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I am a 35 year old with a wife and two small kids making 70 thousand a year and no credit card debt. I am paying for 2 new cars. I just finished my post grad degree and have 85 thousand in student debt. My wife does not work out side of the home, and the only savings we have are in my employeer based savings plan, and it is not much as I graduated last year. I have read the postings on conslidation and July 1, but my questions are:

1. Is it better to put every penny into paying back the student loans, or to build emergency and long-term savings while paying back?

2. Should I try to pay it off sooner (10 year plan, 500 to 1000 a month) or over thirty years (a steady 500 a month).

Thank you all for helping.

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If you can get someone to lend to you for what are historically very low rates (like 5.2% or even 6%), my personal opinion is always go for the longest payback period possible. Some people can't tolerate the debt "hanging over them", and so they say take the shortest-term available. Also, other folks say to get the thing down, 'cause it affects the ability of the borrower to qualify for other lending (like mortgages).

Let me explain my view of it:

When the lender lets you carry a balance at 5.2%, you are able then to take any money that doesn't have to go to the lender and put it someplace else that may yield you a return greater than 5.2%. (I know there are always tax effects in this, but I am leaving them out here for the sake of clarity.)

For example, I know of a student loan borrower (not from these boards) who is paying on the note "as much as possible", while at the same time ignoring her employer's large fractional match in a 401(k) plan. (Say, a 50% match.) It is a sound company that matches in stock, true, instead of in cash, but still, the person is giving up obviously free something of value in return for knocking down what is today an 8% loan, and could be under 6% next week.

It is no stretch of the imagination to foresee that at the end of 5 years, say, a person could save up enough that the 401(k) balance (with tax deferment, matches and gains) is as big as whatever the normal-payment (or extended payment) student loan debt balance would be. ($50,000 401(k) balance vs. $50,000 debt.) In a pure finance sense, I say the loan is covered for, even if it isn't paid off. In fact, it probably can't be paid off, cause the 401(k) can't be broken open without taxes and/or penalties. But at least there is an asset with some expected growth on one side of the balance sheet, matching the declining principal balance, with interest growing at a rather small 5.2%.

(This is close to my own personal situation, except I am in stocks that go up and down. I hit "even" on a mid-5 figure debt in only 20 months, believe it or not, coincident with the tech bubble, but since then have bobbed up and down over that break-even line. I could stop putting into 401(k) if I wanted to, and use that money to pay Direct, if I had to, and still be assured that I had an asset sitting somewhere that is expected to grow more than the interest that I'm paying Direct.)

Also, I imagine there are situations where people are having great jobs and making money that they are using extra to pay the student loan, and then one fine day they lose their jobs and income! Now, they have a nice low student loan balance, and no emergency money. They end up borrowing on credit cards that cost three or four times as much as the student loan debt did. And even though it's great that the student loan has deferments just for this kind of situation, there's still no cash to put food on the table!

Had they just chilled about the student loan balance, and paid the minimum required, they might have built up a fund that could be used for "the unexpected". And not just "the unexpected", but any opportunity that comes along that allows you to save more than the 5.2% interest you are being charged at Direct---and those opportunities abound in our investment-driven society.

I have a real tough time with this phrase "hanging over your head" to describe debt, that you did not use but is commonly used. I look up, and nothing is "hanging over my head". In fact, the thing is sitting as a paper contract in a drawer, below me. It's in there, with other tools. And as long as I take care of it, like other things I have, it should be useful to me for a long time. After all, the education I got is going to last me a lot longer than 10 years, so . . .
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Hey Papercomet,

Congrats on the degree and the family, you are doing well. Being in a similar situation, I will offer you an opinion. Just remember that it is only an opinion.

Depending on the interest rate that you can lock in and the prospect of future income, you should definitely try to pay the loans down as quickly as possible. With that in mind, the fact that you are the sole bread-winner for the family begs the point that you really need to have the emergency fund available, because you will utilize it with 3 non-wage earners depending on you.

If you like, there are several calculators available on the Fool homepage that will help you figure out how much you should save for emergencies and how much your loan will cost you in interest over different time periods. A 30 year loan will cost usually around 2x the original amount ($170K). My current plan is to save the maximum matched amount in the employee savings account (403b or 401k depending) and then allocate any other cash flow to a 50% split between emergency fund and loan repayment. After hitting the amount that I want in the emergency fund, the plan is either 75% loan repayment and 25% future purchase fund or 100% loan repayment.

Some other general ideas are do you own a home with any equity, are you planning to buy a home, and what do you plan to save for your children's college? You will likely benefit from the tax deductions of student loan interest, but I do not. Depending on you car loan rates, you may look into retiring those first with any excess funds. It is a tough row to hoe, but good luck and remember what your priorities are.

mjk
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What would you do if you had an accident and couldn't work or were laid off....

That would be a nightmare with no savings and four hungry mouths. Especially with a family you need to generate an emergency fund. Say, six months of living expenses for your family (bare minimum budget). The going e-fund standards on the other boards are at least three, maybe six months of living expenses. This is your contingency fund you don't want tied up in stocks, 401K, or anything else (try a Credit Union interest bearing account or money market fund). IMHO, it should be the minimum for any family and one wage earner.

In my opinion the e-fund is before any other spending/paying back. Emergencies are not predictable, by definition.

Then I would get the free money with the 401K match, no more, until the student loans were paid off. Why? Because I want to have a positive net worth. Sure, I can take the tax deduction on the student loans for 60 months and I will try to get it paid off in that time frame.

E-fund should be non-negotiable with kids. Then 401K free money. Then get that monkey off your back, get a positive net worth by paying off the loans. Federal loans can be defered if an emergency happens and you have financial hardship. Private loans may not be that easy. Then start investing with a DRP, CD, IRA, whatever.

Just my holy opinion.
Mangard
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