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Between both of our student loans and car loan, we are in the hole about $48,000. My spouse is adamant about paying off all debt in the next month or two since we currently have about $55,000 in the bank. The issue is that I don’t see why we need to pay off everything so quickly and basically drain our account.

Our monthly take home net income is about $8,500 a month and after all bills are paid, we have about $4,300 left to save or do whatever we want. Our school loans and car loan use up a little over $1,000 dollars of our monthly income.

The way I see it, the amount that we are paying for those loans isn’t really hurting us. We are still saving a good amount and don’t see the rush to use up most of our money to eliminate these loans. My spouse claims that it’s alright because we will be able to recover fairly quickly because of the extra grand we would now have.

But what about emergencies? Or something that requires us to spend a large unexpected amount of money? Doing it their way would leave us with about $7,000 in the bank and it just seems like such an extreme to pay so much off so fast. Would paying off all this debt this fast be more beneficial than I’m thinking? I want to keep an open mind before really deciding what to do.

Car loan has about 3% interest and $8,000 left on it. There are 3 school loans, all at about 4-6% interest rate. One is at $13,000, the other at around $3,000 and one big one at around $24,000.

JTP - Apologise to Monica
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jo13
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    Every answer so far gives a reasonable argument that attempts to persuade on the merits of a sensible plan. None of them address what I suspect is the real issue: your wife (like mine!) might have an extremely strong aversion to debt, possibly because of some earlier difficult family experience with debt in the Great Recession or earlier. Is this actually a question about financial strategy, or is it about the psychological burden of living in debt? – Eric Lippert Sep 01 '18 at 13:54
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    Depending on country, some loans have a offset account, which is similar to paying off the loan early in terms of interest charged, but can also be used as emergency funds since it's considered a transaction account, just linked to your loan. Redraw facilities are a similar concept. It may be advisable to check if your bank(s) offer either of these for free, and the exact terms,to see if they are acceptable, though usually they work similarly to lines of credit. – timuzhti Sep 02 '18 at 14:21
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    It is really difficult to answer without country tag. Do you have insurances or will you need to have money in case such unforeseen things happen? In some countries you are more covered by default than in others. – mathreadler Sep 02 '18 at 18:00
  • Sounds like in the long run you will incur more costs by not paying off debts. Why do you keep a lot of money in your account when you have debts to pay that have interest? What's the logic? – ESR Sep 03 '18 at 04:56
  • @Tas you are correct that that’s part of the issue, at least, for me. I agree with most of the comments here. The money in the bank is just sitting there. I’m not investing at the moment. We are both in our mid twenties and have only been working in our career jobs for about 2 years, so, we aren’t too knowledgeable about investing. Seeing so much money just go away from our account really discourages me, even though I understand it’s for the best. In the end, I will end up compromising as other comments suggested. – jo13 Sep 03 '18 at 06:22
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    Possible duplicate of Is it a good idea for me to divert savings to pay off my debt? – Dmitry Grigoryev Sep 03 '18 at 06:56
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    WHAT kind of emergencies are you expecting??? Even right after paying all debt off right now, you'd have $7k for emergencies left, in 3 months you'd be back at more than $20k. Are you planning on sabotaging your country's power grid and covering the liabilities? – mastov Sep 03 '18 at 09:51
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    @mastov I am aware of people who consider a year's salary to be a reasonable emergency fund. In some specialised occupations it may well take one this long to find a new job of a similar grade to the previous one. – Tom W Sep 04 '18 at 11:16
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    @GreenAsJade By the same token, there's no indication whether the OP is a "he". – Brian Sep 07 '18 at 14:01
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    Is there an early payment penalty for paying off your student loans? If you don't know, then you should check that first. In the U.S., most FAFSA loans cannot be repaid early without penalty. A car loan is always the worst type of loan as it's a depreciating asset of the worst kind (no other large purchase item loses value as fast as vehicles do). I'd prioritize that and credit card debt ahead of anything else. Does your bank require a minimum amount to be in the account to avoid assessment of a fee? Have you considered investing a small part of that $55K in mutual funds and/or an IRA? – CubicleSoft Sep 08 '18 at 01:21
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    @brian Yeah but everyone in comments is referring to the OP's spouse as "your wife' – GreenAsJade Sep 11 '18 at 03:43
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    @GreenAsJade Everyone in the comments is jumping to conclusions :) There's no indication as to gender in anything the OP wrote. – Brian Sep 11 '18 at 16:30

15 Answers15

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Split the difference. Keep $30K in the bank and pay $25K of loans now. Use your $4,300/month to pay the remainder of the loans over the next 6 months, and then use the following 6 months to replenish your bank account to $55K (if that is the amount you feel like you need liquid for emergencies).

By paying some of the loans now, you demonstrate to your spouse that you are serious about paying them off quickly. This is a compromise that should satisfy most of the needs expressed in your post.

NL - Apologize to Monica
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    I agree, it's a good compromise. My wife prefers to put money towards our mortgage, I prefer investments, so we split the difference and put half-ish towards each. – Kevin Aug 31 '18 at 20:03
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    "My wife prefers to put money towards our mortgage, I prefer investments". I understand both desires. Note that while an investment might return 15% per year while the loan is 6%, the 6% is guaranteed, and an always increasing stock market is not. Debt is a risk. – RonJohn Aug 31 '18 at 20:53
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    It might be interesting to the spouse that with $25k, you could pay off a couple of those loans immediately (or maybe the one big one). – jpmc26 Aug 31 '18 at 21:49
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    An investment returning 15% a year is doing very well. – Sebastiaan van den Broek Sep 01 '18 at 07:57
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    Investing the money while in debt can be seen as having debt for investing. Easy to fall on the nose with that. – glglgl Sep 02 '18 at 12:56
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    @SebastiaanvandenBroek: Normally you'd be right, but the open stock market is up 30% this year. Kinda makes up for 8 years of 3%. – Joshua Sep 03 '18 at 03:34
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    @Joshua – An investment returning 30% a year is doing very very well! – Will Sep 03 '18 at 09:06
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    You can eliminate 3 of your 4 loans easily with 25K and will just have one remaining, which will likely put your spouse at ease. A single loan, which will be payed off in 6 months is a lot less uncomfortable than 4 loans which will take a year. – Falco Sep 04 '18 at 10:41
  • @jo13: Out of curiosity, is accepting this answer an indication that you decided to take this approach? – Brian Sep 04 '18 at 13:41
  • This should be obvious but the money should go to the student loans first. Not only are they at a higher rate, student loans are the worst kind of debt because it is not tied to any asset and is difficult to get away from. – JimmyJames Sep 04 '18 at 14:11
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    I realise it was just an aside, but in no way does 8-years at 3% and one at 30% come anywhere close to matching 9 years at 15%. It's the same as annualized 5-6%. Incidentally, slightly lower than the loan rate. I'm with your wife and Polonius, to be honest, but it's a matter of taste. I sometimes think I'm financially illiterate/conservative but then I discover people who are trying to educate me have little instinct for the underlying maths/concepts. – Dannie Sep 04 '18 at 14:30
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    @SebastiaanvandenBroek True, but the 6% figure for a mortgage is equally exaggerated for the market of the last 10 years (if we're talking about the U.S. here.) Somewhere between 3 and 4.5% would be more accurate, unless you're paying PMI (and if you're in a position to choose between investing and paying off your mortgage, you probably aren't paying PMI.) – reirab Sep 04 '18 at 15:34
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    @Joshua Last night at 7:32:07 pm bets on 07 in roulette at a nearby casino returned 30:1. Makes stock market investors look like chumps. – Yakk Sep 04 '18 at 15:54
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    It should be noted that the debt which accumulates the most interest should be prioritized to pay off first. In this case, I'd say the $24K debt is an easy target, since it's both higher interest and larger value (of note, if you had a $13K debt at 3% and a $7K debt at 5%, the $13K debt would be accruing interest faster, at least until it gets paid down some) – Doktor J Sep 04 '18 at 16:39
  • Remember. Even if your 15% were 100% safe (It is not) you need to pay taxes for the profits and still pay the loans. Calcultate profit after taxes and please estimate an scenario when it also goes -15% – borjab Sep 05 '18 at 08:58
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If your interest on those loans accumulates monthly, it's cheaper to pay them off now (unless the interest rate is below what your money earns you in the savings), though I would make sure I have enough money socked away for an emergency($2k-$5k plus a couple months expenses minimum). If the interest was assessed at the onset of the loan, and early payback won't reduce it, then let the debt ride for as long as you have comfortable disposable income beyond your monthly expenses, seeing as $55k is likely enough for emergencies.

If you do pay back the loans early, check to see if there is an early payback penalty, and if that penalty wipes out the savings from paying it back early.

Another thing I would caution against: If you're considering retirement money in that $55k, don't. The cost of withdrawing from a retirement account, even if it's on a plan-approved loan, is very high.

NL - Apologize to Monica
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GOATNine
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    +1 for not withdrawing retirement funds, even if it's a plan-approved loan. Yes, you pay it back with interest, but the massive hit comes when that money is no longer working in the plan. Consider a 3%, 4%, even 8% loan to yourself, compared to, say, 12%, 15%, maybe 20% (depending on what you're invested in) that it could have been making if you had left it there. Only when it's making the same anyway as the loan interest, does it become worth considering, and even then I'd be hesitant on principle. (If you are at that point, is there really nothing better for you to invest in?) – AaronD Sep 01 '18 at 02:45
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    @AaronD: At the present time, I doubt you are going to find any sensible investments that are at all likely to pay 12% or more. Sure, 2-4 years ago you could get something like that from an index fund, but some things have changed since then. Personally, I'd pay off the loans that are above 5%. – jamesqf Sep 01 '18 at 02:56
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    @jamesqf: It's definitely not a sure thing that those types of gains will continue, but too early to label those gains as years in the past. Considering only low ER broad index funds I hold: ONEQ is up 18% YTD (so that includes the February correction). VUG 15%. VTWG 18%. VTI 10%. MTUM 15% – Ben Voigt Sep 02 '18 at 01:40
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Look at how much interest keeping that amount in cash is costing you. At 5% interest, that's $200 a month wasted in interest payments just for the peace of mind of having cash in the bank.

I agree with your wife. Pay the debt, start saving and/or investing again and that $48k will be built back up in less time that it would have taken you to pay it off a little at a time. It also gives you the flexibility to look at tax advantaged savings (retirement) that will benefit you more in the long run.

If you decide you don't like it, you can always get another loan to put the cash back in the bank.

What kind of "large expense" are you anticipating? Do you not have health and car insurance that would cover you in case of expensive accidents? The only thing I can think of that you would need to save that much money for is a down payment on a house, and I would recommend paying down the debt before doing that anyways.

D Stanley
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    It's the unanticipated large expenses that really get you into problems. Having a large savings prevents having to go back into debt if things really hit the fan. – computercarguy Aug 31 '18 at 21:19
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    If you don't pay off debts, you're definitely in debt. If you pay them off, you might have a large unexpected expense, and so you might be in debt. – David Thornley Aug 31 '18 at 21:26
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    @computercarguy I get that, but $200 a month is a lot (to me) just to keep cash on hand. As I said, you can always borrow if absolutely necessary. – D Stanley Aug 31 '18 at 21:31
  • @DStanley, usually you can borrow the money, but sometimes that's not an option. Sometimes you can't wait to hear back from a lender and just need cash now. I hope that never happens to the OP, but it's an unfortunate possibility that needs to be at least considered. – computercarguy Aug 31 '18 at 21:51
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    IF something really bad happens (that isn't covered by current insurance) and IF it costs more then $7K (or 30K in 6 months) and IF there's no way to borrow or make payments, then yes you'd be better off. That's a lot of IFs for $200/month. – D Stanley Aug 31 '18 at 21:55
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    @computercarguy Usually 'not available' happens to people with bad credit scores. If you've got loans you've paid off, a mortgage you're paying off and $4k a month savings, no lender anywhere will turn you down. Basically the only unforeseen large expense is a car, or health issues in the US (or other countries where health is considered a luxury). The former you can easily get a loan again, and the latter should be covered by your employer's insurance. – Graham Aug 31 '18 at 23:33
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    There are all sorts of emergency expenses that are conceivable, and they can't always be fixed with a loan. Someone could lose their job, resulting in a lower income for a time. It could be difficult or impossible to obtain a loan under such circumstances, even with good credit, because you wouldn't be able to demonstrate the income to pay it off. Health issues in the US could involve expenses not covered by insurance. Major appliances could break. Somebody could need bail and a lawyer. Paying off much of the debt now without wiping out the emergency fund is a good compromise. – Zach Lipton Sep 01 '18 at 05:51
  • This is the only sensible answer. There is simply and literally *no reason* to keep the large pile of cash sitting around. – Fattie Sep 04 '18 at 13:53
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    People lose their jobs. I think there was a time maybe 10 years ago where a lot of people did all at the same time. – JimmyJames Sep 04 '18 at 14:06
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    $55,000 invested at 8% gives $366/mo. So that's a net $166/mo gain for you if you invest it (and can get 8%). Depending on the investment vehicle you can also withdraw the $55,000 for emergencies. Even if you can't get 8% anything above 4.3% will be a net gain. – Arluin Sep 05 '18 at 18:22
  • @Graham They way I understand the US credit score system, having gotten rid of loans might in fact worsen your score. After all, while it shows that you are good at paying debts, it also shows that you are an awful customer who does not earn them years of steady interest ... – Hagen von Eitzen Sep 07 '18 at 06:32
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Unless

  1. You plan on investing that cash in a way that will bring you higher returns

or

  1. You really believe you will need that money for an emergency

You should pay it off. Stopping the paying of interest rates will save you money in the long term. Hoarding it in savings will lose you money in the long term.

Plus, it feels really, really, really good to pay off your school and other outstanding loans. I suspect that is what your spouse wants.

Jamie Clinton
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    An outstanding answer from a new user! – Fattie Sep 04 '18 at 13:55
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    It does not help if you believe that all emergencies you anticipate can be handled - they are not even emergencies, as you plan for them. The unexpected emergencies are the problem, because they are unexpected! Oh, and Welcome! – Volker Siegel Sep 09 '18 at 10:44
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You're both right! I agree with your spouse's inclination to stop paying interest when you have the money sitting in the bank. I also agree with your trepidation of paying it all off due to a possible emergency.

One way to achieve the best of both worlds is with a line of credit. If you have a decent credit score and $55K sitting in the bank, there is a very good chance your bank will give you a line for at least $20K. Then you can feel at ease paying off all your debt right now, since in case of an emergency you could access some of the line, and if you don't have an emergency (which is the likely scenario) then you benefit by avoided paying another dime of interest.

TTT
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    Isn't a line of credit just another loan that will have to be paid off? This would only be useful if the interest rate is lower than the loans you're paying off. – Barmar Aug 31 '18 at 22:35
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    @Barmar A line of credit isn't an active loan - it's a promise that you can take out a loan instantly if you need one in the future. You don't pay interest on it unless you actually use it. – Brilliand Aug 31 '18 at 22:40
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    @Brilliand: But the ones I've seen want you to take out an initial draw on the loan that's somewhere around 25% of the limit. – jamesqf Sep 01 '18 at 03:00
  • @jamesqf - That might be a different product than a typical LOC. All my personal and business lines have no minimums, though many business lines do have an annual fee. – TTT Sep 01 '18 at 03:25
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    When I was young and was learning how to structure my finances I asked my advisor about your strategy -- take out a line of credit for use in emergencies. Her answer was: if the supposition is that you could be in a position where you have an emergency bad enough that you need tens of thousands of dollars instantly, are you likely to also be in a position where it's a great idea to suddenly have new debts to pay? Take out a HELOC to pay for expected debts, like an upcoming home renovation. It's not the best instrument for emergencies. – Eric Lippert Sep 01 '18 at 13:48
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    @EricLippert - I respectfully disagree with her for this reason: anytime you have existing debt and an equivalent amount of cash sitting the bank you are unnecessarily paying interest. The alternative would be to keep some cash and not pay off all the debt (currently the top voted answer to this question). That is better than OP's current situation, but is still unnecessarily paying interest. With the LOC you pay no interest. Once OP builds their cash reserves back up they will likely never touch the line ever again even in emergencies. But they might as well save on interest until then. – TTT Sep 01 '18 at 14:51
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    @EricLippert - (continue) Also, if OP pays off all debts, opens a LOC and then has an emergency, they are in no different of a position then they would be if they had not done that and used cash to pay for it rather than pulling from the line. (Except for the slight difference in the interest rates between that of the current loans and that of the line.) – TTT Sep 01 '18 at 14:56
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    Just as @TTT says. It's that simple. There is just literally > no reason < to keep so much cash sitting around, when you could be paying off a crippling debt. – Fattie Sep 04 '18 at 13:54
  • Personally, my gut reaction to a line of credit for emergencies is no. Some of the types of emergencies (e.g., unemployment) that would require such a line of credit may cause that line of credit to be withdraw. – Brian Sep 04 '18 at 14:54
  • @Brian - See my second comment to Eric (continued). When you have both cash and debt right now, your choice is to either pay interest with certainty, or only pay interest if you have an emergency. The amount of debt you have does not change by having the LOC. – TTT Sep 04 '18 at 14:58
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Paying loans is exactly like making a limited-term investment with very low risk. If you have a 4% APR loan, by paying it off early you will avoid paying interest (assuming your contract allows it) so it is as if you invested the amount you repaid into a business that returned 4% every year. Actually your gain could be a bit more than the 4%, because paying off your loans could improve your credit score and potentially result in lower fees and interest on any new loans you take out.

Then the question of whether to payoff the loan has exactly the same concerns as any investment:

  1. Is the return worth it?
    • Your 3% is maybe on the low end, but 6% is quite respectable. But to be sure, either is better than a typical bank deposit, which might return something like 1-2%.
    • You should be subtracting inflation from your expected returns.
  2. Does it return more than other things you could invest in?
    • Stocks are said to return 7%, but of course that is much more variable and risky.
    • When comparing, keep in mind that the "income" from paying loans early is not taxed, unlike most investments. So paying a 4% loan is technically better than investing in a business with 4.1% return, because you would pay tax on one but not the other.
  3. Is it riskier than other investments?
    • There's not much risk in repaying loans, but there is a big one: There could be some extraordinary circumstance that would discharge the loan without you having to repay it in full. If you've already paid off your loan by the time this happens, you could miss out on the "free money" that essentially comes from someone else footing the bill for your debt.
    • Conversely, holding cash also has risks: It could get stolen, for instance.
  4. Opportunity cost - are you likely to need the liquid funds for an emergency?
    • Unlike traditional investments, you can't simply "sell off" a loan you already paid off. But if you were creditworthy enough to get the loans back then, chances are that after paying them off you will be equally creditworthy so you could easily borrow money again to cover any unexpected emergencies. It is up to you to make sure the loans you could get now have terms as good or better than the ones you currently owe - for instance, student loan interests tend to be very good due to government regulation (yours seems a bit high, though), and you're unlikely to get as good a loan without going to school again.
    • Alternatively, you can try to pay off the loan and buy insurance against the "emergencies". The money you lose on premiums will be comparable to the interest you'd be saving from the loan, but depending on your specific situation you might come out with a small net loss or gain.
    • Having the loan also has an opportunity cost: It could make it harder to get a mortgage or a car loan for instance. But chances are you wouldn't suddenly need to buy a mortgaged house right away, so you could just hold on to the money and pay off your loan if and when the mortgage problem actually happens (it might not).

By looking at these 4 points, and investigating alternatives, you can decide for yourself if you should pay them off or not pay them off. In your case, the interest rates seem a bit high, so I'd look into refinancing for a lower rate or maybe even pay it off.

"On average", a person who has cash on hand exceeding their debts and is using that cash for something productive (either investment or even spending on something they need/want) is not much better or worse off - that's why the bank sets the interest rate at exactly the number it does. But if you're just letting that money sit under your pillow gathering dust, you are the bottom of that average. Borrowing money is like renting it, and paying rent on something you don't use means that rent (=interest payment) is going to waste.

Money Ann
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  • In US (which Q doesn't say, but I don't know any other country whose currency is $ and uses student loans as much) student loan interest is tax-deductible 'above the line' (without itemizing) with a limit of $2,500 and phaseout over $135k MAGI for MFJ, neither of which appears to affect this OP, so paying that off is equivalent to investment income of the same % taxed at ordinary rates -- and worse than same-% qualified dividends or longterm capital gains which are taxed at lower rates. – dave_thompson_085 Sep 01 '18 at 10:05
  • This seems like the best answer. Too bad not enough upvotes. – CrabMan Jan 02 '19 at 22:15
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I'll suggest a compromise: Don't pay back all the loans in one go. Pick the one with the highest interest, and pay off say $6,000 every month (pay back in eight months) or $4,800 every month (pay back in ten months). As much as you can from your monthly income, and the rest from your savings.

Your spouse will be pleased that the debt goes away very quickly. On the other hand, you won't use too much from your savings, and when everything is paid back, you will be able to replenish your savings very quickly. On the third hand, if you pay back the loans with the higest interest rate first, your interest payments should go down every month. If you just pay back $6,000 on a 6% loan, that's already $30 you save every month. And that's just from one payment.

If you only have loans left where the interest rate is lower than your saving account's interest rate, then maybe reduce the repayments.

gnasher729
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Provided that:

  • You aren't locked into paying the full amount of interest, or otherwise penalized for paying it off early
  • You leave enough of a cushion to cover a short-term emergency (anywhere from $1000 to 6 months of minimal living expenses)

...then paying off as much as possible, as soon as possible, may or may not be optimal, in terms of the fastest theoretical growth of your wealth, but it's definitely safe. If you invested that money, you'd likely see returns greater than your interest rates, but you have be willing to accept considerably greater risk than paying it off now.

I don't think there's a single right answer here. It really comes down to you, and your spouse's personal tolerance for risk. If having a loan looming over your heads, or the possibility that the market could take a dive, or you lose your job, or some other emergency, and you might be forced to sell low to keep up with payments, is likely to cost you some sleep, then maybe lean toward repayment. If that doesn't bother you too much, then keep up with your payments and invest the rest.

For what it's worth, I would personally lean toward repaying sooner. But that's me. And that has far less to do with concern about a market crash, and far more to do with valuing the ability to walk away from a job if I need to without being concerned about keeping up with loan payments.

Salad Peasant
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    Yes. If you have good medical insurance (as opposed to promises that they’ll weasel out of), then an emergency fund need only be six months of living expenses, the medical deductible, and the cost of a decent used car. Having that and no debt (speaking from experience) is extremely pleasant. – WGroleau Sep 01 '18 at 12:23
  • Your final paragraph seems to contradict your advice to pay down the debt. OP's current 55k savings can cover his current expenses (4.2k) for almost 14 months without any change. If he pays down the debt, the 7k left over can cover expenses (3.2k) for 2 months. – mao47 Sep 04 '18 at 17:42
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If your earnings are $8500 and surplus is $4200, your burn rate is $4300. Assuming you could belt-tighten at down to $3500, an 8-month emergency fund is $28,000. Done.

Then I'd make sure my 401Ks and IRAs are maxed out, at least to the degree that makes sense to you. These are special trust accounts which are immune to lawsuits, because they are a trust-fund for a purpose: funding your retirement. Fund these first because people chasing you for consumer debt can't go after your 401K, so you will have paid yourself instead of them. Finally the debt.

As far as the loan priority, student loans are weird. They can't ever be discharged in bankruptcy unlike every other loan. But they also have lots of programs for deferring them. If they are Federal loans, they are even easier to deal with if you can't pay them right now. This makes them fairly magical. A Federal student loan is the last thing I would pay off. Seriously.

Private secured consumer debt (car loan) first - get it out of hock. Then other private unsecured consumer debt (credit cards). Then private student loans.

For loans in the same "tier", pay them off in interest rate order. Some people argue to pay the smallest one first, because they feel the "warm fuzzies" of having Knocked One Out will help keep you motivated. That's not really a problem you have, though.

Harper - Reinstate Monica
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    If you defer student loans, or use a payment reduction plan, they will continue to accrue interest. It doesn't make any sense to defer them if you have the money to pay them off. – SeraM Sep 04 '18 at 16:13
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JUST DO IT

Provided there are no pre-payment penalties on anything and you can agree to quickly rebuild your emergency savings back to a level you are both comfortable with, I'd encourage you to go for it. That's four bill payments a month. It sounds like that's four sources of stress to your wife every month.

Just think about never sending in another student loan payment or car payment. Think about having a wife that isn't stressed out when those bills come in. Think about being able to drop that $1000+ a month into a Roth and watching it grow instead of sending it to the car dealership or Sallie Mae.

Kevin
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While I understand your concern about "draining your account", I'd suggest looking at it from a different perspective:

If you had $7K in the bank, would you go out and borrow $48K just so that you feel prepared for emergencies? While you have debt, the money in your bank account isn't really yours any more than if you had borrowed it, so it's a bit of a false sense of security.

Also, regardless of interest rates, there is a definite psychological win to being debt free. And you're in quite a good spot with your income as well - with the debt off your back, and $5300 extra per month (plus interest savings), you'll be able to easily rebuild your emergency fund in right around 9 months!

sǝɯɐſ
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I like GOATNine's and Nathan L's answers, and for different reasons. I've up voted both of them.

GOATNine's answer has you look at the closing fees/costs to make sure it's a good fit, which you should definitely do.

However, I like Nathan L's answer a lot more. Getting rid of debt is usually a great thing in general, and helps your credit score, too. Even if you don't continue to pay off the rest of your debits over 6 months, you've put a serious dent in your debt and your debt to income ratio will still have become much better for you.

To add to those answers, I'm going to suggest looking at your credit history first. To a certain extent, your credit score is dependent on how long you have loans or lines of credit. The longer the better, usually. Having loans that aren't very old can negatively affect your credit score, where having "old" loans can help.

Do some research, and maybe consider consulting a financial adviser before doing anything. Paying off any recently acquired loans first might be the way to go. Keeping a mix of old vs new loans might work better. I'm not sure if having new loans matters, if you have old debt.

Generally, keeping lines of credit is better than having loans, so I'd suggest looking into paying off any loans you have before paying off credit cards.

If you have a lot of different credit cards, now would be a good time to consider getting rid of some of them. Having a lot of different credit cards can be negative to your credit score, but you should keep a couple higher limit cards. These, as long as you respect them and use them responsibly, will help your credit score. Getting rid of the smaller cards can be slightly negative, since your credit to income ratio can change, but since you would be paying credit/debit off at the same time, it should at least even out. Or, with the amount of debit you're looking at removing, your debt to income ratio may improve so much that anything lost due to getting rid of small cards won't even be noticeable.

As an aside, you might want to look into investing into a 401k or IRA for retirement, due to how well you are saving. Those investments will pay out much better returns than a savings account. Other investments can also help you save for retirement, but this is going way off topic here.

After all this research, you may find out that keeping 1 old/long term loan until it naturally is paid off is worth the interest, if it continues to help your credit score. Maybe it doesn't, but do a little more research to see what's good for you. I know paying off all your debt sounds great (it really does), but it might have some unfortunate negative impacts as well.

Just make sure that you and your spouse agree on the final decision, or you might end up on the IPS site next, asking how you can fix the problems you accidentally created here.

Good job at your savings and keep it up!

computercarguy
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    Strongly recommend not spending 2 paragraphs praising other answers. ;) – jpmc26 Aug 31 '18 at 21:50
  • @jpmc26, I'm just trying to keep things in perspective and give credit where it's due. – computercarguy Aug 31 '18 at 21:53
  • Referencing other answers is fine. Just don't spend so much time on them. It's a turn off reading until you get to the actual content you're trying to present. – jpmc26 Aug 31 '18 at 21:54
  • Will paying everything at one shot help your credit score more then paying it quickly but over a few months? To me, the former suggests a lottery winning or inheritance while the latter suggests discipline. That said, I’ve been debt-free for years, and I’d rather continue this way than try to create a credit score again. – WGroleau Sep 01 '18 at 12:13
  • @WGroleau, that sounds like a great start to a new question! I wish I had paid more attention to my credit score as I paid things off so I could have a hope of answering this. – computercarguy Sep 01 '18 at 23:35
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A few points to consider before making the decision:

  1. The pre-payment penalty - Sometimes you have to pay a penalty if you close your loans early. Talk to your bank and check how the penalty compares against savings you will make by pre-payment. If the penalty is small enough, it may make more sense to pay it off.

  2. Tax-saving on interest - In my country you can claim tax deduction against interest paid for education and home loans but not on car or personal loans. Pay off the loan that can't be claimed in tax deduction.

  3. Higher interest loan - Pay off the loan with higher interest rate first. Keep the other.

  4. Larger installments - Instead of paying off the entire debt in one go, maybe you can increase the monthly installment. This will reduce the outstanding debt faster without wiping out your savings.

Paresh
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First look at the quality and kind of debt.

In the USA, student loans cannot be discharged in bankruptcy; but they can sometimes be forgiven if you fall on hard times. On the other hand, some retirement investments cannot be lost in bankruptcy.

Second, car loans at low rates like that are usually because the alternative was a discount for paying in cash, or some other trick. The original interest rate was probably 8%+, because securing a loan against a car is a stupid thing for a bank to do. But now, the benefit of paying it off early is only 3%. Car loans can be discharged in bankruptcy (at the cost of losing a car, which is usually worth less than the car loan anyhow).

Your expenses are currently ~4k$/month. One rule of thumb is to have 6-12 months of living expenses availiable: that is 24-48k$. You currently have more than the high end.

What I would consider doing is:

  1. See if you can get a 10-20k$ unsecured line of credit at prime+3% or so.

  2. Drop your savings down to 6 months -- 24k$. Use the rest to pay off loans.

Start with the student loans at 6% and go down. The ability to reduce payments due to hardship is not as useful as the ability to discharge in bankruptcy, and the car loan is smaller.

You'll end up with a 10-20k$ line of credit (empty), 9k$ in student loan debt, 8k$ in car loan. Your "leftover" cash will go up by 300-600$ (depending on amortization).

Say 5000$ leftover per month. If you put half of this towards debt clearance, you are now 8 months away from being debt free.

The 24k$ in savings plus the line of credit gives you enough money to both buy a brand new car and replace a roof before having to stretch or use credit card debt. (See above comment about why car loans are bad).

Now start saving 2.5k$ a month. Over 10 months you'll recover to your 55k$ in savings.

So 1.5 years from now you are debt-free and sitting pretty, without having to stress your lifestyle or risk a low bank account balance.

Yakk
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    once the loans are paid off, the expenses instantly go down from ~4k to ~3k/month which would mean 18-36k$ of living expenses. – Pieter B Sep 05 '18 at 12:26
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Your goal should be to build equity and maximize net cash inflow. Equity isn't cash in the bank, it's the difference between what you own and what you owe. When you look at cash flow, you want to minimize the tax and interest you pay relative to the income you earn.

Consider the difference between the interest you would earn on money in the bank vs interest you pay on money borrowed. Chances are, you are earning little to nothing on your savings while paying all that money in interest. It's a net outflow you don't need. Once you've paid off the debts you have additional cash flow freed up from the interest you are no longer paying. You could then use that money to either buy stuff or save for a rainy day. If you like the idea of ready cash for an emergency, do as suggested in other answers and set up a line of credit; it should cost you nothing unless you have a balance on it; over all, you will be better off financially.

The only time it makes sense to not pay off a debt when you have "money in the bank" is:

  1. Interest rates have inverted (rare but not unheard of) - you earn interest at a higher rate than you are paying on money borrowed. Banks avoid this because they make their money on the spread between savings and loan rates, but economic fluctuations can occasionally (temporarily) create situations like this.

  2. There is a penalty to pay off early. Here is where some careful math is needed. If the penalty is high enough, it might be better to keep the loan going until it matures; however, even with a penalty, it might still be better to pay off the debt, penalty and all, to minimize the final total cost of the loan.

  3. The "money in the bank" is actually some form of registered retirement savings to which you contributed in order to get a tax refund (reduce your income tax for the year you did it). Collapsing a retirement fund prior to retirement should be a last resort because you will end up paying income tax on that money, potentially cancelling out the entire tax benefit it gave you in the first place. When the tax you've saved outweighs the interest you'll pay, it can make sense to borrow for an investment or keep a loan going.

Anthony X
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