Six Figure Student Loans

I'm 23 and graduated college last year and have thus far paid my student loans down to $163,000 (yikes), with an interest rate of 6.62%. Before taxes I will make ~$80,000 this year. I work in a very stable industry and my company gives a raise between 4-8% every year so my income stream is a minimal concern. I currently have $8,000 in savings and $25,000 in a brokerage account. I am currently renting an apartment but will be moving back to my parents once my lease expires (June 2021) as covid has paved way for me to permanently work from home (no need to be close to the city). From there my expenses will be almost non-existent as my parents are much more than understanding of the amount of money I owe and willing to help me in any way possible. We have a great relationship so I'm not in any rush to get out but I would like to buy my own home as quickly as possible so they can retire and not have to think about supporting me in any way. I have a multitude of questions on how I should be allocating my money... Should I empty my brokerage account into my loans? When is the best time to refinance my loans? Should I try to completely elimate the loans before I start saving for a home? Money management has never been a big problem for me and its almost natural for me to live somewhat frugally but its a big number to have in front of you at such a young age and I would appreciate the advice from someone who has a little more life experience than myself. Thanks in advance!

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  • I would definitely get that student loan monkey off your back before buying a house. Luckily you've got a great income (as Dave Ramsey says, you've got a big hole but also a big shovel!) and are in a great situation to really buckle down and get rid of this debt. Personally I would drain the brokerage account and probably at least some of the savings account (why have money sitting in a savings account when you're paying interest?), throw that at the debt and then put like 75% of my income towards loan payments. You could easily be debt free with a nice down payment for a house in less than 5 years.

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  • I don't know much about optimal timing for refinancing student loans specifically, but interest rates across the board look really low right now, so you should be able to get a better rate if you try (especially because your income situation is solid).

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  • Put aside one month of expenses and then dump the savings and brokerage onto the student loan. There, doesn’t that feel better already. You probably won’t get a lower unsecured loan rate. If your parents have some money perhaps you could borrow from them at a lower rate and they probably would get higher return than they already have. Just focus on the student loan right now and kill it before thinking about a house or investing. 

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  • Even though you have a big student loan balance, you have a great starting salary and level of savings! I have about $200,000 in student loan debt that I have been paying for quite a while. I won't go into long-winded detail here so we can focus on your situation, but let's just say that at the peak of my loan balance, I owed about $300,000. My repayment really picked up once I started getting good salary raises, and it picked up once again when I was able to refinance my loans a couple of years ago from a 7.625% interest rate to a 3.95% interest rate. 

    My advice to you would be, as step one, trying to refinance your loans. Your interest rate is high, and you will likely be able to get a much better one, as rates have fallen quite a bit in recent years. Look at the amount each month that you are paying in interest at 6.62%. Based on your balance, that is nearly $900 per month. Think about how great it would be to get that down at least a few hundred dollars per month. That money saved could be put right back into the loan's principal in the form of extra payments. Honestly, the best time to refinance is now, as long as you can get a good rate.

    When it comes to balancing the desire to save with the desire to repay your loan more quickly, remember that you don't have to just choose one, and can split your efforts while doing both. For example, if you get a $5000 bonus at work, perhaps save/invest $2000, put $2000 towards the loans, and treat yourself with the remaining $1000. I would actually recommend you *not* drain your brokerage account. Take a look at compound interest calculators and you will see the power of exponential growth coupled with time. For me, it feels good to be making progress on *both* paying down my loans and saving for the future.

    When it comes to the question of saving for a home, banks will certainly be more willing to lend you money once you've improved your debt-to-income ratio and lowered your monthly payment obligations. Once you've done that, if you decide that you really value purchasing a home, then go for it! 

    Happy to talk specifics and give you more detail on how I went about refinancing my loans, if you send a private message.

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  • What kind of growth are you seeing in the brokerage? That has a pretty big impact on how you should approach this. If that's your only long-term asset, I would be hesitant to wipe it out, especially as you would still have a significant student loan balance after doing so.  Also, you need to consider potential taxes/fees for withdrawing from your brokerage. That alone may make it not worth doing at this time.

    Honestly, it probably makes sense to engage with a proper financial planner to go over all this rather than asking for advice on the internet. (Esp for questions like "When should I refinance my student loans") The cost to do so is likely going to be low because your current portfolio is pretty simple. You may also have access to this as an employer-provided benefit. If you go this route, you'll want a FP whose services are fee-based, (You don't want a 'free' FP that makes their living on commissions) ideally one which is a fiduciary. 

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  • Try to refinance the student loans and don't touch your brokerage accounts to pay them down.  Maximize your retirement contributions, put together a plan to save for a down payment for your house, and if you have income left over (which, given your expense situation, sounds like you should) you can use what's left to accelerate your student loan payments.

    Unless you're talking about super high-interest credit card debt, it is almost never worth taking money out of investments to pay down loans.  Also, retirement investments are super critical for you now because you have a long enough time-frame on retirement that you can generate really substantial returns.  Finally, the bank will treat your retirement account balances as an asset when it comes time to get a home loan.  They will treat your student loan debt as a negative on your net worth and as an expense against your income (debt to income ratio).   Paying your student loan debt faster will increase your net worth, but unless you keep refinancing, it won't lower the minimum payment!  But retirement savings also increase your net worth while earning average returns that should out-perform your loan's interest rate.

    If you think of debt as a tool and can  manage it, then it is better to have debt than not have debt.  That money you owe can be more productive doing other things.  Inflating your lifestyle isn't one of those things, so if you can't manage your debt, or tend to get in trouble with debt, then it is probably better not to have it in the first place.

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  • If it were my life, I would:

    • Keep your savings and brokerage account as-is. The world is fairly uncertain right now, and I'll bet you could survive a year on that money, living at home, if you lost your job.

    Option 1:

    • Put enough into retirement accounts to get your company match (probably 3-6%).
    • Put every extra dollar toward your student loans. Make an aggressive goal to pay them off within X years. If it were me, I'd say 4 years in your situation.
    • When everything is paid off, max out your retirement savings. Anything extra, put toward saving for a house.

    Option 2:

    • Max out your retirement savings.
    • Anything extra, put toward saving for a house.
    • Continue to pay off your student loans at a reasonable rate (10 years?).

    I would not prioritize saving for a house (you can always rent, if you don't want to live with your parents) over saving for retirement or paying off student loans, personally. I'd tackle one or both of those goals, first, because they will benefit you most in the long term.

    Also, buying a house is easy, if you prioritize those things. You can pull together 5%, 10%, 20% whatever you want for a downpayment, very fast, once you've focused on those items for a while.

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