Debt Reduction, Everyday Living

What do YOU think? How aggressive should I be at paying off “good” debt?

My husband and I are having an interesting conversation today over email … I have a fire lit under my arse to see how quickly I can pay off my college debt ($37,500). He has come back and countered “what is the savings to paying off your college loans quickly as opposed to the normal schedule?”

Here is my logic … if I make two payments on each of my college loans every month, I will theoretically have my college loans paid off in four years. This doesn’t take in account future child expenses (no, I’m not pregnant, but it would be nice to have kids within the next couple of years.) and even if I’m aggressive in paying off these loans, I would still be kicking around $400 per month to my “savings account” – a.k.a. my husband. This money would be used towards house projects and eventually towards a downpayment on a different car in the future. (We’re very far from getting a different car, but both of us drive older model vehicles. We’d probably be looking at getting something “newer” in the next five years.)

What’s missing in this equation? An emergency fund and retirement savings. Technically, we have an emergency fund, but it needs to be built up. And in terms of retirement savings, we are looking at setting up a Roth IRA for my husband since he does not have a 401K right now. (I also need to max out what I’m contributing to mine.)

So what do you think? I’m seduced by the idea of aggressively paying off my college loans. As I said to my husband, once that’s done – it’s done. (And actually, once it’s done, then we can turn that money towards paying off our mortgage – that’s about $110,000 in debt that would be wonderful to eradicate in a quick manner.) But there are other factors I need to consider … how would you tackle this problem?

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7 thoughts on “What do YOU think? How aggressive should I be at paying off “good” debt?

  1. Well, it seems like you already know the answer. You should first max out on retirement savings to the extent it creates tax benefits. And you need to have a solid emergency fund.

    You didn’t mention exact numbers for your retirement contributions or total cash savings that could be used in an emergency, and you didn’t mention the interest rate on your college loans versus the mortgage. But I suspect you already know that it would be wiser to shore up the other stuff before you get too aggressive with paying off the student loans (or the mortgage).

    Good luck!

  2. Personally, I wouldn’t put student loans under the category of “good debt.” They are a beast kind of all their own. I think it can be wise to pay them off quickly. (They can’t be discharged in hard times, etc. Think about disability, etc.). Another thing to consider is if you have kids and stay home with them. Even if that is not your plan – it is a common choice once kids arrive. I would think you would want to pay off those loans while you were working full-time. IT’s frustrating to pay off loans when you aren’t generating income from your education.

    But, it depends. If the interest rate is fixed and low, I could see making retirement more of a priority. Well, I think retirement should be a priority, regardless.

    I wouldn’t put a dime towards a reasonable mortgage with a low/fixed rate, unless my retirement was well on track.

  3. Student loans are only considered “good debt” becus they’re paying for something really worthwhile…..a college education. It’s still debt that’s incurring interest payments, right? So I’d want to get rid of it too so you have more of a clean slate when you have kids, and so you can focus on your other priorities.

    If you don’t make a concerted effort to pay it off now, student loans have a way of hanging around forever. Even if the interest rate on them is low, I’m betting the going rate for savings interest is even lower.

  4. honestly i would pay off the student loans first. I hate debt of any kind. It leaves risk out there. Also I would contribute to your 401k to the match and everything else I would put in a roth ira. If you max the roth out after that for both you and your husband then I would go back to putting some in the 401k. Just my 2.5 cents.

  5. I am debt-free and I AM PROUD OF IT! I had my student loans for eight years and once I decided to gazelle intensely pay it off, it took me seven months to do it!!!!!!!
    I have three years worth of emergency funds and NO DEBT!!!
    Financial Peace University changed my life!!!!!!!!!!!!!!! I wish you financial peace and a future of no debt!!!

  6. I’d probably say if you can get 401k matching that should be priority over student loans for two reasons – because of the matching and because you are limited per yer in how much you can put into retirement accounts. So you can’t just pay off student loans first and then start chucking more money into 401k and IRAs if you’ve hit those maximum contribution limits. But you absolutely want to contribute the maximum 401k amount that your company gives you matching on, as that is free money that you can’t get back later. (for example, it would not make sense for me to pay off my home mortgage quicker at a 5% interest rate where I get appx 1/3 of that back on taxes, and forgo my 6% per year 401k matching). And there are tax implications to contributing to retirement accounts (example, maximizing my 401k contribution at 15% of my income per year saves me appx 1/3 of 15% of my income on taxes).

    Personally I would prioritize maxing out retirement over “good debt”, which to me means any debt that you can write off on your taxes. For me that was student loans and home mortgage. While I certainly wish I was completely debt-free, I also take the big life picture into account – $ saved on taxes, tax and $ implications on retirement, equity in my home, what I realistically need for an emergency fund, etc. Also, remember that retirement investments need not be stock-market-based if you’re worried about volitality – all 401ks generally have a more “stable” investment option, and an IRA designation can be put onto anything, even a plain old savings account (I’d recommend at least doing something long-term like a CD with a guaranteed interest rate because long-term interest rates are generally better than short-term ones like savings accounts have).

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