Personal Development for Smart People Forums - View Single Post - Advice on debt RE: student loans/house mortgage

somaziro · 04-26-2007, 05:41 PM

The first thing that I hear when learning about investing is to get your debt under control. I have just graduated from law school and will have debt of 55,500 in federal loans at varying degrees of interest (see below). I also am planning on saving all my money for 1 year after graduation to have 10% to put down on a house, the top of my range is a 135,000 house.

Given that I have crunched some numbers below.

The decision I have to make is whether I should pay 700 a month to paying down principal on my debts or if I should invest 700 a month. I guess the question is over the long run, will I get better returns on that 700 a month invested vs. the interest that I won't have to pay if I paid off my debts.

DEBT
House
135,000 dollar house
with 10% down would be 122,500 loan

taking out a 30 year loan at 6% interest payments would be $735 a month payment

only paying the minimum on the mortgage it would take me 30 years to pay off loan and would pay 141k in interest

paying an extra 300 a month to principal it would only take me 15 years to pay off mortgage and only pay 63k in interest

Student Loan
loan 1
18,500 consolidated at 2.7% over 30 years would be 75 a month

only paying minimum payments it would take me 30 years to pay off loan and would pay 8,500 in interest

paying an extra 100 dollars a month to principal it would only take me 10 years to pay off loan and only pay 2600 dollars in interest

loan 2 and 3
2 X 18,500 = 37,000
consolidated for 30 year loan at 6.7% would be $239 a month

only paying minimum payments it would take me 30 years to pay off loan and would pay 49k in interest

paying an extra 300 a month to principal, it would only take me 7 years to pay off loan and only pay 9,700 in interest.

Total Interest over time
only paying minimum payments means that that end up paying 200k in interest for a house and student loans and I would be in debt for 30 years.

paying an extra 700 to all principals as shown above would drop that down to about 75k in interest and be completely out of debt in 15 years.

I guess the question comes down to whether I would make more investing 700 a month over 30 years than the difference between 200k interest and 75k interest... 125k. If I would make more over 30 years, then I should invest, if I would make less, then I should pay off the principal and be debt free in 15 years?

In any event, I was already planning on paying 10% of what I bring home every month into investments for retirement/future so if I chose to invest that 700 it would be on top of the 10% already invested.

My gut tells me to use that 700 to pay off debt and be free of it in 15 years. I have never been really good at math, but the difference between paying 200k in interest and 75k in interest seems like alot of money to me. I feel like I am probably missing something though.

Any suggestions, comments? Thanks!

04-26-2007, 05:41 PM	#1 (permalink)
somaziro Member Join Date: Apr 2007 Posts: 35	Advice on debt RE: student loans/house mortgage The first thing that I hear when learning about investing is to get your debt under control. I have just graduated from law school and will have debt of 55,500 in federal loans at varying degrees of interest (see below). I also am planning on saving all my money for 1 year after graduation to have 10% to put down on a house, the top of my range is a 135,000 house. Given that I have crunched some numbers below. The decision I have to make is whether I should pay 700 a month to paying down principal on my debts or if I should invest 700 a month. I guess the question is over the long run, will I get better returns on that 700 a month invested vs. the interest that I won't have to pay if I paid off my debts. DEBT House 135,000 dollar house with 10% down would be 122,500 loan taking out a 30 year loan at 6% interest payments would be $735 a month payment only paying the minimum on the mortgage it would take me 30 years to pay off loan and would pay 141k in interest paying an extra 300 a month to principal it would only take me 15 years to pay off mortgage and only pay 63k in interest Student Loan loan 1 18,500 consolidated at 2.7% over 30 years would be 75 a month only paying minimum payments it would take me 30 years to pay off loan and would pay 8,500 in interest paying an extra 100 dollars a month to principal it would only take me 10 years to pay off loan and only pay 2600 dollars in interest loan 2 and 3 2 X 18,500 = 37,000 consolidated for 30 year loan at 6.7% would be $239 a month only paying minimum payments it would take me 30 years to pay off loan and would pay 49k in interest paying an extra 300 a month to principal, it would only take me 7 years to pay off loan and only pay 9,700 in interest. Total Interest over time only paying minimum payments means that that end up paying 200k in interest for a house and student loans and I would be in debt for 30 years. paying an extra 700 to all principals as shown above would drop that down to about 75k in interest and be completely out of debt in 15 years. I guess the question comes down to whether I would make more investing 700 a month over 30 years than the difference between 200k interest and 75k interest... 125k. If I would make more over 30 years, then I should invest, if I would make less, then I should pay off the principal and be debt free in 15 years? In any event, I was already planning on paying 10% of what I bring home every month into investments for retirement/future so if I chose to invest that 700 it would be on top of the 10% already invested. My gut tells me to use that 700 to pay off debt and be free of it in 15 years. I have never been really good at math, but the difference between paying 200k in interest and 75k in interest seems like alot of money to me. I feel like I am probably missing something though. Any suggestions, comments? Thanks!