Post # 1
Bees, I’m a professional bee with tons of debt starting with post-graduate school. I started making a 6-figure salary a year or so ago, and I support a husband who only works part time, so I’m looking for ways to max out tax exemptions for the future. I want to meet with a financial planner to get into the details of how to go about paying off my debts strategically to meet this goal. But I thought I’d ask financial bees for their thoughts on my situation to get a “second opinion” in advance. So here are my debts:
around $165k in student loans on 30-year payment plan 3.125% interest rate
mortgage is around $425k at 3.99% interest rate and 30-years as well
car payments around $500/month for 5 years at a 1.99% interest rate (due to be paid off in November 2016)
home improvement loan of around $12.5k with 0% interest rate, will be around $500/month x 2 years (due to be paid off in March of 2015)
I should also add that I’m maxing out my 403b/401k savings plans and putting away around $30k/year towards our retirement. With all this in mind, which would you start paying down and why? I feel like the mortgage is the obvious based on the interest rate. But at the same time I think the tax benefits might outweigh paying that off faster, for example things like qualifying for tax/interest deductions and for scholarships for any future children. Am I wrong? TIA!
Post # 3
i am paying off my car loan first and with the spare cash i have at the end of the month is going into a high interest savings account and then we are paying off a lump sum off the mortgage at the end of the year. that way it comes off the capital not the interest.
Our mortgage is over 35 years and most of what we pay each month is interest.
Post # 4
Pay off the debt with the highest interest rate first, that’s generally the rule.
Although in your case you want to get rid of the “bad debt” first. Ie, the home improvement loan. The good debt, like your student loans and mortgage should be second, with the priority on the highest interest rate first.
Post # 5
Your mortgage and HIL (if taken as a second mortgage) offer tax benefits that, in this economy, benefit more than early payoff. Paying the car off first gives you a “quick win” for almost instant gratification, and allows you to begin saving that car payment for your next vehicle, provided you pay yourself after the loan is retired.
IMO, after you have the car paid off, I’d work on the student debt, and then finally work on the mortgage.
Post # 6
Car loan because you get absolutely no tax benefit at all for it. With a mortgage, you can itemize the interest expense on your schedule A and with student loans, you can take the interest expense as a deduction on page 1 of your 1040. The home improvement loan is currently interest free, so I wouldn’t worry about that as much if you’re looking to just pay one of them off immediately.
Post # 7
How long have you had your mortgage, do you plan on staying in that home? Would it be worth refinancing? We just went from a 3.785 to a 3.325 on a 400k mortgage and that cut payments almost $200/month.
With the rates you have, you just about meet or beat inflation, so I actually don’t really think there’s a rush to pay any of it off. I don’t have student loans so I’m not familar with the tax advantages, but I thought I’d heard from others that if you make over a certain income, your student loan interest is not deductible? Car pay interest isnt right? So even with the rate so low, I’d probably just pay that off and call it done.
As long as the interest is deductible for student loan and mortgage, I wouldn’t bother paying it off early. We were aggressively paying down our mortgage, and recently decided that it just wasnt worth it. It was better to keep that money and invest it for a 5-8% growth (not guarenteed, but fairly safe portfolio) than to pay down the mortgage faster. We’d done a bit of reading and research to come to that, but heres the article that we read that put it best and was exactly what we were thinking. http://www.heracliteanriver.com/?p=478
Post # 9
@MRSsrm85: Not necessarily true, there is a lovely income cap to deducting student loan interest, 150k for a married couple
I would pay off the car loan first
Post # 10
I’d usually say highest interst rate first because most debt payment plans include a bunch of credit cards. I would attack the car loan first despite the low interest rate. Why? Because that will be easy to knock out quickly, it would still save you SOME interest, and once its gone you can start throwing that exra $500 a month at something else – like your student loans. Gives you more paying power that way.
Post # 11
@LGenz: Yes, but OP sais she started making a 6 figure salary a year or so ago. If she’s already at $150k only a year later, I want her job! I went under the assumption that she is under $150K.
Post # 12
car cause its not doing you any good just sucking up money
Post # 13
Since the interest on the mortgage and SL is deductible and also your longest term debt, I’d worry about the car. I also believe that when you have multiple forms of debt (autos, credit cards, etc.) it makes you feel more accomplished when you can knock one off at a time….which is entirely possible in your financial situation.
Also, I haven’t had SLs since 2005 but did they change the number of years you could deduct interest? My exH had a 10 year loan and the number of years (back then) was 5 so I had to scramble to pay it off by the 7th year since there was no more tax benefit.
Post # 14
Usually I would pay off whatever has the highest interest rate, but in your case I would pay off the car first so you aren’t getting hit with that interest. After that, I would work on your student loans.
I carried no debt with me when I got married but my husband had a car and student loan. I paid off the student loan with money I had from selling my home. Now we are putting as much as we can towards the car, which we should have paid off by the end of summer. Then it is all about the house.
Post # 15
@pinkshoes: That’s what I thought too. We literally just bought the house at the end of January, and I qualified for a physician loan so I had to put 0% down. So basically, I have 30 years to deal with that, and doubt I could ever refinance for a lower rate than what I got. But I could totally undertand why if you have any equity built up and are at a rate higher than 4% you should definitely talk refinancing!
@MRSsrm85: Bingo! We make more than $150k as a couple (I just graduated residency/training and am now a full physician), so my $10k+ of student loan interest last year was not deductible. Made me want to cry. But it is the cost of becoming a professional in any field now. 🙁 At least now with the house, I should be getting some income back rather than paying Uncle Sam the way I have to this year!
@texasbee: Oh I had no idea about the time limits to deducting interest on student loans either! My husband has student loans too, though nowhere near as crazy in amount as me (and mine are purely from medical school, nothing from undergrad!). This is the type of question that would be great for a financial planner. I wondered if now having the house would somehow allow us to deduct the student loan interest. But if it’s purely income based, we’re screwed. Everywhere else in the world, as long as you have the test scores, you can become a doctor for essentially free. In the US, it’s money that reigns supreme!
So the consensus seems to be the car then student loans, and I was leaning in this direction too. Thanks so much bees! 😀
Post # 16
First off, don’t touch your 401K/retirement contributions. You are doing great here so keep that up!
I’m assuming you currently have a jumbo mortgage since your mortgage amount is $425K. If the conforming rate limit for your area is $417K (can be higher in some areas), rapidly pay down your mortgage to the conforming rate limit, then re-finance to a fixed lower rate. If you make in the really high six figures (say >$400K), you might want to ask a tax planner about that since I believe the fiscal cliff resolution hurt high income earners with respect to mortgage interest deduction.
Then rapidly pay down your car loan since this isn’t deductible and cars just depreciate.
Then it’s a toss up between additional payments on your mortgage and student loan. If you are out of the income limit for the student loan deduction, then it’s a no-brainer, pay off the student loan first.
Don’t bother paying off the home improvement loan any faster. 0% interest is pudding!
This is just my opinion regarding student financial aid for your children, but unless your debt is huge compared to your income/assets, you can’t expect a whole lot of financial aid for your children. This is all likely going to change in the future since it seems like the cost of higher education is outpacing inflation so it’s not worth worrying about it now.
Just a question out of curiosity…how are you saving up so much for retirement without running into any IRS income restrictions? Max contribution for a 401K is $17.5K, for a Roth IRA $5K, for a traditional IRA $5K. Then there are the income limits for the Roth (~$180K married filing jointly) and the IRA ($115K). Just wanted to know since my Darling Husband and I make over the income limit but would like to save more.