Financial Advice--Keep our Savings or PAY OFF OUR LOANS!

[o_mom]

One additional thought. Be very careful on any deals to pay off for a lesser amount. I have heard stories of people doing this only to find out later that it was reported negatively on their credit report. They thought it was just between them and the lender, but it was reported to the credit agencies as if the lender wrote off their debt. I don't remember the exact term, but basically it looks on the report like they defaulted on the loan.

Unless you are in default and they are just trying to recover something, the bank has no incentive to forgive part of the loan.

[Smillow]

You may also end up with a 1099C at tax time next year. Cancelled debt is taxable income unless discharged in bankruptcy or reduced to the amount of insolvency (which wouldn't apply if you have the funds in savings). There is also a possibility that some may be forgiven at some point in the next 2 years by congressional legislation.....

[specialp]

The current bill had a provision in it making student loan forgiveness through 2025 tax free. https://www.forbes.com/sites/markkan...h=4559210f2d1e

[bisous]

One additional thought. Be very careful on any deals to pay off for a lesser amount. I have heard stories of people doing this only to find out later that it was reported negatively on their credit report. They thought it was just between them and the lender, but it was reported to the credit agencies as if the lender wrote off their debt. I don't remember the exact term, but basically it looks on the report like they defaulted on the loan.

Unless you are in default and they are just trying to recover something, the bank has no incentive to forgive part of the loan.

This is what DH had heard as well. Since we are trying very hard to keep our credit looking good we're skeptical that this would be a good option for us, unfortunately.

[bisous]

This has been full of great advice. I think what we'll do is figure out what is a good amount to have as "savings" in our bank account and try not to go below that. We think we can pay off one whole loan (that is being sold this month, actually) and have enough left over for a healthy savings amount. It isn't enough left to buy a home. But it will be a relief to have no interest payments. I like the idea of playing with payoff calculators and get a solid plan to both pay off the loans AND contribute to our savings account for our home down payment.

DS1 would like to attend a school through the BYU system which will be very affordable for him. DH's parents contributed nothing to his college. My parents contributed 10K and I was able to graduate with my undergraduate with no debt through a combination of summer employment, employment while up at school, and merit based scholarships. But the number one reason that I had no debt is that tuition was very inexpensive.

You guys asked for our tips? I feel like we worked really, really hard at the begin of our journey to pay down our debt. We said no to everything and were super frugal and disciplined with a budget. Once we were able to pay down our lowest balance loans, it really did start "snowballing". Still, I'd be remiss in not noting that a lot of our situation is due to luck. The pandemic has been very kind to our finances. But even prior to that, DH was gifted 15K from his parents. We even feel lucky that all of our major appliances and cars have held out without expensive repairs or need for replacement.

Thank you so much for all the advice!! I feel like I have a blueprint to how we want to move forward.

[dogmom]

The only other thing people that is don’t see people mention a lot is borrowing from one’s 401K/403B. I know people tend to advise against it, but it has worked out well for us. We had some debt and needed make some improvements and put in central air to have my MIL move in. I just couldn’t deal with the headache of a home equity loan and I wound up taking money out of my retirement fund as a loan. The interest rate is 5%, but you are paying yourself back. The negative is you are “buying” the stock again at a higher rate, in all probability. We set it at a strict 5 year repayment, I probably would have stretched out the repayments longer in home equity loan. At the same time I upped how much I was putting into my retirement account to make up some of the “loss” of increased stock equity and this is of course all pretax. It worked out well for us and the debt will be retired on time. You can’t do it with all retirement funds. I think people really advise against it because a lot of people wind up not paying it back, then you have both the loss of retirement and tax penalties. It would have been better if we had that much is savings to spend when we needed to, but we didn’t.

[legaleagle]

The only other thing people that is don’t see people mention a lot is borrowing from one’s 401K/403B. I know people tend to advise against it, but it has worked out well for us. We had some debt and needed make some improvements and put in central air to have my MIL move in. I just couldn’t deal with the headache of a home equity loan and I wound up taking money out of my retirement fund as a loan. The interest rate is 5%, but you are paying yourself back. The negative is you are “buying” the stock again at a higher rate, in all probability. We set it at a strict 5 year repayment, I probably would have stretched out the repayments longer in home equity loan. At the same time I upped how much I was putting into my retirement account to make up some of the “loss” of increased stock equity and this is of course all pretax. It worked out well for us and the debt will be retired on time. You can’t do it with all retirement funds. I think people really advise against it because a lot of people wind up not paying it back, then you have both the loss of retirement and tax penalties. It would have been better if we had that much is savings to spend when we needed to, but we didn’t.

An issue with this is if you leave that job (voluntarily or not), you generally need to repay the loan very quickly, or it's treated as a distribution (as taxable ordinary income + 10% penalty if you're under age 59). So even if you have a clear plan to repay it can go south very quickly if you're laid off.

OP - In addition to refinancing the loans if possible, I would look at some of the savings formulas for emergency savings, etc and err on the overfunding side, then use remaining amount to make a loan payoff, and also up your monthly payments on the remaining balance.

[o_mom]

An issue with this is if you leave that job (voluntarily or not), you generally need to repay the loan very quickly, or it's treated as a distribution (as taxable ordinary income + 10% penalty if you're under age 59). So even if you have a clear plan to repay it can go south very quickly if you're laid off.

Yes, and the loss of the tax-free growth while you are paying back the loan usually makes this an unattractive option.

[frugalmom]

Huge congrats to all the debt you have paid off!!

That 60k is your efund? And your house down payment fund? Would you have enough for a 20% down on a home? Do you not have a rental agreement that you know you will be in that place for a certain amount of years?

I would for sure keep an e-fund. Do you and your dh work? If both 3 months and if only one income 6 months or more. This past year has taught everyone you just never know what is going to happen.

Do you have college savings for your children?

If this 3rd Covid stimulus payment goes through, can you use some of that to pay off the loan?

[LBW]

I think you've gotten some great advice above. I was in a position recently where I could pay off a huge debt (my mortgage). I talked it through with some people I'm close to who are fiscally savvy, and they recommended that I keep the debt since the interest rate was actually lower than the rate I'm earning with my savings. By keeping the debt, I could continue to let the savings work for me. So, that's something else for you to look at - what's the rate of interest you are getting on your savings? And, is that rate of interest higher than the interest on your debt? If so, then keep the savings. If not, do everything you can to reduce the rate of interest on the debt and increase the rate on the savings before choosing to use savings to pay the debt. Does that make sense? Thinking about it this way really helped to quell my urge to pay off my debt.