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Thread: Investment Thread - For all your money needs

  1. #41
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    Quote Originally Posted by DentedDeacon View Post
    Sounds like a lot of peeps on this thread should look up the term "opportunity cost" before making the decision to pay off loans.
    Meh, the peace of mind that I would get from paying off the loans would be pretty nice.

  2. #42
    I have struggled with finding the answer to this question about student loans, mostly because when I call the people at directloans (which is the US government, i'm pretty sure) they are complete idiots and never know what I'm talking about, plus I get different answers from the first idiot I talk to on the phone and the supervisor I speak with after getting fed up.

    I have the option to do income sensitive repayment, which means right now that my student loan payments would be way less than what I am paying. However, in the future when I hopefully make quite a bit more income (very likely), I will have a much higher payment. After 20 years of paying, if it is not paid off, they will wipe the debt free. You're free to switch back to basic payments at any time.

    So the question is if I do this and have a lower payment, is it some sort of credit or is it strictly paying off the balance. What I mean by that is if, for example, I pay $500/mo instead of $1000, will my balances decrease by $1000 anyway because the government is giving me a "break" or credit because I'm poor, or does that balance stay until the 20 years is up and then it's all wiped clean at one time.

    I hope that's clear enough for someone to understand. To try not to hijack, I don't really need advice on the pros and cons of this vs other methods, I just need to know if that's how it works or not. Someone out there be smarter than the people who actually own my debt!

  3. #43
    I didn't know they'll wipe it clean at the end of 20 years; I have never heard that.

    My interpretation of it is that it pays off just like any other method - so since your payments are smaller in the beginning, they will go more towards interest, and less towards principal. That's why you end up paying more interest over the life of the loan.

  4. #44
    I just looked at their website. I would be careful with this method, and not just expect the loan to be forgiven (since you do expect to make quite a bit more income in the future).

    Also, it says that if your payments aren't large enough to cover interest, the unpaid amount is capitalized (added to the principal balance), which in turn will increase your interest payments. So, that could happen in the beginning of your payment period, depending on your income.

    Here is an excerpt from their website which seems to answer your original question:
    http://www.direct.ed.gov/RepayCalc/dlindex2.html
    "The maximum repayment period is 25 years. If you haven't fully repaid your loans after 25 years (time spent in deferment or forbearance does not count) under this plan, the unpaid portion will be discharged. You may, however, have to pay taxes on the amount that is discharged."

    Looks like they just forgive anything left at the end of the 25 year period.

  5. #45
    Quote Originally Posted by DentedDeacon View Post
    Sounds like a lot of peeps on this thread should look up the term "opportunity cost" before making the decision to pay off loans.
    Maybe. I suppose it depends on what your financial goals are. I'm not sure how I'm worse off by saving and investing the $400/month that I had been paying on my auto loan (not to mention money saved/gained by avoiding interest charges over the remaining life of the loan).

    I'd be curious to hear the scenario in which NOT paying of the loans is the smart thing to do.

  6. #46
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    Quote Originally Posted by leftcoastdeac View Post
    Maybe. I suppose it depends on what your financial goals are. I'm not sure how I'm worse off by saving and investing the $400/month that I had been paying on my auto loan (not to mention money saved/gained by avoiding interest charges over the remaining life of the loan).

    I'd be curious to hear the scenario in which NOT paying of the loans is the smart thing to do.
    When you can earn a greater rate of return on the money you'd spend paying off the loan than the interest rate you are paying on the loan.

  7. #47
    Quote Originally Posted by TWDeac View Post
    When you can earn a greater rate of return on the money you'd spend paying off the loan than the interest rate you are paying on the loan.
    I should have realized this when I posted the comment. I guess the amount of outstanding debt is probably something to consider when making these choices.

    For me, the choice was simply - pay off the debt. Of course, I was pretty fortunate in that my loans were relatively small.

  8. #48
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    Quote Originally Posted by leftcoastdeac View Post
    I should have realized this when I posted the comment. I guess the amount of outstanding debt is probably something to consider when making these choices.

    For me, the choice was simply - pay off the debt. Of course, I was pretty fortunate in that my loans were relatively small.
    There are a bunch of other reasons as well but this is the main one.

  9. #49
    Quote Originally Posted by TWDeac View Post
    When you can earn a greater rate of return on the money you'd spend paying off the loan than the interest rate you are paying on the loan.
    Student loans and mortgages are especially interesting when it comes to this because the interest paid on both is tax deductible.

    Lets say you have an interest rate of 5% on one of those types of loans and you pay in the 25% tax bracket. That 5% rate essentially becomes 3.75% (5 times .75) because 25% of all interest you paid becomes essentially a credit on your taxes. So instead of paying extra on the loan, what if you took that extra amount and put the money in a Roth IRA? As long as you get a 3.75% return (no taxes because this is a taxed dollar growing tax-free which can be withdrawn later tax-free) you are making the better economic decision.

    Who makes 3.75% a year in this market you say? Well as of December 31, 2010 the following indices outpaced that return on a ten-year annualized basis:

    US Equities:
    Russell Midcap Index
    Russell 2000 Index
    Russell Midcap Vale Index
    Russell 2k Growth and 2k Value Indices

    Int Equities:
    MSCI EAFE
    MSCI World ex-US

    Bonds:
    Barclays Agg
    Barclays US Gov/Credit
    Citi World Gov't Bond


    That list isnt exhaustive. Basically anyone who put money into the market Jan 1, 2001 and rode the wave of not one but two recessions and didnt invest exclusively in large cap US equities beat a 3.75%. Again the last ten years have been horrible.

  10. #50
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    Quote Originally Posted by DentedDeacon View Post
    Student loans and mortgages are especially interesting when it comes to this because the interest paid on both is tax deductible.

    Lets say you have an interest rate of 5% on one of those types of loans and you pay in the 25% tax bracket. That 5% rate essentially becomes 3.75% (5 times .75) because 25% of all interest you paid becomes essentially a credit on your taxes. So instead of paying extra on the loan, what if you took that extra amount and put the money in a Roth IRA? As long as you get a 3.75% return (no taxes because this is a taxed dollar growing tax-free which can be withdrawn later tax-free) you are making the better economic decision.

    Who makes 3.75% a year in this market you say? Well as of December 31, 2010 the following indices outpaced that return on a ten-year annualized basis:

    US Equities:
    Russell Midcap Index
    Russell 2000 Index
    Russell Midcap Vale Index
    Russell 2k Growth and 2k Value Indices

    Int Equities:
    MSCI EAFE
    MSCI World ex-US

    Bonds:
    Barclays Agg
    Barclays US Gov/Credit
    Citi World Gov't Bond


    That list isnt exhaustive. Basically anyone who put money into the market Jan 1, 2001 and rode the wave of not one but two recessions and didnt invest exclusively in large cap US equities beat a 3.75%. Again the last ten years have been horrible.
    It's tax deductible up to a certain income level, correct? If I were making 100k a year, I wouldn't get much benefit from them.

    My loans are all around 6%.

  11. #51
    Thanks for the help. I figured that's the answer so I will stick with the repayment plan I'm on for now.

  12. #52
    Quote Originally Posted by TWDeac View Post
    It's tax deductible up to a certain income level, correct? If I were making 100k a year, I wouldn't get much benefit from them.

    My loans are all around 6%.
    My wife and I make well over the amount you stated and 100% of her interest was deductible. At 6% you need a 4.5% return (or say you are in the 15% tax bracket 5.1%), which really isnt that tough.

  13. #53
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    Quote Originally Posted by DentedDeacon View Post
    My wife and I make well over the amount you stated and 100% of her interest was deductible. At 6% you need a 4.5% return (or say you are in the 15% tax bracket 5.1%), which really isnt that tough.
    Nice, I had heard other things from people.

    Hopefully that isn't dependent on getting married or any other factors.

    Let's be real, It will take me a few years to have enough money to pay off my loans even if I want to, so there is no real threat in that.

  14. #54
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    Quote Originally Posted by DentedDeacon View Post
    My wife and I make well over the amount you stated and 100% of her interest was deductible. At 6% you need a 4.5% return (or say you are in the 15% tax bracket 5.1%), which really isnt that tough.
    What would you suggest a normal person do to earn 4.5%?

  15. #55
    Quote Originally Posted by DentedDeacon View Post
    My wife and I make well over the amount you stated and 100% of her interest was deductible. At 6% you need a 4.5% return (or say you are in the 15% tax bracket 5.1%), which really isnt that tough.
    It's definitely phased out between $60-75k (single) and $120-150k (married filing jointly).

  16. #56
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    Quote Originally Posted by DrummerDeac View Post
    It's definitely phased out between $60-75k (single) and $120-150k (married filing jointly).
    Fuuuuu

  17. #57
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    I can do stocks, but bonds are something I don't have much experience with. What do you look for when picking bonds?

  18. #58
    Quote Originally Posted by TWDeac View Post
    I can do stocks, but bonds are something I don't have much experience with. What do you look for when picking bonds?
    Fixed income is about 10 times more complicated than equity investing and for a guy in his mid 20s, you probably dont need much bond exposure but if your risk tolerances require it then just buy a bond mutual fund. The PIMCO Total Return is a good one. Bill Gross can probably pick bonds better than you can.

  19. #59
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    Quote Originally Posted by DentedDeacon View Post
    Fixed income is about 10 times more complicated than equity investing and for a guy in his mid 20s, you probably dont need much bond exposure but if your risk tolerances require it then just buy a bond mutual fund. The PIMCO Total Return is a good one. Bill Gross can probably pick bonds better than you can.
    Sounds like a plan. I'd definitely go the mutual fund route if I needed exposure to bonds.

  20. #60
    I disagree with you
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    DentedDeac > TraderDeac????

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