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The perennial question... Should I pay off my loans?

Here is my situation...

Mid 30s. Infant child. Homeowner with a mortgage/condo fees.

I owe about $7750 on my loans. Interest rate is approx 6.67%. Already (unfortunately) consolidated. :(

I have $20k in (liquid) savings, but that is earmarked in various ways. I would say $10k of that I would consider 'E-Fund'... The rest is set up to pre-save for mortgage (withdraw weekly to a saving account, then auto-debit from lender for monthly payment, which puts an extra mortgage payment in savings each year); pre-save for insurance (same deal, save the money in advance then pay in full, to avoid payment plan fees); and pre-saving for a car payment, so I can buy a car outright when my lease ends next year (this is about $5k of my savings).

Complicated, I know, but it works for me :-)

I also have approx $5500 in CDs which wont mature for 4-8 years, but I could always break them and eat 6 months interest as a penalty if required.

Finally, I have my 401k. I am saving 10% right now... I do have enough in there to borrow the max ($50k) if I chose to do so (which I really dont want to)

Its worth mentioning that I really want (not need) to sell my place and buy a single family home. This year. I know my e-fund isnt as robust as I'd like, but that is both another conversation as well as germane to my quandary...

So, as the new year begins unfolding, I am wondering if I should:
(a) Leave well enough alone. Make those minimum $130/month payments and not worry about it--I mean c'mon! Its 'Good Debt', aint it? </sarcarsm>
(b) Pay off the loans from my savings. Just lease another car next year instead of buy--which is what I'd likely do anyway as I think NYC destroys cars which is enough to get me past my anti-lease views in the past
(c) Use one of those blank checks my credit card company sends me (I dont carry balances on credit cards--this is my last piece of 'debt' outside of the mortgage and lease payment) to pay it off. 0% interest for 2 years. 3% fee.
(d) Lower my 401k withholding to 6% and roll the post-tax adjusted take-home bump into my student loan payment (would pay off the loan in 3-4 years, maybe a little quicker)

There are also combinations of the above. I am trying to balance a need for additional savings to buy a new house (and leave some money in the kitty for unforeseen expenses) with a burning desire to retire this debt. I've been out of school going on 13 years now. Enough already! :)

It would also be nice to put in more than the pittance I am saving into my daughter's 529 plan

I guess this is quasi-vent, this post. But I would love to hear some Foolish perspective on this. I know the house thing will be a point of contention, but I am more focused right now with what to do with these loans...

Thanks in advance!
-K
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There are several different ways to approach this decision and ultimately you'll have to decide which approach works the best for you.

Assuming your loan is a federal one (and not private party), one small measure you could take would be to prepay a certain number of loan payments (Double check your loan terms to make sure, but all the federal loans I've seen have a provision were an early loan payment allows you to skip the next payment while also reducing the current balance for interest calculation). You could take an upfront amount out of your savings and then in future months forgo paying the loan and instead transfer the loan payment amount back to your savings account. It takes discipline and some tracking, but from your description of your savings account it sounds like that's something you might actually enjoy.

As a variation to the one above, you could use the balance transfer check to prepay the 2 years worth of payments, then repay the credit card with the money you would have paid to the student loan. Note that this would increase your risk as student loans usually have more favorable terms regarding payment deferrals and economic hardship.

If it weren't for your desire to buy a house, I think the clear choice would be to payoff as much of the student loan that you could afford to. I would include the CDs as part of your efund amount, as its liquid enough to use in an emergency if need be. Then after looking at your monthly expenses, if your new efund is bigger than what you need, put the extra towards your student loan.

If you want to buy a house in the near term than it would be a good idea to build up your cash savings. This would help you with qualifying for a loan and avoiding having to pay for mortgage insurance. And nothing would prevent you from paying down the loan after you've moved in if you still have enough money.

Just some of my thoughts in considering. Good luck!
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If it were me, I would tend to view the CD's as part of the e-fund as well. In that context, you are well funded. I'd suggest paying off a bit excess on the student loans, similar to what was suggested by the other poster, because you are getting a better ROE on paying off the student loans than on any CD or savings vehicle right now.
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I also have approx $5500 in CDs which wont mature for 4-8 years, but I could always break them and eat 6 months interest as a penalty if required.

Why is this not counted as part of your emergency fund? As you point out, you could break the CDs for a pretty minimal hit, if you really had to. That would increase your e-fund up to the $15k range.

So, as the new year begins unfolding, I am wondering if I should:
(a) Leave well enough alone. Make those minimum $130/month payments and not worry about it--I mean c'mon! Its 'Good Debt', aint it? </sarcarsm>
(b) Pay off the loans from my savings. Just lease another car next year instead of buy--which is what I'd likely do anyway as I think NYC destroys cars which is enough to get me past my anti-lease views in the past
(c) Use one of those blank checks my credit card company sends me (I dont carry balances on credit cards--this is my last piece of 'debt' outside of the mortgage and lease payment) to pay it off. 0% interest for 2 years. 3% fee.
(d) Lower my 401k withholding to 6% and roll the post-tax adjusted take-home bump into my student loan payment (would pay off the loan in 3-4 years, maybe a little quicker)


Are you willing to stop using the credit card that sends you the checks? (You don't really have to do this, if you are able to pay the monthly charges off every month, in addition to the required minimum payment, but it will be a bit harder to make sure you are paying enough to pay the former student loan debt off before the promo rate expires.) Are you willing and able to make payments in the $350/month range in order to pay the debt off before the promo rate expires? If so, I would say that you should consider this option. It will cost you about a $233 transfer fee and the debt will be gone in 2 years. Compared to continuing to make $130 payments for the next 6 years or so, which will cost you almost $1700 in interest, using the 0% balance transfer option will be a significant savings.

Another option might be to transfer the debt to the credit card, and continue making the $130/month payments. plus any extra money that you can find, to the credit card. (Please note - your first payment may need to cover the $233 fee so you should plan for that). At the end of the promo rate, you should be down to a $4600 balance (or less, depending on how much extra you've been able to toss at it), which could be covered by your money in CDs, if you don't have another decent BT offer. If you end up buying a car instead of leasing one next year, putting your previous lease payments toward the debt could probably pay it down substantially before the promo rate expires.

AJ
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<quote>Why is this not counted as part of your emergency fund? </quote>

I was considering the CDs part of my car savings.... As I mentioned, I could just plan on leasing again next year, and that would be fine (likely need $1-2k for fees, etc, instead of $15-20k for a new/preowned car--I wont buy used cars in NYC...that is another topic *grin*)

The only fly in the ointment about the BT method (I used that to get out of CC debt about 10 years ago--well versed in this!) is how it would reflect on my credit score.... Not sure I want to take that hit...

I should note that my e-fund, even at 15k, would likely cover at most 3 months of expenses (living in NYC is pricey)... Also, I do not use the CC with the BT offer

These are all great suggestions... Prepaying the student loan seems the most attractive so far.

Good to know that, thus far, it seems that my assessment of the situation seems to be on point... No easy or 'right' thing to do.

Curious... No one has commented on the option of ratcheting back on my 401k.... Should I take silence on this point as it being a bad idea?
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The only fly in the ointment about the BT method (I used that to get out of CC debt about 10 years ago--well versed in this!) is how it would reflect on my credit score.... Not sure I want to take that hit...

Do you know how much of a credit hit that you took when you were using the BT method to get out of debt before?

What is the credit line on the card that you would transfer the debt to? What is your total available revolving credit?

In general, if the debt is less than 50% (sometimes up to 90%, depends on your particular credit strata) of the credit line amount on the single card, it shouldn't be much of hit if any. I once used one of those '12 months 0% on purchase' deals, paying minimium payments and putting the other money into savings (paying 5% at the time) and my credit score was not affected until the balance hit 90% of the line, and even then it was only a few points.

And if the total that you charge on other cards plus the debt is less than 10% of your overall available credit, then there generally isn't an impact either.

If you are worried about what the impact on your credit score would be, there are several credit score simulators that you can use. I've used one at www.creditkarma.com and it seems to be fairly accurate. I think www.bankrate.com has one, too, among others.

No one has commented on the option of ratcheting back on my 401k.... Should I take silence on this point as it being a bad idea?

As long as you continue to contribute enough to get any match from your employer, I would say it's a personal preference for you - investing vs. paying off debt. I will say, it's tough to find a risk free investment that yields 6.67% nowadays, so if that's a way that you can bump up payments on the loan or the BT to pay the debt off faster, I would strongly consider it, assuming that you will be disciplined enough to start putting the loan/BT payments back into investing once you get the debt paid off.

AJ
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Regarding the credit score it, it took a long time after some of my loans were paid off before they got cleared off my credit report as debt - that hurt a little bit.

If you are getting any type of 401k match, keep at it. If no match, maybe dial it back a bit, but I'd still tend to simply pay off with the CD's at that point. CDs are post tax, I assume, and you lose the opportunity to put that money (tax deferred) into the 401k if you don't do it now. you might look at what it does to your New York taxes.

I'm not a big fan of leasing cars, but you know what you need to get around in.

could you get by with one of the car sharing services?
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