Post looks at total debt
repayments for four mortgage/student loan options
Question: Consider a person with a $100,000 student
loan and a $300,000 mortgage. The interest
rate on the student loan is 5.0 percent and the interest rate on the mortgage
is 4.5 percent. The borrower is
considering four repayment combinations – (1) 30year FRM & 10year student
loan, (2) 30year FRM & 20year student loan, (3) 15year FRM & 10Year student loan,
& 15year FRM and 20year student loan.
What are the total loan payments for the four combinations?
Consider the potential implications of these calculations
for your long term financial strategy and the advice you are probably receiving
from your financial advisor about the importance of making large contributions
to your 401(k) plan.
Technical Note: The mortgage and student loan payments are
made in Excel with the PMT function. The
syntax of the PMT function is
PMT(monthly interest rate, number of monthly payments,
original loan balance)
Results:
Below are the calculations for total debt repayments for the
four mortgage/student loan combinations.
Total
Loan Repayment Calculations for Four Options


30year
FRM and 10year Student Loan

30year
FRM & 20year Student Loan

15year
FRM & 10year Student Loan

15year
FRM and 20year student loan


Number
of student Loan payments

120

240

120

240

Monthly
Payment

$1,061

$660

$1,061

$660

Lifetime
Loan Payments

$127,279

$158,389

$127,279

$158,389

Number
of Mortgage Payments

360

360

180

180

Monthly
Mortgage Payment

$1,368

$1,368

$2,065

$2,065

Total
Mortgage Payments

$492,498

$492,498

$371,787

$371,787

Total
Student Loan & Mortgage Payments

$619,777

$650,887

$499,065

$530,176

Observations:
The least expensive loan combo 15year FRM/10year student
loan is $499.065.
The most expensive loan combo 30year FRM/20year student
loan is $619,777.
The difference a staggering $120,000.
Implications:
Most financial advisors want you to pay off your credit cards,
start a small emergency fund and then start investing in your 401(k) plan.
These numbers indicate there are huge potential gains from getting
your student loan repaid in ten years or less and getting into a 15year
mortgage. Many people who choose to
make large contributions to their 401(k) plan do not have enough left over to
make higher payments on shorter maturity student loans or shorter maturity
mortgages. The higher lifetime debt payments associated
with the 30year FRM and the 20year student loans will largely offset investment
gains from increased 401(k) contributions.
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