Need help with small windfall

[SavedintheCity]

Well, the long and the short of it is that my parents will be giving me 10k to pay off some school debt. I have not asked for this, but I would be foolish to turn it down.

I know, an enviable situation to be in. I am embarrassed with my good fortune. Nevertheless, I have a small (but happy dilemma).

I am "supposed" to use this money to pay off a Direct Student Loan I have from my undergrad education which is an outstanding debt of 10,500 at 7.35% interest annually. I make monthly payments (of the minimum) of $115.14.

My wife and I also have an outstanding car debt of $12,454.56 on a 2005 VW Golf with 6,000 miles on it at an annual interest rate of 4.9% My monthly payment is 315.18.

My dilemma is this, do I use the money (along with our tax return) to pay off the Car or the Student Loan?

A few more facts about our financial situation:
All on a per month basis

$3752 /month (take home)
$1315 rent
$92 cell
$550 groceries
$92 Cable/Internet
$67.37 car insurance
$5 renters insurance

Other student loans (not listed above):
$447 (out Prin. 45K) 8%/year
$265 (out Prin. 52K) 3.75%/year

I think I would be better off paying off the car, and using that extra $300 per month to pay down the student loan. Thereby, this windfall will help us rid ourselves of 2 debts instead of just one. So I can pay off the undergrad student loan (the 11K one) over two years. I realize that the car loan is for a lower interest rate, but in terms of "real" interest rates, the car probably costs more due to depreciation. Once that is done, I can really then concentrate on that killer 45K (ADJUSTABLE RATE) student loan currently at 8% yikes!

What say you kind folks?

[sweeps]

Putting the economics aside, you should spend the money on your student loans. It's the right thing to do since your parents are giving you the money for that purpose. IMHO.

[JanH]

Sweeps has a good point. Maybe if you talk to your parents and explain what you told us here, they might agree with what you want to do with it.

[SavedintheCity]

Sorry, I just don't see it that way. My financial decisions are only based upon economics (don't flame about the car loan I know it was stupid). I could care less what my parents think of how I used the money. It is a gift, as a gift it is unconditional. Gifts cannot by definition contain any conditions. What would make them happy is if I am happy, and I will be happy if I am debt free as soon as possible. So optimizing this money's value toward that goal is all that interests me.

Thanks for your reply though.

[sweeps]

Wow, talk about ungrateful.

Ok, you want the economic answer? Do not pay the car off. Pay off the highest interest rate loan first. The monthly payment amount is completely irrelevant if you want to minimize the amount of time (and money) it takes to pay off all your loans. The loan you should pay all your extra money towards first is the 8% rate.

Someone's going to comment that student loan interest is deductible, but that will not come close to compensating for the difference in rates between the student loans and the car loan.

[cptacek]

I agree with Sweeps' original statement. Your parents are giving you a gift to pay off student loan debt, not to pay off any other kind of debt. Unless you tell them you would like to use it for something else and they are ok with it, I think it is rude to use it for an unintended purpose. You should respect what the gift is for, IMO.

[SavedintheCity]

Originally Posted by sweeps

Wow, talk about ungrateful.


Someone's going to comment that student loan interest is deductible, but that will not come close to compensating for the difference in rates between the student loans and the car loan.

First, please keep the editorializing to a minimum thanks. I don't presume to pass judgment on your relationships, please provide me with the same courtesy.

Second, that was not my question. I know you should always pay down the high interest debt first. Student loan interest deduction is currently capped at 2,500 a year. NO way that makes up for the difference. Anyways, I find that there is an irrational relief associated with shrinking the number (in additional to the amount) of creditors. Call me crazy, but having one less 10K debt hanging over my head will make my life a little less stressful. I also want to use the monthly payment from the debts I payoff to tackle the larger debts.

So I want to either pay off the car loan, or the 10K student loan.

As an aside:
Yes the monthly amount DOES make a difference. If on a 10K debt at 8% annual interest you make a $50 rather than a $100 payment you will amortize the credit over a longer term. They are each variables in the same equation, so one does affect the other.

[baking23]

Originally Posted by SavedintheCity

. My dilemma is this, do I use the money (along with our tax return) to pay off the Car or the Student Loan?

That is really nice of your parents. I would pay off the student loan, even though it's a bit less total debt than the car, simply because it has the higer interest rate. Then you'd only have a little less to pay back, and that would be off your mind. Focusing on the car debt would come second.

Just my opinion though.

[SavedintheCity]

Thanks. I was thinking the same thing. Also, another consideration that is playing here is that we will be moving to another country in two years time so at that time I would like to be leaving with as little debt as possible in terms of # of outstanding obligations upon which I must make a payment. So when we leave we will sell the car (so no more payment there) and if I pay off the student loan, then I only have the other two student loans to pay once I move abroad. I am trying to pare down the number of creditors in the states and not the total debt, because I will need to make monthly payments in foreign currency which will expose me to exchange rates so I need to limit that to as few credits as possible. It will cost me more in terms of the length of term, but it will help hedge against unfavorable fluctuations in exchange rates.

[baking23]

Originally Posted by sweeps

Wow, talk about ungrateful.

I don't think that's necessarily ungrateful. I know I asked my parents if I could sell some figurines they bought me, after I had asked them not too, as an early teen.

They were kind of surprised I wasn't going to keep them (IE. they'd paid $50 for a statue, other than one that sold for $35, all the others are going for maybe $10) all are signed by the artist, in the box and I'm still only getting a little bit. I'd rather have that though, that have them collect dust when I don't want them anymore. I offered to give them back, but they said no thanks, so I'm trying to sell them.

And after I explained why I"m selling them, my parents are kind of pack rats, and that they aren't sentimental my dad said the exact same thing. Once you give a gift it isn't yours anymore, and there is no bearing on what the giver wants done with it.

[Scanner]

Editorializing mostly aside, I agree with sweeps - you pay off what the parents give you the money for.

Besides the interest rate, student loans tend to be for a long term - 7-25 years, usually 10 years. Car loans are usually 5 years or less. So, your long term interest would probably be more.

Your parents are giving you the money maybe because they had wish they had provided more while you were in college but now their investments are probably stable, so they elect to pay down the loan now. Better late than never.

Since IMO and your opinion, the Golf was indulgent purchase on your part, I think you should live with high car payment until the end of the loan's relatively short term.

Good luck.

[sweeps]

Originally Posted by SavedintheCity

First, please keep the editorializing to a minimum thanks. I don't presume to pass judgment on your relationships, please provide me with the same courtesy.

Hi, welcome to the Internet.

Originally Posted by SavedintheCity

Second, that was not my question. I know you should always pay down the high interest debt first.

If you know this, then why are you insisting on paying a loan with a 4.9% interest rate before a loan with a 7.35% interest rate?

Originally Posted by SavedintheCity

I find that there is an irrational relief associated with shrinking the number (in additional to the amount) of creditors. Call me crazy, but having one less 10K debt hanging over my head will make my life a little less stressful.

That's fine, but then you're not really looking for the economically correct answer. You're looking for the answer that makes you feel better, which we can't answer for you.

Originally Posted by SavedintheCity

I also want to use the monthly payment from the debts I payoff to tackle the larger debts.

Sounds good in theory, but you will end up paying more in interest over the long haul.

Originally Posted by SavedintheCity

Yes the monthly amount DOES make a difference. If on a 10K debt at 8% annual interest you make a $50 rather than a $100 payment you will amortize the credit over a longer term. They are each variables in the same equation, so one does affect the other.

When trying to figure out the fastest way to retire your debts, no, the minimum monthly payment does not matter. The number of creditors does not matter. What matters is where you put all your available cash after meeting the minimum payments.

[SavedintheCity]

Originally Posted by Scanner

Your parents are giving you the money maybe because they had wish they had provided more while you were in college but now their investments are probably stable, so they elect to pay down the loan now. Better late than never.

Good luck.

Or they feel guilty for bankrolling my sibling who does not have any student debt currently.

Either way, I AM grateful that they decided to give me this money. My manners are NOT the point here however. The point is, for reasons of their own, my parents have decided to give me the money.

The car was not an "indulgence" as you put it. We needed a car, ours was inoperable and could not be fixed. We had no cash on hand to purchase an automobile. We couldn't live/work without one. So it made economical sense to purchase the car. I was pointing our that financing a car purchase is often a foolish economic decision. However, we felt that this decision was made for us. We had no choice but to purchase a car. I don't want to get into a debate about used vs new financing deicisions here. The decision is made, and it's time to move forward.

Thanks for your help though. I think that we will be paying off my student debt with it, since as I said, the car loan is a credit we can get rid of upon sale (it is right side up).

[Scanner]

Another "soft factor" to consider - student loans are generally "unforgivable." Bankruptcy will not protect you. The gov't will work with you - they'll forebear it, they'll refinance it, they'll income contingent it but they'll never forgive it.

A car loan can be discharged with bankruptcy.

I know you are not thinking of bankruptcy and nobody here is but look at it this way - you have some bad circumstances happen to you and you get behind. . .I'd rather have the student debt reduced as much as possible.

You've got a lot of prinicipal on those (sounds like 100K) student loans - you need to start chipping away at it.

Finally, you wrote:

The car was not an "indulgence" as you put it. We needed a car, ours was inoperable and could not be fixed.

With 100K in student loan debt, a 2005 Golf (I assume this was new when you bought it) was an indulgence.

What's the matter with a used Toyota or Honda?

[SavedintheCity]

Yeah I know about the dischargeability, I'm a commercial/transactional attorney

What's the problem with a used Honda? Well, we did not have cash to purchase a used car at the time. Used car dealerships were offering worse interest rates on older models. So despite the disparity in principal amount of the loan, the interest rates would have worked out to the same total amount paid. So, we decided that a new car was a better choice than a used one as all things being equal it has more resale value.

Again, the decision is made, it was not an indulgence, it was the right decision at the time.

Thanks for your help though. I think I am leaning towards the student loan much more strongly now. It just seems more like the "right" fit for my situation.

[Scanner]

Okay, fair enough, I'll take your word that the interest rate on a $4000-5000 loan was high enough for a used car vs. $18,000 for a new car (you are stating you had no cash for either purchase).

It's just that remember this - the car dealership always wins. Yeah, people tell me what a swell deal they got, yadda, yadda and they always say the same line:

"Gee you are such a good negotiator you should come work here."

(now I know I was screwed when they say that to me, LOL)

But if you got 4.9% on the car, you can betcha your bottom dollar, they tacked an extra $1000 on the cost to make up for your poor financial circumstances (high debt) and credit.

Good luck to you - despite the exchange here, you seem to be making decisions on the merit of the arguement, true to ESQ fashion.

[SavedintheCity]

Originally Posted by Scanner

It's just that remember this - the car dealership always wins. Yeah, people tell me what a swell deal they got, yadda, yadda and they always say the same line:

"Gee you are such a good negotiator you should come work here."

(now I know I was screwed when they say that to me, LOL)

But if you got 4.9% on the car, you can betcha your bottom dollar, they tacked an extra $1000 on the cost to make up for your poor financial circumstances (high debt) and credit.

Actually the used car prices were closer to 8-12K and I bought the VW for 15K. So it was much closer to a new car than what you are thinking. Also, we didn't need to put any money down on the VW, and the used car guys wanted something down. Again, we needed a car (public trans blah blah blah) so it was the optimal economic choice at the time, despite not being THE optimal economic choice one can make.

Shivers . . . never ever ever heard that from a car dealer, usually they are too pissed off at me to even talk to me by the end of the deal. We walked out 3-4 times on the purchase of the VW. The sales guy jumped in front of our car to stop us from leaving. We finally signed the loan docs @ 9 pm. on a Sunday night. NOBODY in the dealership smiled at us as we left. HA! You're right of course, the house ALWAYS wins. They were just a little less successful with us.

Thanks for all your help.

[sakigt]

Originally Posted by SavedintheCity

Sorry, I just don't see it that way. My financial decisions are only based upon economics (don't flame about the car loan I know it was stupid). I could care less what my parents think of how I used the money. It is a gift, as a gift it is unconditional. Gifts cannot by definition contain any conditions. What would make them happy is if I am happy, and I will be happy if I am debt free as soon as possible. So optimizing this money's value toward that goal is all that interests me.

Thanks for your reply though.

Luckily your parents dont think the same way, or you wouldnt have any extra money

Pay off the student loans

[bjl584]

I would use the money for the student loans. That is why it was given to you. If you think that it would be better to use it for another purpose, then explain your situation to your parents. I'm sure that they will understand, and will not mind that you use the 10K to pay off some other loan. But at least talk to them about it. Gift or no gift, it's the right thing to do.

[Ima saver]

I agree, I think you should pay off the smaller student loan.