly timing. Wishing you continued good luck!

    Thanks for stopping by.

    Cheers!

  7. Asset Grinder,

    I agree. It makes sense mathematically to keep the debt around, but at some point I’d also like to rid myself of the burden completely. One day…

    I also agree with those rates. If I was looking at 5% or so I’d be much more interested in paying it off. Below 3% with a tax break, and not so much.

    I’d tell you to keep on grinding over there, but I know you already are. 🙂

    Take care.

  8. Zee,

    I feel your pain. I have never had a mortgage. Not completely sure I ever will. Depends on the life circumstances. But I can see how one might feel a bit trapped.

    Maybe you’ll sell your abode one day and go on a extended trip abroad. If there’s anything I’ve learned in my years it’s that you never know what tomorrow will bring. Life can change in a second.

    Cheers!

  9. TwoInvesting,

    I would have done the same thing as you with a 6.8% rate. I would have attacked that thing with the same kind of ferocity I’ve attacked saving and investing.

    But at the rate I’m looking at I think I’m okay here. Of course, I’m also anxious for the day when it’s all gone. It’s more of an annoyance than anything else now. And I’d love to free up that $200+ every month!

    Best regards.

  10. IP,

    Yikes, I’d hate to see a 10% interest rate. My whole strategy would have been different if I were looking at rates like that. I’m grateful I’m in this position!

    Sounds like you caught a break there, though. We have similar income-based repayment plans as I discussed. Which certainly benefits those just getting out of college with few resources.

    Best regards.

  11. I agree with the blended approach, at least for now…. I go back and forth sometimes, meaning sometimes I am so debt averse, that to tackle that sucker once and for all and get rid of it would be such a major victory. I make a pretty good salary, and can probably pay that off once and for all in a year or so.

    But I’ve done this blended strategy for a few years now, and the stock market has been on a tear! not to mention, the increase in dividends… It’s been working so far this way, and currently, I’m in the camp of taking advantage of the opportunity.

    But still…. the interest rate is 6.75%; and that was post consolidating it years ago… who knows… maybe in a few months, I’ll change my tune and pay it off.

    Btw, I totally dig your blog. I too have that same goal in which my passive income surpasses my monthly expenses. And that student loan debt is the biggest 900 lb gorilla in the room next to my mortgage debt on my investment property.

  12. You’re getting a good deal on the interest rates! You’re basically doing an arbitrage between the loans and dividend investing. So keeping student loans is very understandable. Thanks for outlining your thought process.

    Cheers!

  13. DM,

    This is beginning to get a little scary. First, two snowball articles and now we both write posts regarding our position on debt.

    I just wrote a post a couple of days ago on the so-called “good debt” vs. “bad debt” issue. I argue there’s no such thing as “good debt”, (not even when it comes to mortgage debt and student loans. It’s admittedly a controversial position I’m taking, but it should get some re-thinking their take on the “good debt” rationale.

    http://payoffmyrentals.blogspot.com/2014/07/all-debt-is-risky-debt.html

    Your student debt is what I would consider “tolerable debt”. There are certainly far more intolerable, dangerous and risky debts one could have. Your student loans are less risky not because they are federally funded and low interest, but because you have the liquidity to pay them off overnight at anytime you chose.

    The debate will continue indefinitely because as you correctly alluded to, the peace of mind variable will always enter the picture. Some are wire to play the debt/income arbitrage game whereas others are not comfortable playing. Let the debate continue. In any event, the mere fact that people think it through and act accordingly is better than blindly spending away thinking “hey, it’s all good”.

  14. Welll before I’m starting my DGI journey then I will first have to pay off the long going debt..

    When i was young around 19 years old I had a buddy of mine to borrow my cellphone for a month because family issues and he abused it while I didnt know it. Only thought he would make some ongoing phone calls. and made a bill of 5897,22 euro’s… at that time I was a student and didnt know about the rates and my mom just told me just pay it for 100 euro a month so it doesnt have a huge impact. He was no longer a friend of mine because of the abusive behaviour i found out about.

    Im 26 years now so I got the time.. Glad I found out the frugal lifestyle and not spending money on useless stuff. Able to save alot from my income of €1600/month arround €1000 a month at the moment so 4k to fix it.
    Myself never cared about it untill I found out I had arround 14% interest rate.. and that scared me off.. especially now that I see the numbers in front of me. 2 more months of saving and I will deal with this high interest debt.

    Now u can see more people would need more education on financial terms of saving and debts and how to forecome it. Allways thought by myself i just take care of 100 a month and then theres 59 months to go by so its finished.. but it aint finished that easily because of the high interest it seems…

    Beginning debt : € 5.897,22
    Interest payed on top € 3.941,23
    Costs the collection agency :€ 700,00
    Payed till now : € 6.550,00
    Still to pay : € 3.988,45

    Would be a total of €10538,44 so as u can see because of the high interest rate I payed almost double the starting debt.

    I wont borrow my cellphone to anyone anymore ive been abused in such a way that i still feel the rocks on my shoulders untill its fully payed off. That will luckily as I see it now by the end of september.

  15. One factor you might consider adding into your decision matrix is the value of the market. Since we never want to over pay for Mr. Market, you could double or triple down on your student loan payment when Mr. Market is overvalued. NET: your situation can be fluid and tweaked along the road to independence. #my2cents

  16. I have a different view on debt. I have been borrowing to buy stocks, and have been making more money.

    The worst time to borrow is when the market is high and margin rates are high. In the recent past stocks were beaten down and the Fed provided cheap money which i have been borrowing at 1% from my broker.

    This has been the best opportunity to use debt to your advantage (whether it is a cheap car loan or margin debt). This party wont last forever, the tide will turn once the Fed indicates a change in interest rate policy.

  17. That debt is at a great interest rate so I completely understand your strategy. It almost makes me wonder why I am pushing so hard to pay off my debt. Maybe I should be investing more of my free cash flow and make my money work for me. If you continue on your current payment amount, how long will it take you to get the loans paid off?

  18. Jason,

    I use the snowball technique to get rid of my debts. I decided to focus to one debt at the time (paying the minimum instalment on my other debts) starting with the one with the lowest balance. It kept me motivated to see debts disappear from my balance sheet at the speed of light.

    When all the small debts were fully reimbursed, I started focusing on debts with the highest interest rate and put all my money toward reimbursing these debts.

    I still currently have a 12,000 car loan, a 4,500$ loan for a spa I had purchased for my house but I’m about to clear the spa loan during the course of the month since I sold some assets to get rid of my debts. My debt burden was more than 33,000$ at the same time last year when I said ok it’s enough. I can’t live like that anymore!

    Having a plan is very powerful. Now the only two debts I’ll still hold are my car loan (3% interest) and my mortgage 2,99% interest rate. I could easily clear my car loan with some extra cash I have right now, but I prefer investing it in my freedom fund. My debts are now manageable. I sleep ok with them and I have a plan to clear my mortgage in 7 years with the help of my fiancee. I could also sell the underlying assets of those debts and be debt free.

    It’s easy in life to just let the life push you in every ways. It’s easy to pay with your credit card by lying to yourself and telling you “bah whatever I’ll have money later to pay for that..”

    What I found great is that it can be as easy to completely change the way you manage your money and turn the situation all around pretty fast.

    Keep going my friend I think you’re doing just the right thing with how you manage to pay that debt.

  19. If you are smart about it, debt could be helpful to your wealth building process. It’s all about opportunity costs of course..

    If you can earn a 3% dividend today, that will increase over time, you should not pay off that deductible debt.I am also wondering if you can’t actually stretch it out a little further. I don’t know the rules, but can you take on student debt, and use the proceeds to say buy a house or buy stocks?

  20. DM,
    My view of debt has changed over the years, mostly skewed by the very low rates. I was previously very anti-debt in general. Now I’m more anti-consumer debt. You seem to be making the right move based purely on the numbers. But there’s that balance of what the numbers are saying versus the good feeling of being completely debt free and having that extra cash flow. Years ago when I had some car debt I picked a date in the future and added small extra payments each month so that I would pay it off by that date. It was exciting to be done with it. But my rate was higher :), so that changed the equation.
    -RBD

  21. I did the same thing with the family SUV. We got it at 1.9% on a five year loan. I paid about $100 more a month to ge t it paid off in 3 1/2 years. I remember somebody asking me, “If you can pay $100 more a month, why can’t you pay $200 more a month?”

    My answer: “Because I can make more than 1.9% in the stock market with that other $100”. And that’s what I did. 🙂

  22. Hi Jason,

    I agree with the balanced approach, specifically what Retire Before Dad said – to have a target date to payoff the debt. The reason is if you have a specific date (or an optimistic date) for which you desire to retire you want to put yourself in a position to reduce your cashflow needs. Although I don’t think I will have the means to retire for another 19-22 years, I still plan to pay off all debts in 12 that way if things go better than expected I will be in position cash flow wise to take advantage of that while not giving up on investing now. In my view it is all about balance and others have mentioned if the market gets even more over priced maybe the best thing would be to pay off loans quicker. The great thing is the flexibility you have, long term stocks or gaurunteed returns by paying off debt if there is a lack of bargains in the market.

    Kipp

  23. Excellent article. I know a lot of people including my fiancee who have student loan debt. A few that have interest in investing see the loan as the real hurdle to get over before they can aggressively invest. However, you are spot on, if it makes sense pay the minimum and build your wealth elsewhere.

    I am lucky in that I have no student debt, and that I use my credit cards as debits (never carry a balance). Still, if I were in your shoes, my thinking would be exactly the same.

    – Gremlin.

  24. DM,
    I think you have exactly the right attitude about this. It all comes down to interest rates. 3% is a sweet deal, 6% is not. If you had debt with 6% interest you would pay it off before buying more stocks because a 100% guaranteed 6% return is pretty good. But as a DGI you cannot be satisfied with a 3% return.

    By all this logic, if you had the opportunity to borrow another $50K at a fixed 3%, would you? It’s hypothetical because I don’t know how you could do that. But I think you should. You are aggressively pursuing FI, so why not leverage up a little? Just like with owning stocks, the decision to pay off debt and the decision not to take on new debt are the same question.

    If you could borrow at 3% to buy stocks with a current 3% yield, the dividends pay all the interest, and after dividend hikes they start paying down the principal. 20 years later those stocks have bought themselves.

    The fact that student loan interest is deductible without itemizing is a cherry on top.

  25. I have never heard of a person with no mortgage complaining that they have no mortgage.

    Conversely, what do people with mortgages always say.

    There in may lie the answer.

    “Thought food”

  26. It is definitely a great decision. Stocks most likely with return over 3% easily and with dividends, it will be even more. While I also hate debt, I have come to agreement with myself that if you can have i turned to your favor, it is great as long as it is in control.

    DGJ

  27. We paid off my wife’s loan early for her Masters degree but I think the interest was around 5 percent. Now I have a dilemma: Do we aggressively pay down mortgage at 5.5 percent or put more into the markets? I missed the opportunity to refinance to a much better rate due to procrastination and I am still nervous about how high the market is at the moment. Even though a lot of the S&P companies are having pretty good earnings at the moment. Just curious as to what opinions people have on that. Thanks!

  28. I don’t like any debt. Even at 0% I want to pay people what I owe them as soon as possible. I would spend a few more months enjoying your family then get a 20 hour a week job and start slamming savings/debt payoff again. My wife and I had around 18k in credit card debt and another 20k in student loans to pay when we were younger. I basically put my head down and worked hard for one year and it was all gone. I was delivering pizzas. You could do something similar and set your own schedule and still blog. If I were you I would never take another 9-5 job IMO. Paying debt is no where near as fun as buying investments, but well worth it for your mental sanity. GL

  29. You could call paying off any debt as investing in a bond with a certain rate. That’s how I see it, and I’m also repaying my student loan as slowly as possible (at a ~1,5% interest rate at the moment). My 150K mortgage interest rate is at 0,65% at the time so I’m seriously considering stopping the monthly repayments (~1000 euros) and putting the money into some bonds with a higher interest rate. It’s a small gain but I’ll take those any day.

  30. Considering this is your only debt and your self discipline I understand your rationale. However, paying off debt is a guaranteed return and usually brings a certain peace of mind. Investing in stocks or real estate for that matter gives no such guarantee. You might initiate a combination of making extra payments along with continuing to buy stocks in high quality companies. Just my 2 cents!

    MDP

  31. Hi Josh,
    I would max out any employer match retirement plan you have available, and max out Roths for you and your wife. After that I would put everything toward extra mortgage payments.

  32. Don’t forget about the impact of inflation! With a blended rate of only 2.73% those loans are shrinking in value every year. In other words, assuming a 3% annual inflation rate means that inflation is helping pay off those loans for you.

    While my personal feeling is to be opposed to debt, in your case I would be in no rush whatsoever to pay off those loans. When the creditor would prefer you to pay off the loan earlier and pay less interest to them you know you are in a great position with the loan!

  33. I’m on the same boat as you. I have student loans which range from 1.6% to 3.5%. I am in no rush to pay off the low interest loans unless I had nothing better to do with my cash. I’d prefer to invest my money rather than to pay them off. I know many who really hate debt and just want to get rid of them. To each their own…as long as they understand that paying off that debt is mainly a psychological benefit. The math says that investing is the better bet financially.

  34. Thank you for posting this article. I am new to dividend investing and have learned so much from your blog and your readers’ comments. I’m 50, so starting a bit late but am committed to reducing expenses and investing every month in my brokerage account. So far I have about $120K in high quality dividend growth companies and have a goal to add additional capital monthly.

    This post was timely for me as I have been debating if I should pay off my mortgage fully or invest slowly in periodic increments or a little of both. I am fortunate as I expect a nice lump sum payment from my job early next year and I need to decide how to best deploy.

    I have a 388K balance on my mortgage @ 3.875% and I’m in the 33% federal tax bracket. I used an online calculator that attempts to find the “real” cost of a mortgage considering income, tax rates, deductions, AMT impact and other factors. After entering a whole bunch of info from my 2013 federal return the results told me if I could invest at a 3.87% or better pre-tax rate, I’d be better off investing than paying off my mortgage. Weird. I expected my tax deductions to reduce the effective rate of my mortgage, even if my deductions are somewhat limited by AMT and other restrictions.

    Currently, I’m leaning towards keeping my mortgage even though I really don’t like the idea of carrying debt. Long-term viability for my job is iffy, so I think it makes sense to reserve my liquidity for now.

    Thanks again for all of your excellent articles. I look forward to your posts as I work towards financial independence!

  35. Great explanation for why you have done things the way you have done them.

    I completely understand your point of view, but I’m one of those people who doesn’t want to owe anyone anything. I couldn’t do it. I would have to pay it off. Just get rid of it and be done with it. I won’t even do a car loan. I save up and pay cash and I put myself through school by paying as I went. Your numbers make perfect sense, but I just feel so much lighter with no debt.

  36. Well your comment about peace of mind really hit me. I’m getting married in a couple months and my fiance has quite a bit of student loan debt. Although we will have no other debt than this is has made me extremely nervous. I feel like my whole life I have worked hard so that I didn’t have to worry about much of anything. I’ve never been too stressed about anything at all before really. I’m encouraged by the challenge but still very worried as she does not have a job right now. I’ve turned off all reinvestment of dividends on the companies I own. Even so its going to take me 3 straight years of doing nothing other than working and sitting at home to pay these off if she doesn’t get a job. What’s worse is the interest rate is 6.8%. If the interest rate was as low as yours I would be less worried. Still, I am choosing not to invest any new cash at all until these loans are gone. Piece of mind is my main concern. Piece of mind is the reason I started investing in dividend paying stocks in the first place. I’m trying to be less worried about it, this article helps a little to help me to not worry so much.

  37. It makes sense that you are doing. You pay only 2.33% for your student loan and get some tax benefits. I think it’s better to have 18k invested in good stocks than to pay off student loan, especially if you have to sell your stocks in order to do so. If I would be you I probably would increase my student loan payment by small amount every month.This would make me think that I am still paying it faster. 🙂 I see that you consider tax benefits when you are talking about your student loan but if so why don’t you invest some of your money into SEP IRA and IRA in order to reduce your self employment income (SEP) and get some saver credit (IRA)?

  38. I’m doing the same thing Jason. To me the student loan is simple interest – meaning you only pay interest on what you owe. Where as stocks compound over time. I’d even borrow money at interest rates like that to buy stocks. But some people need that peace of mind. I’m more mathematical

  39. I think you are justified in keeping the loans. Personally I would pause and knock out the debt.

    You get a guaranteed return of the % on the student loans. Plus you can join the “debt free” club. It is a cool club. 🙂

    Your cash flow improves once gone and your snowball would be able to pick up more steam.

    It is hard to think about when stocks keep going up and up. Maybe when we have our next prolonged slump it will be easier to knock out the debt. Or maybe if your portfolio had started in 2005 and went through 2008-2009. It is hard to replicate those moments outside of the moment.

    Thanks for the perspective.

  40. Debt! I hate debt, even good debt. I currently owe under 78K on my mortgage with an interest rate of 3.87%. I still chip away at my mortgage because this will become an investment property that I will rent out in 2-3 years. Then it will be producing around $900 in monthly income when paid off. I shovel most of my extra cash into equities, but for every 8K I invest in equities I like to put 1K toward my mortgage debt. I consider this diversification to some degree. Yes, the market definitely gives me a better return than 3.87% but I feel good about chipping away at the mortgage.

  41. Jason,

    I’d like to offer a different perspective. It sometimes feels like all the comments here are a chorus of agreement from people with similar blogs, but my net worth and income is more than all of them so I hope that gives my argument weight.

    This is the decision process I always use for these types of situations:

    Say right now hypothetically you were completely debt free. If I was to offer you an $18,000 loan to invest in the stock market, even at 2.73% interest with all the same terms, would you take it? Would you borrow money to invest in the stock market? Why not? It is the exact same scenario after all. You are effectively making the same decision.

    Since you abhor debt and would never use margin, I am quite sure you would not take this deal. My point is that by not eliminating the debt you already have first, you are basically making the same decision.

    Let’s walk through why you would never take the above deal. It’s because you understand that all leverage multiplies risk, and human being always tend to underestimate risk. The risk is more than the simple math of comparing the interest rate to your investment returns. With the case of a small debt like this, the risk is mostly in the category of that “life happens” type of risk. Having that $200 a month liability could become very inconvenient for you if the unexpected were to happen. I think you know this and this is why you abhor debt in the first place. Case in point: your recent move home provided a lot of uncertainty and you felt it necessary to put the loan on hold. It’s great that you had that option, but wouldn’t it have felt better if you did not have to make that decision? If “life happens” again, wouldn’t it be nice to not have to make that decision again?

    I think you are very smart and generally give top notch advice (you are my favorite of the dividend growth type blogs and your portfolio is a model I am trying to emulate), but I have to express my misgivings about the example you are setting in this scenario because I know a lot of people read this and follow your lead. People love to rationalize reasons for not paying off debt, and your readers on the fence about their own debt will give your words a lot of weight.

    I’m definitely not suggesting you sell any of your investments to pay off the debt, but I think it makes a lot of sense to press pause on the additional investing until you are debt free. In your shoes I would aggressively put all of your disposable income (including dividend income) towards the debt. It will be gone so fast your head will spin, and you will be back to purchasing position number 50 in no time!

    Just my two cents, Best Regards

  42. Same boat here, I’ve had this same conversation with myself for 4 years. I’ve aggressively paid off all my student loan debt except for some 2.3% & 1 4.5% loans. the 4.5% is always on the fence and with every bonus check I say I’ll pay it off but I haven’t yet 😉 I still hate paying 180/month in loans so it’s still on my list.

    I know this is a bit out of place for your column but if anyone has advice I’m soliciting it!

    I could take a loan out of my 401k and put that to use to pay off the debt then I would be paying myself back at 4.5% instead paying the student loans. I think if you take into account the tax deduction that ends up being at 3%, Sure 3% is low but my new companies 401k options are pretty bad so paying myself back at 4.5% instead of the 6% I’ve averaged this year (or 7% over the last 2 years) sounds pretty good and then that $180/month goes back to me. What’s really got me thinking about this is how high the market is right now on average I figure it may be a good time to do cash a bit out and then slowly reinvest as I pay off the loan.

    Anyone have any advice or thoughts? I imagine it’s just the personal choice of it but if there’s any pros/cons DM or I’ve missed I’d love to know!

  43. DGI,

    As long as you keep sending in the student loan re-payment checks, you can do whatever you want with the principal. However, I think that’s a pretty risky strategy for most folks. Someone investment savvy like you or Jason might be able to borrow for investing with a substantial margin of safety between benefit and cost (a 2.75% loan is a pretty safe bet when dividends are 3%, but 5% or 6% interest is probably pushing it).

    U.S. stocks are likely to produce a far less rate of return than in years past. So for someone investing in broad market ETFs, it might make more sense to pay off a 4-5% mortgage loan rather than taking substantially more risk to invest in stocks, which – at best – will probably return something around the 6-8% mark over the next decade. Why not take the guaranteed rate of return and then if and/or when stocks present a better buying opportunity, replace the extra principal going towards the mortgage towards buying stocks… That would be my thought for someone with less investing experience, at least.

    What do you think?

    Nate

  44. A 401k loan is a bad idea. Debt for debt. This is where Dave Ramsey has it right. Stop all your retirement contributions. Save $1,000. Put everything else toward your student loans. Sell stuff, take a part time job, just crush it fast. Then build back your emergency fund and start investing again. The $1,000 only emergency fund makes you feel panicky. That sense of panic makes you focus on getting the debt gone.

  45. I have student loans on the UK, but they work slightly differently I think. They are taken from my gross pay so I don’t get the money. That will happen every month until they’re paid off. But, they don’t have any impact on me getting a loan, or mortgage or anything financial, so for now, I’m happy for them to just be automated.

  46. … To me a 401k loan isn’t actually a loan though it’s borrowing money from myself… and paying myself back interest… 😀 thanks for the reply though.

  47. jm,

    Well, the market has indeed been on a tear. That makes the idea of paying just the minimum harder because attractive stock opportunities become fewer. However, it also means I made the right choice from the get go. So it’s an interesting conundrum. For now, I plan to keep paying the minimum.

    With an interest rate of 6.75% I would be in a hurry to pay it off. That’s tough to replicate in the market from a pure income standpoint, and it’s difficult to say what’s going to happen with equities over the next year or so. If my rate was above 5% I’d probably shift my priorities a bit. Maybe still buy equities here and there, but not quite as aggressively so that there is still a decent amount of cash left over for the loans.

    And I appreciate the support! It means the world to me that people enjoy the blog. I truly give it 100% effort. 🙂

    Best of luck with paying off that debt. I know it can feel like an albatross around the neck at times.

    Cheers!

  48. Henry,

    Exactly. It’s a form of arbitrage. Of course, I wish I could go back in time to never take out the loans, as there is no current utility for them. But it is what it is. I’m still paying for mistakes I’ve made in the past, but those mistakes led me to where I’m at today. So it wasn’t all in vain. 🙂

    Thanks for stopping by!

    Best wishes.

  49. Curtis,

    I’m with you. All debt sucks. I think of all the possible kinds of debt, my debt is probably the best out there. But it’s still not fun. Especially since I gain nothing from it. It’s not like low-interest margin where I’m using OPM to make money. But the 20 year-old version of myself made some mistakes. What can ya do?

    And I agree peace of mind does definitely enter the picture. That’s really more of a personal call. If you’re restless, you’re better off ridding yourself of the debt, even if it’s not the best financial decision.

    Best regards!

  50. William,

    That’s a horrible story there! That’s definitely no friend.

    That is one crazy phone bill. You say you have collection agency fees. I don’t know how it is over there, but over here it’s on your credit report once it goes to a collection agency. I’ve never reneged on anything in my life, but I’d try to find a way out of paying off someone else’s debt. I definitely would have gone to small claims court or something else. I can’t see myself spending years of my life paying on someone else’s bill.

    I feel bad for you. I hope this situation clears itself up for you pretty quickly since you’re aggressively paying on it.

    Take care.

  51. SE,

    Right. That’s something I continue to think about, and it’s fluid, as you mention. I continue to find opportunities, but if these opportunities become too limited then I’ll instead just funnel that excess capital to the loans. It’s really about maximizing ROI, and if the future ROI appears higher by paying off the loans then that’s what I’ll do. Of course, hindsight is 20/20.

    Cheers!

  52. Sfi,

    That’s a great way to do it if you can stomach it and you time things in and out correctly. I never wanted to get myself in a situation where I could potentially be wiped out, so I’ve plodded along with no juice. And I’ve done pretty well.

    Leverage goes both ways, but it sounds like you’ve used it correctly. Hopefully, that continues for you. 🙂

    Best wishes.

  53. Debs,

    Yeah, I’m only lax on this due to the points I made above. If the rate were higher, or the tax laws were different, I probably would have already paid it off. But I’m glad that I haven’t had to.

    I’m on pace to pay off the loans in about six years. The payments will continue to increase every two years. So the last couple of years will probably be painful with pretty high monthly payments. But at least I know I’ll be 40 (my anticipated FI timetable) with this behind me. 🙂

    I’m not sure of your entire debt situation, but if the rates are quite low you may be better off investing that capital. Really depends on your situation. But I hope this helped!

    Cheers.

  54. Allan,

    I believe that method was advocated by Dave Ramsey. And I would probably do the same. It may not be the most mathematically beneficial way to pay off debt, but it’s likely the most psychologically beneficial method. And that counts for a lot when you’re digging out of debt. Every victory counts.

    Sounds like your loans are very manageable. And if you can sleep well at night paying the minimum while investing aggressively in something with a better ROI, then I say go for it!

    That’s great that you’re on pace to pay off your mortgage in seven years. That’ll really put you in a fantastic financial position, and you’ll be quite flexible. Plus, you’ll require less passive income to sustain yourself. Keep up the great work!

    Thanks for stopping by.

    Take care.

  55. DGI,

    I agree. It’s really all about the opportunity cost.

    I’m not sure of how that works in regards to student loans. I don’t see why you couldn’t do such a thing if the loan was large enough and you didn’t actually require that capital for education. I suspect once the money is yours, it’s yours. I know that some of the money I received from student loans certainly didn’t go toward education. I suspect if you take the loan out, and can repay it, then it doesn’t matter if you use it all for education or not. But I’m not aware of all of the legal ramifications. And not all student loans have interest rates this low. So that strategy probably wouldn’t work well for a lot of people.

    Thanks for stopping by!

    Best wishes.

  56. RBD,

    I agree. It’s not just pure numbers. One also has to consider their emotions. Just like the stock market, emotions are at play when considering an appropriate level of debt. For many, no debt is good. For some, they can be comfortable with seven figures worth of debt if they’re amplifying their returns enough. I personally lean toward being comfortable with no debt. And that’s only because nobody ever went bankrupt not owning anyone anything. Just my conservative nature.

    Cheers!

  57. Scott,

    Sounds like a very reasonable strategy there. You paid off more than the minimum just to rid yourself of the debt a little earlier, but also maximized your returns in other places. If I could pay less, I probably wouldn’t only because I do want to get rid of the debt. But at the same time I’m not in a big hurry.

    Nice job! 🙂

    Best regards.

  58. I agree with Daniel on this topic. Crush the debt. Get rid of it as soon as possible. That is what I did and now I’m completely debt free including my house. I put my 401k and IRA on pause while I was focusing on destroying my debt. Now, I can contribute a lot more capital to my investment accounts, because I reduced my “fixed” expenses by eliminating the debt bill. Oh, and another thing that is fun with paying off all your debt is watching your net worth increase!

    Best regards.

  59. Kipp,

    Absolutely. Totally agree. I wouldn’t want to just let the debt linger on forever, but at the same time I wouldn’t want to be aggressive with debt if it’s manageable and better ROI can be had elsewhere.

    That being said, I should be able to knock these things out within the next six years or so. And that’s well before I become financially independent. It’ll be nice just to have them out of the way from a cash flow standpoint, and that’s really the only thing that keeps motivated to get rid of them.

    And you’re absolutely right regarding flexibility. It’s wonderful to be in a position to be able to properly allocate capital based on opportunities. Paying off debt vs. investing is really a first world conundrum, and so I’m blessed.

    I hope you’re able to get to your destination even faster than you might think possible. Stay consistent and persistent. You’ll be surprised. 🙂

    Best regards.

  60. Gremlin,

    That’s fantastic that you have no debt. That’s really the best situation of all to be in, in my opinion.

    And every situation is unique. I’m comfortable having a fairly low debt/equity ratio, and the interest rate is low enough to where it makes sense to continue investing aggressively. But that situation could change, and I’m flexible enough to change with it. 🙂

    Thanks for stopping by!

    Best regards.

  61. Grant,

    Well, leverage goes both ways. It’s easy to hypothesize about situations like that right now because the market has incessantly risen for the last few years. However, a major crash with $50k in fresh margin could leave you in a bad spot. I’d rather build from the ground up rather than build on a foundation I don’t really own. Just my take on it. I’m rather conservative by nature. As I said in another comment, nobody ever went bankrupt not owing anyone anything. Of course, opinions on this will vary. Some are just more aggressive.

    That being said, I’m still comfortable paying the minimum here because the loans are already there. Nothing I can really do now but to pay on them. And these loans are also pretty flexible. My brokerage wouldn’t care if I lost my job, but the US Dept. of Education will.

    Thanks for the comment, though. Interesting scenario! 🙂

    Cheers.

  62. lou,

    Well, I don’t have a mortgage. And I’m certainly glad to be in that position. But I think people who cry about having mortgages are typically crying because they’re living paycheck to paycheck and the mortgage is eating them alive. A bit different than strategically taking on debt. That being said, I’d still rather not have any debt at all.

    But definitely food for thought! 🙂

    Best regards!

  63. DGJ,

    I agree. If you’re maximizing your return, then manageable debt shouldn’t be a problem. That being said, I’d still rather see it gone at some point. If nothing else, my cash flow will simply look a lot better. And I like cash flow. 🙂

    Thanks for stopping by!

    Best regards.

  64. Josh,

    That’s a tough spot. If you itemize, that 5.5% comes down a bit. But you really have to compare the tax-free guaranteed return of your rate against what you might see elsewhere. There’s opportunity cost somewhere, and you’re simply trying to limit that cost.

    I would probably try and pay that thing down pretty aggressively. I would still take some capital (if I had any left) to build up a small snowball, because I’d want that thing to start rolling along as soon as possible. But the bulk of my resources would probably be allocated to getting rid of that sucker. Your cash flow will certainly improve when it’s all said and done as well. But as I’ve commented before, I’m rather conservative when it comes to debt. I’m sure others would tell you to invest aggressively instead.

    I hope that helps!

    Take care.

  65. Monty,

    I think that’s easier said than done. I’ve kind of come to the position where I don’t think I ever want to try and work while also blogging again. This is just too time consuming, and I was way too busy for way too long. If I did have to work again at some point I would probably severely restrict my blogging activities or just shut it down completely. I probably spend 5-6 hours or so per day on writing, emails, social media, comments, etc. Add in a part-time job and there’s really not much left.

    That being said, I don’t disagree with your approach. I think paying off debt as soon as possible also makes sense. As I said in the post, for some that is the right thing to do, even if it means sacrificing some ROI. It’s better to sleep at night losing a percent or three than losing your sanity.

    Cheers!

  66. SI,

    Nice rates there! I need to move overseas!!! 🙂

    I don’t blame you for paying as slow as possible. It’s almost not possible for you to do worse elsewhere. That’s fantastic. Enjoy the (almost) free money.

    Best regards.

  67. MDP,

    It definitely depends on your risk tolerance and psychological position. If a 20% market correction spooks you into selling all, then paying off debt first is the right approach. But if the situation is such that a higher ROI is almost a sure bet elsewhere, then the main benefit by paying off the debt early is psychological in nature. Nothing wrong with that. Just really depends on your personality and situation.

    Although, if opportunities become even more limited then I may shift my excess capital towards the loans.

    Thanks for stopping by!

    Best wishes.

  68. Johathan,

    Great point there! You know, I was going to write this article a year or so ago. And I distinctly remember having five reasons, not four. You just reminded me of my fifth reason. There’s a reason the US government is happy to lend long-term money at 2.5%. Inflation, baby!

    Thanks for adding that. Wish I would have written down my reasons back in the day. Inflation is definitely a great reason to take the slow road to paying off low-interest debt.

    Best regards.

  69. Andrew,

    I agree. The main benefit to paying off low-interest debt sooner than necessary is mainly psychological. If better returns can be had elsewhere, then the math if telling you what you probably already know. But if you’re risk-averse or just can’t stand to have debt on the books, then the math won’t really matter. Nothing wrong with that, but it’s best to be honest with yourself and approach your finances correspondingly.

    Best wishes!

  70. southerngirl1,

    Thanks for stopping by and commenting. Glad you found the blog. 🙂

    Sounds like you already made some serious headway. Don’t worry about starting late. The key is that you started, and you’re doing great. I was just reading an article the other day about average 401(k) balances for people near retirement, and it wasn’t pretty. You still have plenty of time to right the ship.

    The calculator already told you where your money is best off. $120k is already a nice self-sustaining portfolio that will partially grow all by itself. Aggressively adding fresh capital, however, will put you in a great spot a decade or so down the road in terms of dividend income. And liquidity is, of course, important, especially if your job isn’t extremely stable.

    That all being said, a $388k mortgage balance is pretty hefty. I don’t know of your entire situation, and in some areas of the country that’s peanuts. But if you could relocate to cheaper housing and slash the housing bill you’d put yourself in an even better situation.

    Best of luck!!! 🙂

    Cheers.

  71. SR,

    I hear you. Nothing wrong with your point of view at all. Some people just feel better paying off debt, even if the math says that the capital would be best allocated elsewhere. Nothing is worth peace of mind. 🙂

    Thanks for adding that!

    Take care.

  72. Mike W,

    That’s an interesting scenario. I guess I’d ask why your fiance isn’t planning on getting a job to help pay on her loans? I assumed she got a degree. As such, I would expect it to be put to good use. I’m not sure how I’d feel if I was marrying someone with hefty loans, no job, and no plans to get a job and pay off the loans. But to each their own. Wish you the best of luck! 🙂

    Cheers.

  73. Happy,

    Well, I’ll actually be forced into paying a bit more as time goes on. I’m on the Graduated Repayment Plan, and as such my payments go up every two years. So I’ll be paying more whether I like it or not. 🙂

    That’s a good point regarding the SEP IRA. I still hold to my previous beliefs on maximizing my taxable account. However, if self-employment income continues to increase exponentially then I’ll probably have to reconsider my position on that. A good problem to have, of course.

    Thanks for stopping by!

    Best wishes.

  74. Luke,

    I’m with you. The reduced free cash flow via the expense sucks, but I know that I’m doing the right thing mathematically. And the loans will likely be paid off in six or so years whether I like it or not. So the cash flow will perk back up and by then the passive income will be much larger than today.

    I can understand peace of mind, because I’m also conservative by nature. But I don’t mind seeking out a much higher rate of return, especially since this debt was put on my plate by a younger version of myself.

    Best regards.

  75. Wade,

    Haha. I hope to join that club one day. Sounds like a great group. 🙂

    Actually, if the stock market takes a significant tumble I’ll try to figure out any way possible to pay even less on the loans and invest more. That’s when the real opportunities open up. But if the market keeps rising like this I’ll likely start to allocate a bit more capital to paying off the loans. We’ll see.

    Cheers!

  76. Jerry,

    Nothing wrong with that strategy at all. Sounds like you’re allocating capital in both places pretty effectively to me. And peace of mind is priceless.

    Best of luck with paying that sucker off and improving your cash flow dramatically. 🙂

    Take care.

  77. Daniel,

    Appreciate the comment there. And I love to see how different perspectives can approach the same problem.

    I probably wouldn’t take you up on that offer for the debt to invest right now, but that’s the current me making a decision for the future me. The past me already took on this debt, and the me of today is trying to allocate capital in the best way fit. I think I can return better than 2.73% in the market. But that’s not a guarantee, and that’s why I wouldn’t want the current me to bet on that. I’m also much more conservative now than I used to be, and much more financially capable. The current me would never take out student loans anyhow.

    Furthermore, if you asked me this same question after a 20% correction, I’d probably have a different answer for you. And that really leads to my last paragraph in the article. I may have to allocate my resources in a different way if opportunities become even more limited than they are today. But I can assure you I’d have done much worse by aggressively paying off that student loan debt from the beginning instead of investing that capital instead. I can tell that just by looking at the stocks I invested in when I first started and what’s happened since then. Of course, the past is no indication of the future, and hence I wouldn’t take you up on your offer right now.

    But that’s just my perspective. I think the math is still on my side here, but I could very well be wrong.

    Thanks again for the great comment!

    Best wishes.

  78. anti1b,

    4.5% is probably right near the borderline for me. I’d start to consider aggressively paying that off. Any lower and I might be okay. Any higher and I’m pretty much knocking that thing out.

    I’m not sure how high your student loan balance is, so I’m not quite sure how the tax deduction works out for you. I would be hesitant, however, in taking a loan against the 401(k). Really depends on how stable your job is, and what you think might happen to the investments you’d have to sell to pay off the loans. As I said in the post, there is always opportunity cost there. And if something were to happen to your job during this period of paying yourself back, that could add complications.

    I’d personally rather just aggressively pay off the student loans with excess capital. The rate isn’t killing you, and you’ve had opportunities in the past to pay it off faster. I’d take those bonus checks and just eliminate it. Just my $0.02. 🙂

    Best of luck!

    Cheers.

  79. anti1b, my advice is to take advantage of the 401k loan. It’s not actually debt at all since the interest is paid to yourself. The only thing I would like to advise is a word of caution. If you think your job is not stable at all, then I would strongly advise against this. 99% of all 401k plans require that you repay 401k loans within 60 days of departure from the company. That being said, a loan on your 401k to repay student debt is a fantastic idea, if you have a high level of confidence you will be with your company long enough to repay the loan through monthly contributions.

  80. Nicola,

    That’s interesting. I don’t know of any situations here in the US like that, unless wages are being garnished. I suppose that’s a nice system over there as it forces people to be fiscally responsible with what’s left. And it reduces risk for lenders. I would thus assume interest rates are lower.

    Automation can be nice, as long as it’s not crippling you.

    Cheers!

  81. luckydog17,

    That’s wonderful that you’re completely debt free. I imagine I’ll join you in six or so years. Looking forward to it!

    I hear you on the net worth increase. However, I also keep in mind that my net worth wouldn’t be a high as it is right now if I chose to crush this debt from the outset instead of investing that capital.

    That being said, I’m still excited to have this debt behind me one day. The improvement in cash flow will be most welcome, and will come just as I’m nearing the finish line. So that will really juice my progress there at the end, as the gap between passive income and expenses closes quite a bit.

    Thanks for stopping by!

    Cheers.

  82. money is fungible. perhaps you have a psychological or behavioural flaw like everyone else and trying to justify the flaw.

  83. Kyith,

    Perhaps you’re unfamiliar with math? You should look into it. It’s really exciting! 🙂

    I’m in awe to be in the presence of someone who has no psychological or behavioral flaws. I’ve always wanted to know what it’s like to be perfect. Your previous comments on this blog tell me that being perfect also inflates one’s ego…so I guess that’s the drawback.

    Best regards.

  84. Thanks for the upvote luckydog17!

    Jason,

    I understand that the raw math here is your favor, but debt is not an investment, it is a liability and therefore represents a different risk profile than a dividend growth stock. There are practical and psychological matters at play here beyond the math.

    I also am constantly arguing the same point with people who’s financial advisers actually encourage them to carry a mortgage on already paid off homes so they can invest it in a fund (Horribly risky and stupid advice, but the adviser usually gets a huge commission in these scenarios so they love telling people this. 100% of foreclosures involve a mortgage, a couple extra points of ROI are not worth that risk.)

    You would not take on the debt now to invest because your investment returns are not guaranteed and your interest is fixed. I know that this was a decision you made long ago, and in hindsight you entered a bull market so it worked out really well. However, you could not see the future back when you started, just as you can’t see the future now.

    You said you wouldn’t take me on my offer to borrow the money, but in effect you are doing that every day that you don’t pay off the debt. It’s the same thing, and I believe it’s important to be consistent in decision making processes.

    Kyith below was extremely rude and I laughed my ass off at your response to him, but he was right in one thing: money if fungible. If you wouldn’t make the decision to go into debt today, under the exact same terms, by that same logic you must also make the decision to not stay in debt today.

    Ultimately we all know you are going to be fine, you are kicking ass at life. This is more of an academic argument at this point, and I think it is instructive to your readers.

    Best wishes

  85. Daniel,

    Great points. It’s more than likely just academic at this point. And as I said, while the math is in my favor now…a continued run in the market could and/or would change my mind on that. And so if attractive opportunities dry up then I’ll simply allocate my capital to the loans.

    As a side note: I generally don’t respond so harshly to criticism, and actually welcome opposite viewpoints. However, Kyith has been here before with similar commentary. I’ve decided to offer him the same level of respect he has me from now on.

    Thanks again for the discussion. 🙂

    Cheers!

  86. Thanks for taking the time to reply. I forgot to mention how much I enjoy checking your blog every day to see if there is a new post. Very motivating and educational. Thanks again for your advice.

  87. DM, I totally agree with your student loan strategy. I, myself have Federal student loans at 3.5%. I exploit the tax code to keep my monthly payments as low as possible. I contribute enough to my 401K and IRA to greatly reduce my AGI. Instead of $307 monthly student loan payments, I pay below $52. My interest expense is about a thousand a year, but save 2-3 times in income taxes. After 25 years of payments, the remaining balance is forgiven.

    Peter

  88. Yeah I wasn’t thinking a $50K margin loan, I was thinking a new loan on student loan type terms. Margin debt is a different story of course.

  89. Really enjoyed this post. While I’m currently aggressively paying off student loan debt, it’s because the interest rate on my current loan I’m attacking is 6.5%. Could I do better in the stock market than 6.5% after taxes. Maybe but I’d have to be pretty lucky/good. I graduated with six figures of debt from professional school so student loans have been a thorn in my side for a while, but I do have a good amount of loans at 1% (and some at 0.1%!) so when I get to those I will definitely deploy my capital to the stock market. I could even do better with an online savings account at that point.

    But you’re right it’s all about peace of mind. For people who are driven by numbers it’s all about opportunity cost. But if paying off debt makes you very happy and gives you piece of mind, then I can’t begrudge anyone that either. To each their own.

  90. I like your logical breakdown. I had very similar reasons for not paying my student loans right away. I had consolidated them into a single 1.8% loan, so I didn’t feel in a hurry at all. When we sold the house I used part of the unlocked equity to pay off the rest of the balance, which was just 9K.

    I think the big takeaway from your article is that it’s important to understand that there’s different ways to approach the repayment of debt. It’s generally a good idea to treat it like your hair is on fire, but sometimes there are more strategic ways to handle it. I’m super glad I didn’t kill off the loan years ago because I was able to use that money to buy shares while they were super cheap.

    I wish you good luck killing off the loans in the future.

  91. Jason – your decision to pay the minimum towards your student loans is the same reason why we have decided to pay the minimum on our mortgage. With an APR of just 2.875% that is tax deductible, the numbers just don’t really favor paying down our mortgage faster.

    Who knows, maybe one day we will cash out some of our investments to payoff the mortgage so we can retire without a mortgage. For now, we rather build our portfolio to hopefully have the option down the road to use the gains for the last mortgage check (if we choose).

    Cheers to maximizing returns on your money! AFFJ

  92. Peter,

    Yeah, that kind of flexibility is exactly what I was referring to above. If I really ran into financial trouble it’s nice to know that I could get some temporary relief. This is obviously not true with most kinds of debt, but the knowledge that you can stay liquid and flexible if absolutely necessary is reassuring. I’m not looking to take advantage of anything, but if I really ran into a problem I have no trouble grabbing a lifeline. I’m sure the same goes for anyone else.

    Thanks for sharing that!

    Cheers.

  93. Syed,

    You’re making the right choice, my friend. I’d also be aggressively paying off the debt if the rate was 6.5%. I wouldn’t even think twice. But I’m guessing you’re making pretty decent money now, so once you get the majority of that debt paid off you’ll be able to supercharge the investments. 🙂

    And I completely agree with you. To each their own. Some will prefer the math. Some will prefer the psychological benefit of having no debt. No right or wrong way, really.

    Thanks for stopping by.

    Best regards!

  94. Spoonman,

    Nice job there. Although the math probably favored continuing to invest, paying those loans off all in one swoop is awesome. Must have felt great to write that last check and just zero out that balance. On to bigger and better things. 🙂

    And I agree there’s definitely different ways to approach it. Some will prefer to be aggressive and invest, while others want the debt gone. I’m okay paying this debt off rather slowly now, but that might not always be the case. I’m definitely looking forward to just getting rid of it at some point here.

    Thanks for stopping by! Always good to see you stop by.

    Best wishes.

  95. AFFJ,

    I’m with you, man. That kind of rate just completely mathematically favors investing. However, it would also be nice just to have the monkey off your back. I think low-interest debt is more of an annoyance than anything else. Paying it off early is almost like saying “You’re really not worth my time right now, but I just want you off my back!”…or something like that. 🙂

    Wishing you luck with maximizing your returns as well!! 🙂

    Take care.

  96. Just over two years ago I re-mortgaged my house from a 4.125% 30 year loan with 24 years to go with a payment of $765 a month to a 15 year mortgage at 3.125% with a payment of $995.

    On the 30 year loan I was paying like $265 a month against principle, this year I am paying almost $675 against principle every month ($688/mo for 2015). One of the reasons I went to a 15 yr was that for an extra $230 a month payment, I am getting an extra $400 a month principle reduction. So it’s like $170 a month free! (hehe)

    Another reason I did this, is that the 15 mortgage’s final payment will be when I am 65 years old, as I wanted to have no mortgage payment going into retirement. So this was the “peace of mind” portion of the decision.

  97. I think you made the right decision for your situation. I struggled with a similar decision six months ago: pay off a 15 year mortgage or allow the amount to grow in a mutual fund account. After much debate, I opted to pay off the mortgage (3.29% interest rate). I figured the stock market is running high, and we are always told to sell high and buy low. I can’t tell you how difficult it was to write a check for over $200K. However, the feeling of having no debt is unbelievable. My focus now is building my nest egg in preparation for retirement in eight years. I figure if the stock market had a correction, I wouldn’t have the money to eliminate the debt and keep an emergency fund. Anyway, it’s done and I couldn’t be happier.

  98. This is good food for thought. I currently have 3 student loans: one is unsubsidized federal, and the other two are private. The first one is the typical student loan rate at 6.8% and I have been aggressively paying that one off this year because it’s my highest interest ($1,147.98 left to go!). My plan was to pay the other two off immediately after completing this one, because the balances equal about $16,500 still, and then not invest any money (though I did just dip my toe in the lake and buy a few shares of stock for the first time ever, just to get started). But I’m wondering now if I should maybe not do that. Their interest rates are 1.95% and 2.5% (they’ve held steady here for the past 5 years), but they are adjustable and so once the market picks up, I wonder if their rates will, too. You have an excellent point, that if the loan rates are so low, I can get better returns by investing my money now. I guess if my rates do ever start going up, I’ll already have money invested and could theoretically take a break from that to pay the loans off – if and when the rates go up. Right now, though, I am beginning to think that after I get this 6.8% one of my back, I should reallocate my money towards other priorities. I do want to retire early (asap!), after all, and I think I could save quite a bit of change.

  99. Here in the UK our old-style student loans are only charged at the rate of inflation, effectively making them interest free. The advice for us has always been to avoid paying off the student loan and instead use the money against a mortgage or other debts. I guess similarly the spare money should be funneled towards investments that return an above-inflation return. One of the very few examples where UK systems seem to assist with early retirement above the US ones..

  100. Great comment about job stability, I hadn’t thought about that concept since my job is so secure but it’s something to think about.

  101. Ron L,

    I think you made a very wise choice there. Regardless of the math, the psychological and financial benefit of being free of a mortgage at 65 is worth it, in my opinion. That will come at the perfect time for you, if that’s when you plan to retire. Your expenses will drop pretty significantly just as your income may as well. Certainly eases the cash flow situation.

    Enjoy retiring without that monkey on your back. 🙂

    Best regards.

  102. EaW,

    That’s awesome that you paid off your mortgage all in one swoop like that! Well, it’s probably even more awesome that you were even in the position to be able to do so.

    Debating whether to write a $200k check to the bank or your brokerage is really a first world problem. Maybe you’ll do better here mathematically, or maybe not. But I think you’ll be just fine either way. Owning your own home free and clear which then frees up a ton of free cash flow with which to invest is a pretty great spot to be in.

    Cheers!

  103. Jamie V,

    I personally would be in a hurry to rid myself of that 6.8% loan. After that, however, I would probably slow my roll. Your interest rates are even more advantageous than mine, and I just can’t see a situation where you do worse than that over the same time period it would otherwise take to pay off these loans paying the minimum. I think the math favors investing, but you’ll have to really think about the psychological aspect. If a 10% or 20% correction causes you to rethink your whole strategy and panic, then you might be better off just paying off the debt.

    But you should be in pretty great shape either way! Just gotta pay off that 6.8% loan.

    Best regards.

  104. ERG,

    Sounds like a great system over there. It’s really all about managing your money properly, while also considering the psychological aspect. If you can psychologically deal with low-interest debt while simultaneously investing excess capital into volatile appreciating assets, then you’ll probably do better over the long run. But if the volatility bothers you, then it would be better to rid yourself of the debt, because it’s a stable and guaranteed return.

    It’s nice that your student loans over there are so low in interest. Our education system is a bit different over here, from what I understand of it.

    Cheers!

  105. I can’t really blame you at all. The sub 3% rate is too easy to beat over the long term especially when you add in the tax advantages. We’re in a similar situation with our mortgage. We have a rate around 4.5% and I figure that’s easy enough to beat that I don’t need to throw extra capital there especially since the payments stay the same even if I pay early.

  106. JC,

    I’m with you, bud. I don’t have a mortgage, and I’m not quite sure how I’d feel with that kind of debt on the books. But if the math tells me I’m better off investing, then that’s probably just what I’ll do.

    Thanks for stopping by!

    Best wishes.

  107. Jason-

    I have been taking a more aggressive stance to my student loan debt – and having just paid-off two loans in the past couple months – I have found myself with an ‘extra’ $500 month.

    I have one remaining loan at ~ $22,000…..but I was fortunate enough to have consolidated it circa 2004, and it is presently at a whopping 0.625% interest rate.

    I can think of far wiser things to do with $22,000 than paying that loan off….so, for now, I will pay my monthly minimum, and figure out how to make those little money-soldiers make more of themselves.

    – Todd

  108. I strongly agree with Daniel and Luckydog17 on this one. My wife and I are completely debt free including the house (Dave Ramsey plan) and there is no interest rate low enough to make me go back to the “dark side”…haha.

    I’m a relatively new reader of yours and this article took me by surprise…I guess I just assumed that you were already completely debt free due to the nature of your other articles that I read and the fact I found your blog through Mr. Money Mustache.

    Are you completely sure the math points to keeping the debt as the smart thing? Selling stock to pay it off would take a hit to your portfolio but it would also add 200/month of cash flow for future stock purchases. That combined with truly (mathematically) accounting for the risk, peace of mind, and life simplification, it might be about a wash…or maybe I’m missing something. I believe you said the debt payoff was $18k, but what would the total dollars paid if you carried out the minimum loan payments as planned?

    Reading between the lines of some of your responses to the comments – you seem conflicted, on one side the math tells you that keeping the student loan is smart, on the other you say you look forward to paying it off because you don’t like debt. Those positions don’t sit well with one another. If your math is truly correct then you should have no qualms about taking out more student loans to invest in the market (as Daniel mentioned). I think you do have qualms with that approach though because in your gut you know that would not be wise – your gut properly measures risk while your math equations are devoid of that variable.

    DM – let me propose this idea to you. Go ahead and cash out some stock and pay off that student loan. Don’t think about it or do any calculations – just do it. (DO it!) Then give yourself 30-90 days to get acclimated to not having that payment and risk. If you begin to experience jitters and spasms because you can’t stand missing out on that tax deduction, then go ahead and take out another student loan. 🙂 I think we know what the outcome would be and you would have some great subject matter for another blog post! (that paragraph was sorta tongue-in-cheek…but not really)

    You could also make the argument that this would be a good time for you to pay it off since stocks have had a good run lately – however that train of thought is along the lines of “timing the market”.

    I might be a bit biased here or maybe just brainwashed by Dave Ramsey, but that debt just sitting in the corner would bug the crap out of me.

    Keep up the good work. I’ll keep reading.
    Drew

  109. DM,

    Your plan makes a lot of sense. Guarantee you made better than 3% the past few years!

    I personally have the opposite situation. I sit on piles on cash because I like the safety and I’m naturally risk averse. Could have made extra $$ investing it the past 5-6 years, but it’s what I must do to sleep well at night! God those cd and savings account interest rates are terrible… Yet because I have the foundation in place it allowed me to invest in the stock market aggressively (for me). Worked out okay so far.

    Have an excellent weekend!

  110. Todd,

    Nice job there. A .625% interest rate is practically free money. I also wouldn’t be in a particular hurry to pay that off. I can’t imagine one doing worse in equities vs. paying that loan off over, say, the next 10 years, or the time period it takes you to otherwise pay that loan off.

    It’d be nice to have that monkey off your back, but paying the minimum means that’s a foregone conclusion anyhow.

    Thanks for stopping by!

    Best regards.

  111. Drew,

    Thanks for the great comment!

    The math does point to keeping the debt and invest instead, assuming I can outpace the interest rate after taxes. And I’m obviously confident I can do so. It’s not just the $200+ in cash flow, but rather the interest I’m paying on the $18,000. That’s approximately $40 per month. Actually less after the tax deduction. But I could sell $18,000 in stocks and pay off the loans, which would reduce my dividend income by a commensurate amount or more. The key, however, is whether or not those stocks would appreciate from here. If they do, then I lost out. You also have to consider that my dividend income (the ~$40/month) is appreciating, while the ~$40 in interest is static. Inflation means my dividend income is going to rise, while my real interest expense is actually decreasing over time. So the math works out.

    I’m actually not conflicted at all. I’m okay paying the minimum because I know that’s the smartest way to allocate capital. However, I’d be lying if I said I wasn’t looking forward to the day that last minimum payment gets cashed and the balance goes to $0. It’ll be nice to get the monkey off my back. But that monkey might be more bothersome to me if I lost out on much bigger gains vs. the guaranteed 2.5% or so return.

    You have an interesting idea there, but it’s all hypothetical. Since I’m not a student I obviously cannot take out student loans. But it would be interesting to see how that would play out if I could. Of course, I’m a bit conservative. If the present me could go back in time I would have never taken the loans out in the first place. But the present me is stuck paying for my past mistakes, and as such must allocate capital as best I can.

    Thanks again for stopping by! And great job paying off all of your debt. I agree with Ramsey for the most part. This student loan debt is the only debt I have, and will likely remain that way until it’s paid off. The only other debt I may take on at some point might be mortgage debt, but that would be a carefully considered decision.

    Best wishes.

  112. CI,

    I definitely did better than 3% over the last few years. 🙂

    Nothing wrong with your strategy at all. As I mentioned, sleeping well is priceless. And for some people counting sheep isn’t going to cut it. Money in the bank is the only thing that works. And that’s cool. Besides, you’re doing quite well with or without that cash in the bank!

    Thanks for stopping by.

    Best wishes!

  113. Hi Nate and DM,

    I was just thinking out loud. I think if someone is saving money consistently, and putting them to work for them, they don’t really need leverage for investing (debt). If you are too leveraged, you are taking bigger risks. I have never taken more than 1 – 2% in margin, and I always paid it off. It might be appealing to lever up, but the downside could be terrible.

    DGI

  114. Hey Dm, I agree with you 100%, I have 2 mortgage one personal (3.5%) and one rental (4.5%). Since the interest rate is so low, I figure I can invest most of my capital in the stock market and gain a better return. Beside I can always write off my expense on my rental property and deduct my mortgage interest.

  115. J,

    Great points there. Sometimes the tax code makes the decision easy for you. In my case, the deduction added to an already-low interest rate makes my decision pretty easy. That being said, one day this monkey will be off my back once and for all.

    Thanks for stopping by!

    Cheers.

  116. I’m in Boston so housing costs are pricey. I live in town to avoid a 60+ minute commute and for the city lifestyle, but it’s a big trade-off. These last few months, I’ve been toying with the idea of moving back to my hometown and if things change with my job situation, the time might be right to make a move. Closer to family & friends and lower cost of living – has a lot of appeal! ☺

  117. How much do you have in the bank? Since you tell us how much your stock portfolio is worth and how much you spend, I’m curious. As for me, I have 80k. But, my stock portfolio is only 27k (All in AAPL). I’m waiting for a crash plus I got that inheritance as long as I outlive my dad.

  118. WMX,

    Great question. My cash in the bank tends to oscillate quite a bit. I usually keep around $4k-$5k in the bank for emergencies and to pounce on stock opportunities, if necessary. However, right now I have around $9k in the bank. The balance is a little higher because I’m transitioning from a conventional full-time job to writing, and my income will likely not be as reliable. So I’ve built a little cushion in there.

    $80k in the bank is pretty strong. I wouldn’t want to have that kind of cash sitting on the sideline, but we all must find what works for us. 🙂

    Cheers.

  119. Good discussion. Here is my situation, and the risk assessment I place.

    I have a mortgage of about $216K. The interest rate is fixed at 2.75% over 14 more years. (Sweet)

    Now, I could just pay this off, but I don’t. Why? The house taxes as well as interest are tax deductible. We are in a higher tax bracket(33% I think).

    So say I have this invested in a utility or similar lower volatility dividend payer at 3.5%. The dividends are taxed at a lower rate(15%) plus state tax(7%) – total 22%. Plus I take in a higher amount than the interest on the loan.

    This works mathematically for me, except to consider risk and upside. Here’s how I gauge that. The utility stock price after 14 years needs to be what I have in it today and the amount of dividends they pay need to only equal what they are today.

    Since I think its a better bet that the price will be at least today’s price after 14 years, and the companies have a long term history of INCREASING dividends, its a bet I’m willing to take.

    We have no other debt, and I could pay this off if desired at any time. I would never borrow money to trade on margin, and if the interest rate were higher it would be a different story.

    An even better option is having some of this money in Berkshire Hathaway, which pays no dividends. So I get the tax writeoffs and no immediate income. The income here just goes into the book value.

    Anyway thats my story.

  120. envisionhappy,

    Great stuff there. Thanks for stopping by and sharing!

    I’m with you. The odds of not seeing a better return than 2.75% over the next 14 years, even after factoring in for taxes, is highly unlikely. The stock market has returned almost four times that over the long haul, and I don’t see any reason why it would be dramatically different over the next 14 years. And even if you only get half of that you’re still coming out far ahead. 🙂

    Keep up the great work over there!

    Take care.

  121. I know this is an age-old question, but perhaps my situation might be slightly more unique, given that I was a little older when I started med school:

    Should I stay in the market or cash out to pay down medical school loans or both?

    I’m a medical student graduating in May with $294-320k in medical school debt with 10 loans ranging from 5.4%-7.9% (6.7% avg across all loans). I have a brokerage account (just stocks, not retirement) with Edward Jones and a Fidelity 401k from my pre-medical school years working. Those accounts total $185k. I’m single, rent an apartment, have no dependents, and have no credit card debt. I already have an emergency fund set up with 6 months of living expenses. I will do the standard residency then attending physician career path (no interest in public service or military service).

    Goal – get out of medical school debt ASAP while preserving my financial reserves (if possible and wise).

    Method – I’ll likely opt for IBR (income based repayment) while during residency, which I will begin this July. Residency will last 3-4 years depending with a salary of $46-49k. Thereafter, I may opt for Standard Loan repayment or a Graduated option with my first big job income of $150-250k.

    I’m out of my depth on this one and have zero idea what to do!

  122. Philip,

    Thanks for stopping by!

    That’s some serious student loan debt, my friend. But I suppose if you leverage that into a great job in the medical field where you’re making well into the six figures then you’ll be okay.

    I can tell you what I would do. I would keep the emergency fund. But all the other liquid capital you have invested in equities – you mentioned both taxable and 401(k) accounts – I would use to aggressively pay down that debt. I don’t know what kind of long-term capital gains/losses you’re sitting on, so that’s certainly something to consider. But paying off the student loans is a guaranteed 5.4% to 7.9% return. Meanwhile, the broader stock market is near all-time highs.

    The IBR will help your cash flow while you’re making much less money, but it won’t alleviate the weight of the debt in the long term. And paying little now will allow the interest expenses to build.

    Once you have those loans paid off and you’re making $200k or so you’ll be able to aggressively invest anyway. And I hope by then the stock market is offering better deals. But your cash flow situation will be substantially better then.

    That’s what I would do. Perhaps other people will give you other advice, but the interest rates on those student loans should be taken very seriously. That’s a real drag on your ability to build wealth. Get rid of it and you’ll be able to supercharge your cash flow, and with it your ability to aggressively save and invest.

    Best of luck! 🙂

    Cheers.

  123. Don’t forget risk of stock market fluctuation, loss of income, and anything else that could go wrong to make you regret your decision. I remember when I lost my job and my forbearance was denied. When I found employment, the Dept of Education garnished my wages and while hounding me to pay up during a time that I fought to make just enough money to eat.

    During that time, my student loans accrued an ungodly amount of interest, which I am now paying off at a roadrunner’s pace over 10 years later now that I have a 6 figure income and no other debt.

    As long as you keep in mind that there is more to personal finance than math, and understand the risks before you make your decisions, you should be ok. I was all about the math and out-earning the interest rate on my debt. Never again. I learned that when Murphy moves into your house( I had such a great big house, once, too! ) , he brings his cousins broke and desperate with him.

  124. Komrad,

    Thanks for dropping by!

    There are always risks. And that goes both ways. I think we can look at the results over the last five or so years now and conclude that I was much better off not paying off the loans aggressively. For others, it’s less about math and more about just having the monkey off their back. Nothing wrong with that, either.

    Not sure why they denied your forbearance request, though. I’ve requested two and received them both with no issues. And if your income really takes a dive, you can simply apply for IBR and likely pay little or nothing at all. The flexible nature of this debt makes it very attractive, in my view. And that’s before even factoring in the low rates and tax-deductible nature.

    Cheers!

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