Student Loan Payoff

[dczech09]

Hi everyone. Here is my situation:

I just payed off my car not too long ago (YAY!). Of course after I pay the thing off, I have to get a bunch of repairs done, which I had to use some emergency funds for. So I have refill my fund which I will be done with shortly.

All I have for debt is about $26,000 in student loans. I have no other debts. I am also possibly taking a new job in the next month which will be a slight increase in pay plus bonuses. I was toying with the idea of straying from the Dave Ramsey plan. Instead of paying of the loans, I was thinking of fully funding my emergency fund, putting money into a 401k (100% match up to 5%), and then paying off my loans.

My rationale for this is that I do not necessarily feel safe with only $1,000 for EF. I have realized that $1,000 does not go very far. Also I don't feel that I should sacrifice retirement to pay off loans. Please note that I plan on pursuing the 100% down plan for home ownership, so this student loan debt I currently have should be the only debt I will have for the rest of my life.

What are your thoughts? Is this a good plan? Should I treat my student loans as if they were to be paid off in Baby Step 5?

[jpg7n16]

Just as a general practice - it would be a very rare situation before I would pass on an employer match.

Like - you need the money or you can't buy food - rare.


If I were in your shoes, I may even contribute 5% to 401k, then build up EF, then SL. So I have no problems with your plan as is.

[disneysteve]

Remember, Dave Ramsey's plan is NOT about what is best financially. He freely admits that. His program is to motivate those who aren't motivated to do the right thing on their own.

If you are motivated and educated and capable of staying on track, you don't need to follow Dave's plan. I sure didn't. Passing up a free 5% match is silly as long as you don't use that as an excuse to drag out your debt repayment indefinitely.

As for the EF, I agree that $1,000 doesn't go too far. I wonder for how many years Dave has been teaching to have a $1,000 starter EF. I think that number needs to be inflation adjusted. One car repair can set you back that much or more. I wouldn't want to have just $1,000 to my name if I could possibly avoid it.

I think your plan sounds just fine.

[dczech09]

Thanks for the replies. That is what I was feeling. I know I don't have to follow DR's advice to a T. I am plenty motivated and educated myself and can make calculated decisions on my own. I guess I had a feeling in gut that paying of the loans first is not my best bet.

[clintdavis]

What interest rate are you paying on your student loan? How quickly can you save your full EF?

[studentloansescape]

If you are comfortable having debt all your life,thats fine.Just wondering if you have considered the interest rate and other charges that can get added onto your student debt over time.I hope you have done your calculations right before taking the risk.

[disneysteve]

Originally Posted by studentloansescape

If you are comfortable having debt all your life,thats fine.

I think you misread the original post. OP didn't say he would have the debt for the rest of his life. He said this was the only debt he expected to ever have from now on. That didn't mean he wasn't going to pay it off.

[dczech09]

My student loans vary on interest rates but the highest is like 6%. Most of my student loans are indexed to LIBOR.

As for holding my debt for my entire life? Obviously someone did not read my post. This is this only debt I have right now, and I do not plan on taking out additional debt for my entire life. I am going for the 100% down plan for home ownership; I do not want a mortgage.

I ran my expected numbers for my new job and I should be able to fully fund the EF by April 2012. If I hit my bonus in December, then I will have it funded then.

After my emergency fund is funded and I am investing 5% in my 401k for the match, I will attack the student loans with everything I got. Basically all I am doing is postponing the payoff of my loans to Dave Ramsey's Baby Step 5 (as if it were a mortgage). I will be debt free before I am 27 for sure.

Edit: Just an FYI, I will be making minimums on my student loans the entire time I am setting aside the EF. There will be no other charges to be concerned with; all my student loan payments are set on auto-pilot.

[clintdavis]

If it were me, I would still pay off the student loans first, simply because of the risk that debt brings into your life. The promise of FUTURE pay and banking my life on that is a scary proposition, and one that has gotten a LOT of people into a LOT of trouble. Be careful presuming upon the future.

The $1,000 is to catch most small emergencies that come up. If you wanted to bump that up to maybe $2,000-$3,000, I think that's fine. But I would attack that debt as soon as possible. Stop paying the penalty of interest.

That being said, you are doing a good job with your money. Keep up the good work, and keep using the ol' noggin.

Thanks for sharing!

[Petunia 100]

<< I am going for the 100% down plan for home ownership; I do not want a mortgage >>

May I ask why? Also, what will you do in the meantime? Rent? Live with family?

[dczech09]

I will rent while saving up money. I live in the Midwest where it is actually cheaper to rent than to buy. I crunched the numbers and I can save up enough to buy a house in under 10 years. The same house with a mortgage would take over 10 years. The way I see it- I can own a home outright quickly...by taking on a mortgage. I would much rather buy a house and not worry about the debt.

Also, with homeownership there are maintenance costs that I will not have to worry about if renting. Don't worry; I'm not your typical twenty-year-old with a wishy woshy dream . I have a brain for this stuff and know what I am doing.

[Petunia 100]

Sounds like you have a well thought out plan. Best of luck to you!

[studentloansescape]

Actually, I intend to suggest that clearing the student loans will be a priority.However,from subsequent posts of dczech09,it seems like hes well prepared with a action plan.So,why not go with it.Best of luck.

[Constance]

There is no way that I would pass on the employee match. It sounds like you have a well-thought out plan. Best of luck to you!

[Student Loan Settlement]

Looks like you built a pretty sound plan What type of student loan do you have? Is it Subsidized or Unsubsidized? Subsidized loans usually have fixed interest. If that is you case, then your plan should go uninterrupted, unless of course our economy as a whole will collapse in a few years. But that's a different subject.

Good Luck

[artwest]

I would bump up the Emergency Fund to $2,000-$3,000 and then start on the Student Loan. Get that paid off THEN start funding the 401k.

The more closely you stick to Dave's plan, the more successful you will be.

[BMEPhDinCO]

I like your plan, but one thing I would suggest:

In addition to the 5% to the 401k, open a RothIRA and put in the max...if you do this until you are 30 and stop, you will be at a HUGE advantage! I am 27 now and just maxed for the first time in 2011. I REALLY wish I had started earlier...and even with the crazy stock market, the time to buy is when it's down...and then sit on it for another 40 years.

So here's what you should do, I think:

5% to 401k (it's not really 5% of your pay, since it's pretax, yay!)
$400 a month to Roth (this will almost max it out, add $200 more in Dec)
3 months in EF (whatever that is for you, expenses only, bare bones)
Pay off SL
3 more months EF (so 6 total)
bump up 401k to 10%, keep going on the Roth
save for your house

[BuckyBadger]

I wouldn't pass up free money (employer match) so I like your plan.

I'd ease up on your no-mortgage philosophy, though, personally :-) There's nothing terribly wrong about a reasonable and appropriate mortgage. But to each his own, of course!

[photo]

Originally Posted by artwest

Get that paid off THEN start funding the 401k.

If the debt were credit card, most of us would probably agree. However, employer-match combined with compound interest on a 401(k) would be foolish to pass up. Most people don't understand the concept of how that compound interest really builds wealth.

The more closely you stick to Dave's plan, the more successful you will be.

I'd never even heard of Dave Ramsey until I watched the documentary film Maxed Out, and it looks like he has done a great job of climbing out of debt and becoming financially wealthy. However, he isn't a god, and although his plan, whatever it is, may be good for several people, it shouldn't be viewed as the only way to build wealth. As with most ideas in life, you listen, apply what is useful to your life, and ultimately make your own decisions.

[Eric80]

How long have you had your student loan for? And how old are you. I presume you are quite far away from retirement age and therefore being prudent about saving for the future, very sound plan. The student debt is quite minor, seeing it is your only debt you plan to have. I think your current plan is good but if you are unsure visit a financial advisor and they will give you all you need to know.