Comment by lettergram | Hacker News Reader

Comment by lettergram | Hacker News Reader

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Currently, I use part of my student loan payments to shield against higher taxes. AKA I can write off the interest payments on my tax return. I can then use the money I write off to invest in the stock market, buy groceries, etc. This is better for the economy long term, but also for myself. That's why there have been discussions around the topic, but not much action in the U.S.

Here are some issues it would have caused:

(a) Reduced my chances of getting an education at a top rate university (because I would be considered "at risk" for not succeeding, at least on paper). So I would have ended up at a less prestigious school, made less money, etc.

(b) If I had say 10% of my income siphoned off to a private company (which is a scary thought), I wouldn't have the opportunity to choose how to spend my money. For example, I have chosen to skip paying a loan payment to pay rent. I called and asked if this was alright, they told me it was fine. It kept me from being homeless for a month while I handled a cashflow issue.

(c) Because of the tax benefits, I have zero incentive to pay off my loan quicker. If 10% of my income went to some loan agency I'd pay it off quicker than I am now, and thus have less interest to write off. Further, I make money quicker than I lose it due to loan interest on the stock market, so I can actually pay back my loan faster by investing, then paying down the loan. This also helps spur the economy along, and at scale this is a massive reason it's not in anyone's best interest to implement a plan like this.

But why spend a dollar to save ten cents? If you paid off your loans quicker the savings in interest will far exceed the savings in tax deductions and depending on your rate of return in the market could even trump those gains.

If your loans are only at 3.5%, but you can earn 7% on the stock market, you're throwing money away by paying over your minimums.

> loans are only at 3.5%, but you can earn 7% on the stock market

This isn't prudent asset-liability matching. If your loan is 3.5% and you can find investment-grade bonds that (a) yield more and (b) compensate you, in the spread, for your risk and hassle, then that might work.

These comments are proof we've been in a bull market far too long

Agreed, and a completely federal reserve fueled one at that.

I remember how, with great fanfare, DOW 10,000 was ushered in. I was in 8th grade and it was 1998 or 1999, I remember how ten years later the DOW hit about 6,000.

We do not know how capitalism will respond to competent robotics and AI, and a population bust.

Exactly right!

My highest loan is 10% interest (private loan), average between all of them is 5.2%. My annual return on the stock market is always well above 10% YoY... sooo it's basically never worth it.

Which is my point, the whole "we'll make you an indentured servant until you pay us back", seems stupid.

averaging 10 pct YoY? For how long? Goldman sachs might want to hire you.

Looking at Dow returns since 1975, you have about a 40% chance any given year of getting < 5% return.

Can't you refinance the 10% one? My unsecured personal line of credit that's fully dischargeable in bankruptcy only charges 6%. 10% is a massive ripoff.

I'm only a couple of years out of school so don't think I'm rich or own property or anything.

What happens when another 1999 happens with three straight years of 20-30% declines? Or a 2008 where there's a nearly 40% decline? It takes several years of double digit gains to recover from these declines, and both of those happened within a decade (and we are not even a decade out from 2008).

Point is, investing v. paying off debt is not a simple matter of average expected growth compared to interest paid on loans. Investments often lose large portions of their value in the short-term while paying off debt is always a guaranteed return. So, for short loans (<15 years), it's probably not wise to use average expected return, instead use a wide range of +15%pa and -30%pa.

I'd argue the fact that you've beaten the average expected yearly return for so long suggests that a correction is imminent and paying off debt has a better expected return than investing. This goes doubly because so many people have forgotten the lessons taught by past recessions and believe that 10%+ annual returns are the norm.

> I'd argue the fact that you've beaten the average expected yearly return for so long suggests that a correction is imminent and paying off debt has a better expected return than investing.

I wont even disagree, but my point is that it should be an option to do, versus money just being taken out of my pay check to pay a loan.

>"My annual return on the stock market is always well above 10% YoY"

That would make you one of world's most elite money managers. I'm sorry but that sounds to good to be true. Bernie Madoff was getting his clients 10% year over year and that turned out to be too good to be true as well.

Could you share some details on this investment strategy you have?

First, I hold all my investments for a year then dump them (occasionally, I'll rebalance before a year). I've been doing this for 5 years, averaging 35% returns. I said 10% a year, because I'm assuming one down year I will "lose" significantly.

I always do this in March, after my tax return, because that's my "play money". All the money I made from the prior years investments + tax return I usually dump into other investments that hold up over time i.e. gold, real estate, etc. or invest in my business.

Here's this years, which has been unusually good:

http://imgur.com/a/j8YWR

I pick the high movers using a method I'm not going to describe at the moment. However, I am making a website which will help others invest as I do. It'll be a paid service, but I'm not going to charge outrageously. You can follow on my blog, I plan to release it sometime in late spring:

http://austingwalters.com/

Feel free to follow me, and I'll send out an update when I'm ready to release the stuff.

You mentioned earlier:

>"I use part of my student loan payments to shield against higher taxes. AKA I can write off the interest payments on my tax return."

and then:

>"All the money I made from the prior years investments + tax return I usually dump into other investments that hold up over time i.e. gold, real estate"

I am sorry but that kind of sounds like you are gaming the system. I don't think the intention of the student loan tax deduction was to allow people to buy gold and real estate but rather to help people to make ends meet. You don't actually need that deduction it sounds like.

You are on hacker news, I'm pretty sure hacking the system is part of what this site is about

> I am sorry but that kind of sounds like you are gaming the system.

Story time.

A side hustle I'm working on is creating a site that matches investors with solar projects. Due to how solar tax incentives are structured, if I can properly estimate your tax liability, I can create a partnership vehicle where instead of your tax liability going to the US federal government, its all invested in solar generation projects.

You still have to pay taxes, but because of a legislative and tax code hack, you can fund renewable energy deployment instead of federal tax receipts.

This is gaming the system, but I'd rather my money go to clean energy and not bombing innocent brown people and another carrier group. Economics 101 is incentives matter. If you set a system up, be prepared for people to poke at it to find its weaknesses.

EDIT: @bogomipz

Regarding your comment:

"So that Federal Government was OK when it came to you getting a student loan for an education but it's somehow not OK when it comes to paying your fair share to fund it? I don't like paying taxes as much as the next guy but I do it and I understand why I need to."

I'm a high school dropout, and the services I care about (Social Security and Medicare) are funded out of my payroll taxes, which I'm fine with (I've paid $73k into Social Security, and $21k into Medicare, not including the exact matches my employers have paid in). I pay for the things that should be paid for (social services), and avoid paying for things that are unjust (the us military).

>"if I can properly estimate your tax liability, I can create a partnership vehicle where instead of your tax liability going to the US federal government,"

So that Federal Government was OK when it came to you getting a student loan for an education but it's somehow not OK when it comes to paying your fair share to fund it?

I don't like paying taxes as much as the next guy but I do it and I understand why I need to.

Student loan interest is an adjustment ("deduction") to gross income not a credit. 2016 - $2,500 for the year max deduction, so based on your tax rate you can compute how much your real "savings" are. I wouldn't necessarily think of this as a shield against higher taxes.. the amount is marginal based on the tax bracket your in.

Totally agree $2500 isn't much, but when you couple it with the fact I make more money on my investments than I do from paying down my loan (plus interest), it would actually cost me a lot more potential earnings paying down my loan.

I thought the same thing. My strategy was just to pay down loans as quickly as possible before putting money in stocks outside of retirement accounts. A flat year in the market doesn't make the OP's strategy worth it, not to mention a decline. Even in a really good year, $2500 isn't a huge amount to offset gains.

> I wouldn't have the opportunity to choose how to spend my money

But you did have a choice. You spent it before you had it, by borrowing from someone else. That was your choice.

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