What should I pay off first

[cbrooks624]

So I am a recently commisioned army o1, AD, owe six years. I have:

2017 Honda CR-V (95kmiles) 16k, 3.25%

student loans of 14k, 4-5%

Career starter loan at 25k 2.99%

7k in ROTH IRA

4k TSP

My question is I already owe 6 years active duty, with a possibility of 10, and a masters(or two) in my future(so potentially more debt) should I pay off my car this year, and delay payment of student loans for PSLF? Or just pay off student loans first? How would you tackle this?

 

[danielcolleano]

@cbrooks624 I’d recommend tackling the car. While it is a Honda and the interest rate is acceptable, owing 16k on a vehicle approaching 100k miles is precarious IMHO.

 

[cbrooks624]

@danielcolleano That’s fair, I’ll work on that first and then tackle what next?

 

[wilberforce001]

@cbrooks624 Your student loans are the highest interest rate, and also the only ones worth paying aggressively as opposed to letting cash stew in an HYSA (even then it’s basically a wash depending on your particular loan vs HYSA). If you are pretty confident you’ll complete the 10 years for PSLF, there’s no financial reason to pay more than the minimum on anything in the current economy. I would just build up cash in an HYSA, and then if things change (interest yields tank or you decide to leave after 6), then you can put it towards paying things off.

 

[nothinges]

@wilberforce001

I would just build up cash in an HYSA, and then if things change (interest yields tank or you decide to leave after 6), then you can put it towards paying things off.

You pay taxes on HYSA interest.

Even as a single O1, none of these loans will beat a HYSA when you account for the 22% tax rate (3.9% post-tax). The CSL essentially ties it.

 

[wilberforce001]

@nothinges Good point. I’m enlisted trash so I tend to forget that the 22% bracket exists. However, I still don’t think it should affect a new O1. Basic pay for under 4 years is still under 60k, and after the standard deduction (14k for 2024), effective income should be below the 47k threshold for the 22% bracket. If it isn’t, or is close considering the interest payments, my strategy would be to put enough money into traditional TSP to ensure I don’t touch that bracket unless I absolutely have to.

 

[nothinges]

@wilberforce001 Hey, you work for a living, don't put yourself down like that.

I'm never a big fan of leveraging small margins for carrying debt. Paying off the debt early is the same as getting an intermediate term bond with a CAP rate of (interest / tax rate). Interest rates are variable; your debt interest isn't.

People invest into 10-year treasuries with 3.4-4% cap rates, so paying off the debt early is like obtaining one of those for free and then being able to invest it into other things.

 

[wilberforce001]

@nothinges I jest. I’m doing work I love and wouldn’t be able to do as an officer, anyway.

Anyway, I basically agree. The margins here are pretty small either way, so it’s basically a personal choice of wanting to get rid of the debt sooner or maintain liquidity. Knowing myself, I’d be itching to get out of debt asap despite what I’ve said.

I do think there’s something to be said for knowing whether OP is going for PSLF, though, as that affects the ideal order to pay. Keeping the cash in an HYSA/CD as long as interest rates stay high is more a stalling tactic until that question is answered.

 

[sloanep]

@cbrooks624 Where did the money go from the career starter loan?

 

[cbrooks624]

@sloanep Mostly to other misc expenses because rotc didn’t allow me to work as much as I needed, books and supplies, and some education expenses

 

[sloanep]

@cbrooks624 Those loans are good news and bad news. Good interest rate but you’re starting out in an extra 25k hole.

Getting your debt to zero is a good near term goal. The 16k on a high mileage car is a good place to start. But highest interest rates to lowest once you set aside a small emergency fund so you don’t rely on credit cards if some unexpected bill comes up.

The order almost doesn’t matter. Get it all knocked out.

 

[nothinges]

@cbrooks624 Both avalanche and snowball methods lead you to the same answer here because the loans with the smallest balance have the highest interest.

Student loans first, then CRV, then CSL.

Make sure you are contributing 15% of your gross compensation (include BAH/BAS/Special Pays) into retirement before you start making extra payments to these loans.

 

[resjudicata]

@cbrooks624 On top of what everyone else said with your loan- use TA for a masters and finish it before your current adso wears out. Your TA adso runs concurrently with your current adso. Stop settling for these easy debt traps and put a little effort in. Aside from a home there is little shit in life worth going in debt for. The only thing i would trade my soul for is medical debt for my wife or kids.

 

[cbrooks624]

@resjudicata Yeah that’s exactly what I’m planning on doing for my masters, then saving Gi Bill if I want to do a second when I get out.

You’re right I have been doing that debt trap, it’s the main goal of mine now that I actually have a job paying more than 18k a year

 

[resjudicata]

@cbrooks624 Just make a budget and if youre gonna do what every other LT does and get 2-3 other LT roommates at first duty station. You can pay all this shit off in a year.

Remember you can only do 3 things with your bread. Spend. Save. Give (youre not really at the point in life to just go give to charities/churches but whatever floats your boat)

Enjoy yourself. But cant stress enough the faster you clear this debt the faster you can live and enjoy life. The army will always find a way to be shitty in itself - not dealing with finances/health/etc stress makes the army bullshit almost laughable. Experiences may vary. Goodluck man-congrats on the commission, take care of your guys and get shit done.

 

[banon6983]

@cbrooks624 Unpopular opinion but you shouldn't be paying these off. The interest rates are too low in comparison to historical market returns.

You should be making minimum payments and 'paying off' these loans in your own brokerage account invested in an index fund modeling the S&P 500 or Total Stock Market.

As an example I've got $70k sitting in a brokerage account against two car loans one at 2.75% and another at 4.99% (the arbitrage for this one is low but worth).

If you absolutely want to pay something off I would start with the highest interest debt (student loans).

 

[xxjesusfreak1984xx]

@banon6983 Normally I’d agree with you, but the discipline has to be there, and I’m not sure it is since their career starter loan went to “miscellaneous expenses”.

 

[nothinges]

@banon6983 You're not factoring taxes into your calculations.

And in the case of tax advantaged accounts, he may have other financial goals in his 30s and 40s, and tax free growth accounts can't be touched.

 

[banon6983]

@nothinges Thanks happy_snowy_owl, I appreciate discourse as it helps everyone arrive to a better understanding of the world, including myself.

I have factored taxes. Assuming federal long term capital gains tax of 15%, state tax of 5%, and a conservative growth of 8%, the end yield growth is 6.4%. You are losing money if you prepay loans under that percentage instead of investing it in a brokerage index fund following the market.

I do agree with your second point and it should be invest in a brokerage account, and not a retirement account.

 

[nothinges]

@banon6983 Dividends are taxed at income tax rate. The compound growth rate assumption includes reinvesting dividends at a tax-free rate.