Student loan payoff conundrum

[Anonymous]

When my wife graduated from law school 18 months ago, we determined to pay off her $150,000 debt as quickly as possible. We have been making payments of at least $6,000 a month (that's about half our combined after-tax, after-retirement-contribution, after-FSA earnings), and have it down to just under $40,000. These payments take us to the edge of our comfort zone every month, but we are highly motivated to free her from the need to remain employed at a big downtown firm. We drive a beat-up 1990 Camry, rent a relatively small apartment, and in general avoid expenses that may be typical of a household earning nearly $300,000.

Here's the issue. She's five months pregnant and baby-related expenses are starting to knock at our door. The car broke down this weekend, and the mechanic says it'll be a least $900 to fix--maybe more. Oh, and we owe $10,000 to the IRS by October, on account of we didn't withhold enough last year.

And we really want to buy a house to take advantage of low mortgage rates and stop living like grad students finally (she's 31, I'm 38). We have $90,000 saved up in a brokerage account invested in index funds and meant to fund a down payment. We expect to receive another $90,000 down payment inheritance.

I don't think we will be able to make our $6,000 student loan payment this month, and I know we're going to have to sell some stock to pay the IRS bill eventually so here are three options I'm contemplating:

OPTION 1. Cut the student loan payment this month by just enough to fund the car-repair cash crunch and go one as we have been. This will entail selling just enough stock in October to pay the IRS.

OPTION 2. Sell about $20,000 in stock now. Use half to pay the IRS, and another $5,000 to buy some baby furniture and replenish the $4,000 emergency cash fund we have basically depleted in recent months.

OPTION 3. Sell enough stock now--about $60,000--to finally pay off the entire student loan bill, tax bill, and some baby expenses. Then start replenishing the down payment fund as quickly as possible, theoretically at $6,000 a month.

My wife prefers the last option, as she's really suffering psychologically under the weight of her student loan burden. I worry that we'll be less disciplined about saving once the student loans are paid off.

Thoughts?

[Anonymous]

I'd go with option 3 but that's because I also *dislike* having debt. What's smartest probably depends on the interest rate on the loans and the growth rate of your stock investments.

The other thing to consider is how your financial decisions now will shape your family's incentives for having your wife continue to work or work part time in the future. If you expect that she will go back to work after the baby is born, but she becomes relaxed because her debt is paid off, what will that do to your household cashflow?

[Anonymous]

OP here: loan rates are 6.8 percent. All the investments are in broad market index funds, so they've been doing better than 10 percent annually in last year, but obviously there's no guarantee that continues--or that their value doesn't fall.

Wife will probably seek out employment that pays drastically less than she makes now (about 180K), but there's no plan for her to drop out of labor force entirely. I'm hoping she makes around 100K as a government lawyer or something interesting but not soul-destroying.

[Anonymous]

I would do option 3. Your wife is pregnant. Allow her that piece of mind.

[Anonymous]

I'm confused how you owe the IRS in October. The time to pay what you owe was April 15. You can get an extension to file your RETURN, but taxes DUE are due on April 15. You may be looking at underpayment penalties and interest. You sure you know what you're doing?

[Anonymous]

And don't forget the taxes on your stock sale. Depending on your income and how long you've owned the stock, it will be 23.8%.

[Anonymous]

What are your monthly expenses? You need a 10-12 month emergency fund and babies cost $$$. I don't see how you'll continue saving at this rate post-baby, esp given childcare costs. Plus give me a break 60k of debt when you're making 300k is hardy psychologically traumatic. I owed that much when I graduated and worked for the govt. And "soul-destroying?" I'm betting your wife becomes a SAHM. Ps a govt job search can take months to over a year easily.

[Anonymous]

I'd do none of those options. I'd cut the loan payments snd bank the difference for emergency savings, baby stuff, and the IRS bill. Once you have that settled, you can up them again. And fix your withholdings so the IRS thing doesn't happen again next year.

Also, you don't need to spend $5000 on baby gear right away. Certainly not if you're considering cutting other priorities of saving/debt payments.

[Anonymous]

option 3

[Anonymous]

Again out soul crushing taxes hurt people trying to do the right thing

[Anonymous]

Anonymous wrote:I'd do none of those options. I'd cut the loan payments snd bank the difference for emergency savings, baby stuff, and the IRS bill. Once you have that settled, you can up them again. And fix your withholdings so the IRS thing doesn't happen again next year.

Also, you don't need to spend $5000 on baby gear right away. Certainly not if you're considering cutting other priorities of saving/debt payments.

+1 I don't understand why you would sell stock and incur a tax liability to pay off another tax liability when you have the cash readily available. And I agree with PPs comment on the $5,000 price tag on newborn baby items.

And, I agree with the other PP - your tax payment was due in April if paying US income taxes. If you haven't paid that yet you will also owe interest and penalties on the $10k.

[Anonymous]

OP here. Thanks for the responses. Yes, we will owe some interest for paying late, but it's minor. I don't think we owe a penalty, because it's the first time we had insufficient withholdings, even though we withheld more last year than we had in previous years.

As for incurring tax liabilities by selling stock, we're going to realize those capital gains sooner rather than later, anyway, since we need the invested money for a house down payment. So either we sell now, or we sell in 6 to 12 months.

The conundrum here, as some of you have noted, is really about the psychological benefit of erasing the debt now, rather than waiting 6 more months. And whether we'll be able to save up for the down payment once we do that. (I assume our savings rate will go down slightly once the baby comes; I'd just like to keep it in high gear until then.)

By paying off the loans early using investments, I would like to give my wife whatever small sense of "freedom" she can get so long as she's working in "Big Law," where she feels trapped and unfulfilled--and overworked in a way that would be astonishing to even most driven people.

I am afraid she will honestly contemplate the SAHM choice once the baby comes. That is not an outcome I welcome, frankly. I hope in the coming years to be able to make more of the money in this partnership and allow her to lean back with a less demanding and more fulfilling job--but she has massively more earning potential than I do now, and it's not like living in this city is cheap.

[Anonymous]

Anonymous wrote:

By paying off the loans early using investments, I would like to give my wife whatever small sense of "freedom" she can get so long as she's working in "Big Law," where she feels trapped and unfulfilled--and overworked in a way that would be astonishing to even most driven people.

I am afraid she will honestly contemplate the SAHM choice once the baby comes. That is not an outcome I welcome, frankly. I hope in the coming years to be able to make more of the money in this partnership and allow her to lean back with a less demanding and more fulfilling job--but she has massively more earning potential than I do now, and it's not like living in this city is cheap.

I had been paying my 6 figure student loan debt fairly aggressively-- My DH paid off the rest when we got married (in the sense that he had more money invested- and we used that), it meant alot to me. Not having the student loans hanging over my head makes a huge difference. FWIW I also have more 'earning potential' since I have a law degree and he does not.

The last paragraph of your post troubles me. The two of you need to talk about this NOW-- not when the baby comes. I never thought I would want to SAHM, but put a baby in my arms, and work becomes the last thing I want to do. I have drastically cut back my career/ ambition since having children. If you think your wife may want to SAH, and you don't want to-- and this is pre-baby, you need to have a serious discussion about it now, and make sure you get on the same page as to what that would mean financially- how your future would look different, etc.

[Anonymous]

It sounds as though the only reason why you wouldn't want to do option 3 is because you want to put pressure on your wife (and possibly yourself). That doesn't seem healthy for her or the relationship.

I would just set up an automatic transfer to an internet bank of $4k or $6k or whatever if you are concerned you aren't disciplined enough.

[Anonymous]

Thanks, 21:03. We talk about it all the time. (I am not more candid on an anonymous Internet forum than I am with my wife.)

Obviously, I will be supportive of whatever professional/personal choices she makes, and I assume she will be of mine.

But life will be financially more manageable if we remain a two-income household, and I strongly prefer that arrangement.

Also, I like that my wife works. My mother worked and it just feels right to me. I've always worked in offices full of women, often for women bosses, and I think workplaces are better in most ways for having lots of women in them, at all levels.