Debt Elimination Question

[VikingsGuy]

Is your $48k in cash on hand or is it part of an unrealized capital gain on stocks? If unrealized gain, unless you have a crazy interest rate on the SL or really hate the asset, you may be "richer" by living with the interest on the SL and riding the pre-tax compounding of the asset.

Do you and your spouse have 6 months of expenditures in cash or other equally liquid assets? If you have debt at a reasonable rate but no cash savings cushion then focusing on early debt payment is shortsighted advice.

If you already have the reserve fund (and not an unrealized asset mentioned above) then pay off whichever has the highest interest rate (even tenths count in the long run). If the interest rates are close then payoff the one with the largest monthly minimum as that can then be turned to the second debt. If that is the trailer then pay it off and half the SL. The sale value of the trailer is an illusory advantage, its sale value is the same if you sell it and pay off its loan or sell it loan-free and then pay the SL. It nets identically all the finances being equal.

 

[VikingsGuy]

In the fall of 1984 my first quarter of university tuition was $274. In the fall of 2021 my payment for my son's first quarter of university tuition (not incl. room/boarding/books/etc) will be $21,500. Now that's what I call inflation.

 

[Deleted member 28227]

Is your $48k in cash on hand or is it part of an unrealized capital gain on stocks? If unrealized gain, unless you have a crazy interest rate on the SL or really hate the asset, you may be "richer" by living with the interest on the SL and riding the pre-tax compounding of the asset.

Do you and your spouse have 6 months of expenditures in cash or other equally liquid assets? If you have debt at a reasonable rate but no cash savings cushion then focusing on early debt payment is shortsighted advice.

If you already have the reserve fund (and not an unrealized asset mentioned above) then pay off whichever has the lowest interest rate (even tenths count in the long run). If the interest rates are close then payoff the one with the largest monthly minimum as that can then be turned to the second debt. If that is the trailer then pay it off and half the SL. The sale value of the trailer is an illusory advantage, its sale value is the same if you sell it and pay off its loan or sell it loan-free and then pay the SL. It nets identically all the finances being equal.

I tend to risk private loans much higher than other debts just because of all the crazy terms, and some of them are really f-ing crazy. For me if it was higher than 5% I wouldn’t even thing about paying it off.

I’d rather default on a trailer and have it repossessed than default on a student loan and have my pay check garnished, also as the OP said you can’t discharge them with bankruptcy, and depending on the terms, it won’t discharge if his son was to die.

Federal, totally different can of worms, same with certain private companies, there are some companies that you can refi with that have terms that aren’t completely batshit crazy.

 

[VikingsGuy]

I tend to risk private loans much higher than other debts just because of all the crazy terms, and some of them are really f-ing crazy. For me if it was higher than 5% I wouldn’t even thing about paying it off.

I’d rather default on a trailer and have it repossessed than default on a student loan and have my pay check garnished, also as the OP said you can’t discharge them with bankruptcy, and depending on the terms, it won’t discharge if his son was to die.

Federal, totally different can of worms, same with certain private companies, there are some companies that you can refi with that have terms that aren’t completely batshit crazy.

If federal it's kind of "odd life insurance" - if you die it is written off (at least in my generation of terms) - just put the payoff amount in an index fund, knowing you could pay it off if in a crunch, but also have the funds for other needs and it grows faster than the interest on the loan and if you die your spouse/kids get the fund.

But folks get emotional about the topic. My wife insisted on paying her's off the minute we could. In contrast, I put funds that could have paid of mine in a vanguard fund and have way more now than we benefited from paying hers off early. We were both at 3.25% - where the heck could you get an unsecured 3.25% loan to invest in stock as a working stiff back then - but marital harmony prevailed over finance on that one.

 

[Pucky Freak]

Playing with fire is a great way to get burned. Use your savings to eliminate both debts tomorrow and swear off all future borrowing.

 

[ChrisC]

I'm surprised the student loan interest rate was about the same as the trailer loan. I recall some of my private student loans having a rate of nearly 11%.

Not necessarily a numbers approach, but I would dump the student loans just for the fact that just hearing the words "student loans" sends a chill up my spine more than any other debt I've ever had. It's crazy that monthly payments are more than mortgages...

 

[VikingsGuy]

Playing with fire is a great way to get burned. Use your savings to eliminate both debts tomorrow and swear off all future borrowing.

For a disciplined person that is unnecessarily conservative advice, for one who lacks discipline it won’t matter much. Debt is not bad in and of itself. Answer for OP turns on about a dozen considerations to determine prudent option, and we are missing more than half of them. YMMV.

 

[Deleted member 28227]

I'm surprised the student loan interest rate was about the same as the trailer loan. I recall some of my private student loans having a rate of nearly 11%.

Not necessarily a numbers approach, but I would dump the student loans just for the fact that just hearing the words "student loans" sends a chill up my spine more than any other debt I've ever had. It's crazy that monthly payments are more than mortgages...

@VikingsGuy… yeah the Obama years were really shitty for loans. I did a total overhaul of my wife’s but she had a bunch in the 9% range including a federal at 8.5%.

If we had a loan at 3.25% I’d been investing as well lol

 

[David58]

Y'all have pretty much reinforced the approach of wiping off the student loan. I think it is about 7%. Helping pay the national debt.

The trailer is likely worth a bit less than we owe, but the payment is very manageable. In fact, our payments on our total loan balance is not really the issue, just trying to use logic as to which to clear first. The SL is the most hateful, and with that payment gone we can basically pay 3X the trailer payment, or quickly wipe a couple of other smaller ones.

My son got a good job with a good degree, but in retrospect, he might look differently at where he went to school. He's doing a graduated payment, they get bigger with time but gone in 10 years the way he financed the stuff.

My last quarter in college, spring '81, my budget changed from $800/quarter to $1000 for that last one. I worked for my dad at $1/hour and he paid most of my school fees (which totaled a bit over $250/quarter, plus room and food). I had to earn gasoline, play money, etc, which I did as a student helper in the department (tutoring, grading papers) at $1.77 an hour. Since then, access to student loans has allowed the costs to soar, since the clientele has the money - and administration and garbage 'studies' have ballooned.

I wish I could have paid for my sons' educations, but we started to run out of gas once they both finished private K-12. Even state schools in Oregon are outrageous - folks send their kids to UofO for the "experience" (read, PARTY) at well north of $50K a year, and the programs at the state schools are set up for kids to take six years to get their 4-year degree. In the end, the kid did better to pay more for private school - they pushed the kids hard up there to get done in four years because the university recognized that they were expensive. The big dollars came in grad school (OT). But with an OT degree, he earns a good salary.

I've rambled a bit, but want to thank you all for your thoughts. My approach didn't change, but you helped me think it through clearly which is what I need - the conversation keeps me from making bonehead calls. Even those of you that recommended a different course make me think, so, again, thanks! Retirement in 23 months, and except for mortgage, the slate should be clean. And up here, with the perpetual undersupply of houses, our hopes are that in MT or ID we will be able to pay cash and have no debt. Fingers crossed.

 

[VikingsGuy]

@VikingsGuy… yeah the Obama years were really shitty for loans. I did a total overhaul of my wife’s but she had a bunch in the 9% range including a federal at 8.5%.

If we had a loan at 3.25% I’d been investing as well lol

Ya, I was shocked by how the fed gov screwed kids and their families when they switched to variable rates but no lock in or refi option.

That and universities convincing society every kid should have a college degree, spending tens of billions on luxury dorms and spa facilities, and then having kids pay for inflated cost “communications degrees” with “free loans” has been a travesty of historical proportions. If we are honest, university presidents have committed a far bigger scam on young Americans (and their families) than mortgage bankers.

 

[thatsjet]

@David58 even though "Dave" would say sell it all until you can pay cash for it, only YOU can make the right decision for YOU and your family

I like Dave too, but at 50 I also have to weigh the value of the time I spend here on earth, hunting, loving my family, and enjoying all of God's great creation.

Sounds like you have a plan. Go for it and don't give another thought to it. I think the psychological "win" you'll feel from eliminating the SL will give you the boost you need to clear the rest in plenty of time.

 

[Deleted member 28227]

Ya, I was shocked by how the fed gov screwed kids and their families when they switched to variable rates but no lock in or refi option.

That and universities convincing society every kid should have a college degree, spending tens of billions on luxury dorms and spa facilities, and then having kids pay for inflated cost “communications degrees” with “free loans” has been a travesty of historical proportions. If we are honest, university presidents have committed a far bigger scam on young Americans (and their families) than mortgage bankers.

Agreed. A number of trustees at my alma mater were on the board of Bear Stearns… so same folks lol

 

[VikingsGuy]

Y'all have pretty much reinforced the approach of wiping off the student loan. I think it is about 7%. Helping pay the national debt.

The trailer is likely worth a bit less than we owe, but the payment is very manageable. In fact, our payments on our total loan balance is not really the issue, just trying to use logic as to which to clear first. The SL is the most hateful, and with that payment gone we can basically pay 3X the trailer payment, or quickly wipe a couple of other smaller ones.

My son got a good job with a good degree, but in retrospect, he might look differently at where he went to school. He's doing a graduated payment, they get bigger with time but gone in 10 years the way he financed the stuff.

My last quarter in college, spring '81, my budget changed from $800/quarter to $1000 for that last one. I worked for my dad at $1/hour and he paid most of my school fees (which totaled a bit over $250/quarter, plus room and food). I had to earn gasoline, play money, etc, which I did as a student helper in the department (tutoring, grading papers) at $1.77 an hour. Since then, access to student loans has allowed the costs to soar, since the clientele has the money - and administration and garbage 'studies' have ballooned.

I wish I could have paid for my sons' educations, but we started to run out of gas once they both finished private K-12. Even state schools in Oregon are outrageous - folks send their kids to UofO for the "experience" (read, PARTY) at well north of $50K a year, and the programs at the state schools are set up for kids to take six years to get their 4-year degree. In the end, the kid did better to pay more for private school - they pushed the kids hard up there to get done in four years because the university recognized that they were expensive. The big dollars came in grad school (OT). But with an OT degree, he earns a good salary.

I've rambled a bit, but want to thank you all for your thoughts. My approach didn't change, but you helped me think it through clearly which is what I need - the conversation keeps me from making bonehead calls. Even those of you that recommended a different course make me think, so, again, thanks! Retirement in 23 months, and except for mortgage, the slate should be clean. And up here, with the perpetual undersupply of houses, our hopes are that in MT or ID we will be able to pay cash and have no debt. Fingers crossed.

At 7% your priority should first be 6 month cash emergency fund followed by paying off that SL. No arbitrage chance on those funds at that rate. But no matter how much we all hate debt, the 6 month fund must always be the first priority for every family.

 

[VikingsGuy]

In the fall of 1984 my first quarter of university tuition was $274. In the fall of 2021 my payment for my son's first quarter of university tuition (not incl. room/boarding/books/etc) will be $21,500. Now that's what I call inflation.

 

[Pucky Freak]

Debt is not bad in and of itself.

Debt, in and of itself, is a vehicle that legally requires a transfer of your wealth to someone else’s bank account. I’ll concede that there are some scenarios where that steep cost is outweighed by the benefit of what is received in exchange, but in most cases it is not worth it.

A majority of Americans take all kinds of debt for granted...just part of life. That’s a narrative created, promoted, and sold by the financial industry, because they want our money to fund their lifestyle. I never considered otherwise until someone explained to me that I can enjoy 100% of my own money if I just save up and buy things instead of paying origination fees and interest.

OP said he is approaching retirement and asked which loan to prioritize. That’s scary. I think it’s the wrong question to be asking.

 

[rwc101]

I knew higher ed administrations were fishy when I had to bring rubber boots to work at LSU's library because the basement flooded with every hard rain but the rec center was having a lazy river installed.

 

[Southern Elk]

I’m going to sound like a dick saying this, but I’ll say it anyway. I don’t think you should borrow money to buy a trailer.

I say dump the trailer, pay off the student loan, and save up and pay cash for a used trailer. It won’t be as nice, but you will be able to save a ton of money without those two payments.

 

[David58]

At 7% your priority should first be 6 month cash emergency fund followed by paying off that SL. No arbitrage chance on those funds at that rate. But no matter how much we all hate debt, the 6 month fund must always be the first priority for every family.

That fund is very liquid and stands in reserve.

 

[David58]

I’m going to sound like a dick saying this, but I’ll say it anyway. I don’t think you should borrow money to buy a trailer.

I say dump the trailer, pay off the student loan, and save up and pay cash for a used trailer. It won’t be as nice, but you will be able to save a ton of money without those two payments.

The trailer will be paid by the time we retire, preferring to use somebody else's money to keep our funds where they are - again, the trailer can be sold and funds recovered if we so desire. Interest of course is deductible as second home (not a justification, but I am doing my best to use somebody else's money on it). 23 months till the ball drops, the slate will be clear by then but for mortgage, the question posed originally was basically which of the two to pay first from the standpoint of flexibility, liquidity. Again, thanks all for your opinions!

 

[VikingsGuy]

Debt, in and of itself, is a vehicle that legally requires a transfer of your wealth to someone else’s bank account. I’ll concede that there are some scenarios where that steep cost is outweighed by the benefit of what is received in exchange, but in most cases it is not worth it.

A majority of Americans take all kinds of debt for granted...just part of life. That’s a narrative created, promoted, and sold by the financial industry, because they want our money to fund their lifestyle. I never considered otherwise until someone explained to me that I can enjoy 100% of my own money if I just save up and buy things instead of paying origination fees and interest.

OP said he is approaching retirement and asked which loan to prioritize. That’s scary. I think it’s the wrong question to be asking.

I respect that each person can chart their own path, so the following is not directed to you @ElkFerver2, but for others that are still in the learning process I will respond.

This is fundamentally flawed financial logic. As with most things, extreme approaches on both sides of a topic are rarely the right answer for most situations.

To under-use “smart debt” is to over pay for big good assets a such as homes (as their prices rise faster than the value of the cash you are saving to buy). You also can lose monumental gains while paying someone else’s mortgage via rent payments.

An underuse of smart debt can minimize growth of your overall net worth and thereby make you more dependent on your employer, your government SS, and your pension - three things I trust a lot less than index funds or 2.85% mortgages.

It’s like saying because too many Americans abuse opioids that I won’t take take any meds and throw insulin in the trash. There are good meds, bad meds and good meds used badly. Debt is the same.