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Subject:  Pay Down Student Loan? Date:  3/22/2007  4:44 PM
Author:  CPAScott Number:  250444 of 313065

OK, I've already had the discussion here about how large my e-fund should be. But I'd like to revisit it to specifically cover the question of whether I should use some of it to pay down a student loan debt.

Some background:

* My base salary is $90K
* My bonus rate is 10%
* With employer match, I contribute 9% to my 401(k) and maximize my Roth IRA.
* I have just over $23,000 at EmigrantDirect in my "e-fund", earning 5.05%
* I am currently paying $300/month on my student loan. The remaining balance is just over $19,000 and carries an interest rate of 6.875%.
* I am not eligible for the student loan interest deduction.
* A portion of my student loan was transfered to a credit card to take advantage of a lower interest rate. The residual balance on this card is just over $2,000 at 3.9%. I currently pay $175/month to this card, well above the minimum.
* Aside from the "installment loan" on the above referenced CC, I carry no credit card debt. My mortgage and my student loan are my only obligations.
* I own a condo with a marginal amount of equity that is going to market next month. I'm not yet clear whether I'll walk away with any cash in hand, but I should, at a minimum, be able to walk away without spending anything.
* My current residence is a townhouse owned by my girlfriend. We opted to keep her place and sell mine but have NOT decided to become co-owners until we buy another house together. At that point we will take full advantage of the equity in her townhouse.
* My GF and I have a joint bank account to which we both contibute. This account is used to cover combined expenses, including all utility expenses at both condos. The only expenses we keep seperate are mortgage payments, insurance, and taxes.
* My career, and job, are quite stable. As a Certified Internal Auditor, I am smack in the middle of a demand-exceeding-supply labor situation which keeps jobs plentiful and salaries high. There is no expectation that this trend will reverse anytime in the foreseeable future.

So -- when I think about what I might need emergency funds for it basically boils down to transportation. I'm driving a 9-year old car with 100K+ miles on it. The likelihood that I'll ever need to use $23,000 over the course of a few months is fairly small. One expense, however, on the horizon is the purchase of a certain piece of jewelry. Thanks to a connection, I can get a near wholesale price, but will still spend thousands. I wish I didn't have to, but, well, there isn't any way to get around that tradition (don't go there ... trust me).

I would dearly love to free up that $475/month going to Sallie Mae and Citibank -- but am very aware not to reduce my e-fund to dangerous levels. Obviously, I could eliminate my student loan debt entirely, but to do so would leave only $2,000 in the e-fund -- much too low.

What I was thinking was the following:
* See how much I end up spending on the diamond. Pay cash. I'm really hoping this is less than $5,000.
* Depending on the amount left in my e-fund, eliminate the student loan on the credit card (yes, it's the lowest rate, but the residual balance is so low that the interest difference amounts to about $60). Take the $175 and overpay Sallie Mae.
* See whether I walk with any cash on the sale of my condo. If I do, use that cash to either a) replenish my e-fund or b) pay down Sallie Mae.

What do you think? How much, if any, should I nab from my e-fund to reduce my student loan obligation?


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