Thanks all, I think that I have resolved my question, after speaking
with the financial advisor at the bank.

I believe that I will go with paying more than the minimum, but also
start a Roth IRA with a monthly contribution. This seems to be a wise
plan, from what everyone has been indicating. And if I stick with my
current employer for five years, I can roll over the benefits in the
state retirement system into an IRA, I understand.


But thank you all, you have all been very helpful.

Robert the Bearded wrote:

- quote -

I don't believe there is any such metric to optimize a split between
paying down debt and retirement savings. This is because either one or
the other strategy is going to provide the highest rate of return, and
once you figure out which strategy has the higher rate of return there
is no mathematical basis for diverting some of the money to the
strategy with the lower rate of return.

You could rationalize dividing your money between the two strategies as
a type of diversification between low-risk investments (paying off the
loan) and higher risk investments (putting money into retirement
account invested in equities). However, I can't think of any metric of
optimizing diversification, since diversification is just a method of
reducing overall risk and there is no ideal level of risk.

If I was in your shoes I would personally take advantage of any
employer matched 401(k) plan, then save up a 6 month emergency fund,
then pay off the loan completely, and then focus on retirement savings.
I would do this because I like the near-term flexibility and financial
robustness that comes with having an emergency fund and being debt
free. If things come up, either good or bad, you have more choices if
you don't have to make a monthly payment and if you have pile of cash
at hand. However, I also think you could make a reasonable argument
for having a smaller emergency fund, and then splitting your extra cash
50-50 between paying down your debt and putting money into retirement
savings.

Andy

To follow up Tad's comments with a few other issues:

what is loan payment without consolidation? interest rates?
what is loan payment with consolidation? interest rates?

The stafford loans and other student loans I had in 1996 had 10 year
repayment windows. I received several offers to consolidate and chose
to pay off in 10 years. This allowed me to spend the payment on other
things (like a new house, roth IRA, 401k and other stuff) much sooner
after graduating. I paid more than the minimums, had some student
loans paid off in 5 years and all paid off in 8 years.

I also agree with starting to invest something now. the toughest thing
to do is start saving. Once you start, it is easy to continue. The
longer the money is invested, the larger it will grow.

"Robert the Bearded" <theapodan[at]gmail.com> wrote
- quote -

Make sure you check out how many years are required to be
vested in any automatic retirement savings program this
government employer has. The federal government used to have
a 3-year vesting period, after which the employer could
leave and rollover some sort of retirement plan into one's
own IRA.

- quote -

How wonderful to have a dream towards which to work. I trust
you will continually educate yourself on the capital needed
to do this and work towards saving that capital.

- quote -

That makes perfect sense. Buying a house is not at all
necessarily a good investment, anyway. Renting actually may
be the more rational financial choice for most folks.

- quote -

Maybe you know this, but you'd have to provide some
assumptions, first. Otherwise, there are too many variables
to calculate what % of your net income (= income after taxes
and living expenses) should go to pay down the debt and what
should go to retirement planning.

Given your relatively low interest loan, I'd do the
following:
1. Contribute to my employer's 401(k) up to the matching.
2. Contribute to a Roth IRA to the max. Note that one may
withdraw the contribution portion, but not the earnings
portion, put into a Roth IRA at any time. A Roth IRA's
flexibility makes it very attractive to most people.
3. Resume contributing to the 401(k), to get the tax break.
4. Use what's left over to pay off loan principal.

In the alternative, give a number of years (call it "Y") at
the end of which you wish to have the loan paid off, and
give the balance on the principal. With the interest rate
you gave of course there is a formula (and online
calculators that use it) to identity how much you need to
pay each month to rid yourself of the debt by Y number of
years.

If I had a loan with your interest rate, I'd be torn. I like
the peace of mind that comes from being debt free. But
financially, rationally speaking, I think the stock market
would be a better place to put your extra money, assuming
you intend to leave it be (in the stock market) for at least
ten years.

- quote -

I think experimenting with various free online asset
allocation tools, to give one ideas about how to invest for
retirement, before such a meeting would be instructive. I
put together a list several months ago:
http://home.earthlink.net/~elle_navorski/id4.html

Tad Borek wrote:
- quote -

This, and the posts above it, are good information, I'm glad I asked,
thank you all.

In my situation, if I was to stay with my current employer, I'd get a
pretty nice pension, as I work for the government. However,
realistically, I'm 22, and the chance that I'll stick with it for 30
years is not real high.

Because the pay working for the government isn't the best, I'm trying
to figure out what will give me the best value over the 4-8 years I
anticipate working with my current employer. At that time would be
considering going back to school for an advanced degree.

However, I do intend to put money into some sort of retirement account.
As much as I would like to see a steady pension, I think that the way
things seem to be going, that's a pipe dream, so I do value my eventual
future highly. I want to raise goats and keep bees on a farm, and
don't figure I can do that without some money.

I'm unlikely to invest in Real Estate (buy a house), just because I'm
uncertain as to what my immediate future (next 5 years) will bring, and
would prefer relatively liquid assets.

I feel that I would be best off to pursue a route where I would pay
over the minimum payment definitely, so minimize my interest, but also
to put money into a retirement account. Is there some metric that I
could calculate to give me a sense of what proportion of funds to
dedicate to these ends? I assume that there is some system of
equations that I can solve or optimize on a computer to find the exact
ratio, does anyone know of how I might go about doing that?


Also, I'm going to talk with the financial advisor at the bank, is
there any recommendation that you all would make to me on what I should
be focusing on, I presume primarily the student loans and the
retirement, although I would also like to invest in the wide open
market with small quantities of money just for fun.

But anyway, thanks again, and please append any comments you have to
this discussion.


======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding. "Trim" means that except for a few lines to add context, the previous post is deleted.

Robert the Bearded wrote:
- quote -

BeardedBob:
All sorts of aspects to this question.

If your income is below $50,000 you're able to deduct the interest you
pay on student loans (up to $2,500) on your federal tax return, even if
you don't itemize your deductions, which you probably don't. Your state
taxes may also show a benefit. The net result is that you save some
taxes. So factoring in the reduction in taxes, you might end up paying
less than the 5.375% rate - more like 4.5%, less perhaps.

This is why some people call student loans "good debt." That's
relatively cheap money (4-5%/yr) and in the grand scheme of things you
might want to delay repayment as long as possible. If you pay back say
$25,000 early, you might just end up borrowing it back again at a higher
interest rate. Imagine you diligently divert that extra $25,000 towards
early repayment and have the thing done in 4 years. And then you go to
buy a house, and mortgage rates are at 7% (not at all unrealistic).
You'd need to borrow an extra $25k at 7% because you'd paid off the
student loan early, instead of throwing the money under the mattress.
Put another way...your down payment is $25,000 smaller, so your mortgage
is that much bigger.

Another factor to consider is your retirement savings, which may seem a
dismal thing to think about, but it's a really advantageous time for you
to save for that. Especially in a Roth IRA (if your income isn't all
that high). This is the time of your life when you should stuff away as
much as possible into that kind of savings...it has the longest to grow,
and 40 years of compound growth works wonders on even mediocre
investment choices (at a measly 5%, $1 turns into $7 over 40 years; at
7% it turns to $15). You may have seen the projections where one guy
puts the maximum allowed amount in an IRA for just the five years after
college, then stops saving; the other doesn't start until age 35, but
puts the same amount in every year until retirement. The second guy
never catches up!

"But what about the interest I'd be paying on the loan?" Good
point...but it's still likely to work in your favor over the long term.
Hopefully your money is going to grow at greater than the 4-5% it's
costing you to keep that student loan balance. Even if it's costing you
a bit, there is something to be said for socking money away in the
tax-insulated Roth. A major limiting factor in Roth IRAs is that you can
only stuff a limited amount of money in them each year (currently
$4,000). And once your income crosses a certain level you can't
contribute to them at all. It's the kind of thing you take best
advantage of in your lower-income years like those few years after
college. You literally could end up in your early 30s with more
retirement savings than most people have in their early 60s. And in case
you're unfamiliar with them: money in a Roth IRA grows completely
tax-free, even when you withdraw the money at retirement.

So you might want to reconsider the whole idea of paying off a low-rate
student loan early. If you plan to buy a house during the term of that
student loan, you'll probably borrow the money back at a higher interest
rate. If you end up skipping allowable Roth IRA contributions because of
these prepayments, you're losing the ability to shelter $4k/year in
savings from future taxes.

And if you're getting a tax benefit and the true cost is more like
4%/year you might at least park the cash in an interest-paying account
to think it over. You can always pay it off a few years from now if all
of the above stuff doesn't pan out. But once you pay it off early...no
going back.

-Tad

PS if you go with "invest instead of paying it off"...don't blow it with
bad investments. One-minute investment decision: Vanguard's low-cost
LifeStrategy series...until you've saved up about $20k+, then you might
tweak it a little. Or not.

Robert the Bearded wrote:
- quote -

What John wrote was very true. A guaranteed 5.3% after tax is very
good. You'll need a return of over 8% (before tax) before it's worth
it. Pay the loan off first, then start investing.

In article <1137469728.090848.37370[at]z14g2000cwz.googlegroups.com> ,
"Robert the Bearded" <theapodan[at]gmail.com> wrote:

- quote -

The goal is to put your money to use where it earns the best
rate of return. If all you do is beat inflation, then you
are getting about 4%, and that is taxable. If you pay off
your student loan, you are getting 5.375%, and that is tax
free. You would have to average about 8% to really make
sense to invest the money, which means putting it all in the
market given that the market is the only tool that consistently
earns over 8% over time.

If you have the income, agressively pay off that student
loan. If you still want to pay with investing, make sure
you are maxing out your 401K and funding your IRA options.
If you still have money left, then look for some low cost
index funds (or stocks called Vipers).

-john-

--
================================================== ====================
John A. Weeks III 952-432-2708 john[at]johnweeks.com
Newave Communications http://www.johnweeks.com
================================================== ====================

I am a recent college graduate, and am formulating a plan for
eliminating my student loan debt with as little interest accrued as
possible. The loans after consolidation have an interest rate of
5.375%, I'm presuming compounded yearly, but I'll have to check. I
have minimum payments of ~$150/month, which I can make with no problem.

My question is: does it make more sense for me to pay more than the
minimum (like 400/month) in order to pay off the principal faster, and
thus pay less interest overall, or does it make more sense for me to
pay the minimum payments and put the money I would otherwise use to pay
off the loan debt to use in mutual funds?

I'm thinking I might invest with just $1000 or so in stocks just as a
fun thing. I used to follow the stocks in the NY times, and think that
I could beat inflation, at the very least. But for my student loan
debt, I'd rather have a less risky investment, so maybe a consistantly
performing, if slightly anemic, mutual fund, or maybe municipal bonds.


What do you all think would be the wisest course of action for me? I'm
no econ major, so any advice would be appreciated.

Robert the Bearded.