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Pay off student loans or invest or both?

Maybe someone can give me a hand with some financial planning decisions. I work in the US but went to school in Canada.

The scenario:

Have ~20k US in a ING type account making 5%.

Have about 14k CDN in student loans:

1) 6700 w/ interest being prime (6%) + 2.5% = 8.5%

2) 5300 w/ interest being prime (6%) + 2.5% = 8.5%

3) 2400 w/ interest being prime (6%) + 1% = 7.0%

Right now I am only paying $231.91 CDN a month to these loans and can't claim the student loan interest deduction since I am not earning anything in Canada to deduct it against.

Have ~40k in 401k accounts.

Have a physical asset worth ~10k that I could liquidate but would rather not as it is appreciating quite well.

Make ~70k a year, ~4.2k net after 6% matching 401k, taxes etc, rent an apt at ~1000 a month + util and probably have $500-$1000 a month to save, depending on car expenses, entertainment etc.

Own an old car that runs well and is paid for but requires maintenance.

No dependents.

No CC debt.

Credit score 750

My question is what to do with the money in the ING type account and if I should liquidate my physical asset to pay off debt. I could use the savings to pay off my student loan debt, but then have very little left over for investing/emergencies. I could try and invest the money in the stock market and try to make more than what I am paying in interest on the loans, or leave it as is making 5%. As I see it, I am losing money every day because the interest on the loans is more than I make with the interest in the savings account so maybe I would be better paying off the loans.

The other thing is that the loans are in CDN dollars so how the US-CDN exchange rate changes can change things as well. If I could have seen that the US dollar would drop 25% against the CDN dollar since late

2002 I would have paid as much off as possible back then but foresight is 20/200. Is there a better way to allocate my resources/debt? I would like to have something for emergencies, but would also like to see my money earn better than 5% and of course getting my loans paid off in cash thereby saving future interest would be good as well as there is no penalty for early payment. Any financial experts have any advice? Thanks very much!
Reply to
a_riot
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If I woke up in your situation, that is what I would do. Pay off the student loans and any consumer debt. Use the ING money. Don't touch the 401K money. Then save money to buy a car with cash so you can avoid getting back into the debt trap.

-john-

Reply to
John A. Weeks III

Me too. Once you've paid off the student loan, your regular monthly expenses will be that much lower, so you won't need such a large emergency fund. Rather than just adding the monthly loan payment money back into your regular budget, you might start investing that amount instead.

-Sandra

Reply to
Sandra Loosemore

I went through this situation after graduating in 1997 from college with ~60k student loan debt. Others I went to school with were in a similar situation.

I aggressively paid off all the loans. I did not consolidate and paid an extra $25 on each of my 4 student loans (while also sending 10% to

401k). Within a year the principal had shrunk significantly, 3 years later the first was paid off, 7 years later I was student loan free. I bought my first house 3 years after graduating and upgraded to a bigger house 3 years after that. Several of my fraterinity brothers have yet to buy their first house... so it depends on what your priorities are.

So my answer would be- pay down the debt. How quickly you pay it down would be up to you... whether you send extra money per month or use the cash to pay it all off- decide what is best for you.

I would make sure you are saving 10% of income for retirement (in 401k/ IRA accounts). I would then work to eliminate debt. Generally speaking I am against consolidation (usually combines all the debt to point it cannot be seperated and extends repayment period from 10 to 20 or 30 years).

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Reply to
jIM

You're wise to reconsider your strategy. In your situation, I'd absolutely drain that ING account down and get rid of those student loans. You're getting no tax benefit, and you're going 2-3.5% backwards on that money right now.

You have more than enough in the relatively low yielding ING account to do this.

Good. I'd keep those. For me, I'd increase your contribution rate unless you're actively saving liquid funds for a future business venture, purchasing investment property, or have some other reason to be more liquid. the tax benefit of 401k contributions is such that if retirement savings is important to you, you really should be maximizing the benefits there.

Then again, you have your aging car to worry about, perhaps start svaing for that.

Cool.

Excellent. You should qualify for great incentive financing on a new car when you need it (or do the fiscally prudent thing and buy a quality late model used car). Buying cars with cash is nice though, but if you can finance 10k of the vehicle for 2% annually and pay it off in 2 or 3 years, why not use their money if you can do better in the market?

Depends on how much said physical asset is appreciating relative your other options. If it's not making more than 5-8% with little risk you might consider dumping it and looking into the market.

You got it!

-- Todd H.

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Reply to
Todd H.

"Todd H." wrote

Only up to the matching. After that, the 401(k)'s offerings and fees may make it disadvantageous compared to a regular taxable account.

See

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for more discussion of this.

Reply to
Elle

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