Student Loan Debt

[thegoat]

I'm a newbie to the forums here but have been browsing the past two weeks or so. There is definitely some great advice on this forum and I'd thought I'd ask some questions..

I have about 74K in student loan debt that is broken up like this:
38K @ 8.1% variable
16.9K @ 5.75% variable
19K @ 4.75% locked

My expenses per month:

Student loan payment: $392
Verizon wireless: $50
Car Insurance: $53
Gym Membership: $40
Food/Gas: $300 - this is probably a high estimate
Total: $835


Income per month: $3660 (I don't put into my 401K yet but that will change this month, I plan to put in 4-6%)
Each qtr I also get a bonus + more: $1500 net
I have about $3200 in savings + $2000 in checkings currently

I don't pay rent right now but that could change by May or June.

My quesitons are:

How much student loan debt do I pay down before I start saving for a home?

What loan should I attack first (I want to attack the 38K one first)?

Should I put as much as possible into paying off my student loan debt or should I also be storing as well?


How much do student loans hurt against getting a mortgage? I'm not ready to buy or anything but I'm just contemplating whether I should pay down all my student loan debt then save for home, or just pay down some maybe half or so then start saving for home? I'm 24 years old...


Anyway, thanks for the input!

[Caoineag]

1st question, have you consolidated the first 2 loans yet? This can actually lower the interest rate and lock it in so it can't climb on you.

As to the hurt against getting a mortgage, the debt payments count as debt payments (this matters because its added into the ratio and you really can't go above those ratios). A general way to estimate that damage is play with the mortgage calculator on bankrate.com or one of the other sites that tells you what you can afford. If you play with the debt payment amounts, you can see how much it affects the size of the mortgage available to you.

Personally, I would take the 38k one out first before anything else and then think about the last two since a mortgage will often times have a higher interest rate than those last two loans have...

[noppenbd]

First off, you should look into consolidating your variable rate loans in July when the rates reset (don't do it yet, rates are around 8% now). According to Clark Howard the consolidation rates in July will be 4-5 percent, plus you will be able to focus a bit more by lowering the number of "targets". As for paying off the loans before saving for a house there are different schools of thought. Some would say you don't need the risk of a house payment when you already have quite a bit of debt hanging over your head. Others would say if you can consolidate and get the rates fixed at below 5-6% you should pay them off on schedule and no faster because you can make more investing the extra cash. It depends on your tolerance for risk and your discipline with budgeting and saving. If you are really intense and focused you could probably pay off the loans in full in less than 30 months by paying 2400 a month extra. The reality is most people cannot keep up that intensity for that long without "life" happening.

If you can get intense about it, you could probably tackle the 16.9K loan first, and see if you can knock that out in 7 months (depending on your rent situation). If you can maintain the intensity go on to the 38K loan, which could be knocked out in another year if you also apply your bonuses to it. I think you could keep the 19K, since the interest rate is so low, although it would only take a few more months to eliminate it as well, since you are taking the payments from the first two loans out so you will have more to use.

This is basically a version of the debt snowball approach espoused by Dave Ramsey and others. You start with the lowest balance and move to the highest to build confidence and momentum. I switched the 2 loans around since the 38K has such a high interest rate, but you could follow the snowball exactly if you prefer. This would take about 2 years to pay off all the loans, at which point you could start putting a huge wad of cash every month into a house fund, and really bump up your retirement savings as well.

Personally I don't think the real estate market is going to recover for quite a few years so I don't think you are losing anything by waiting to buy a house. There is a chance I am wrong about the market, but you are getting a guaranteed return by paying off your loans (and a pretty high one at that).

I'm sure others will differ in their opinions....

Dave

[thegoat]

I'm not sure if I want to consolidate both the private variable loans into one since it will make it 56K total, which for a piece of mind feels like I'll never pay off!

Obviously yeah if I take out the 16.9K, I could do this rather quickly...I'm up for a slight raise in April as well so my income will go up probably 3-5%, bonus may go up as well.

I think my plan was to try and save about 10K then apply that to the 38K each time I have 10K. This allows me to at least have some money for emergency until i get to 10K at least...and i always plan to try and keep my checking above 2K. I figured if I did this I could have the big loan paid off in like 12-15 months (I'm factoring in my bonus pay that I get quarterly and if I don't have rent payments of course). Do you guys think this is a smart way to do things or would you just take the extra money and apply it right away?

[jIM_Ohio]

Know more so you can make good decisions. Step 1 is priorities and learning the right way to do things.

1) I would get 401k to 10% or otherwise set 10% of income aside for retirement. Invest this for growth. No other financial issue takes a higher precedence than setting aside at least 10% of income (pay yourself first).


2) go with a broad plan on all other issues 74k is a sizeable debt, but far from catastrophic, and you have a decent take home income (55-60k?) to pay it down.

38k loan- what are repyament terms?
17k loan- what are repayment terms?
19k loan- what are repayment terms?

10 years is standard- please know if you differ from this.

My advice would be "round up" the payments on all 3 loans to nearest $100 (so if payment is $135, send $200). This is what I did. I got some $200/month loans down to $100/month in about 2 years. Rates looked similar to yours too.

3) I would add more cash to taxable accounts. This is an EF/ house fund. I would suggest keeping 3 months in cash for EF, then another 3 months in something more moderately growth oriented (cash returns 2-4%, moderate growth is 6-7%). If serious in house, ramp this up more (maybe pay less to student loans, grow this account at 7-9% annually, then either pay off student loans or just keep debt and get house).

[noppenbd]

I would apply it right away. You will feel great each time, and my worry is that with the almost-10K sitting in the bank it will be easier to spend. I would keep a little emergency funds to the side but otherwise plow everything you can into the loans as soon as the money hits your checking account.

As far as consolidating the private loans, you probably will not be able to do that well on the interest rate with a private loan since they are not guaranteed by the government. If you are going to pay them over a 2-3 year period the interest is not that important anyway.

[noppenbd]

Sorry, but I don't get the idea of putting money into a "moderate" investment earning a possible 6-7% (taxable) while you are paying 8% on a student loan (some interest will be tax deductible). Plus you are not guaranteed of getting 6-7% every year, or even on average over a period of time. Why not take the guaranteed return of paying off the student loans?

[jIM_Ohio]

Originally Posted by thegoat

I'm not sure if I want to consolidate both the private variable loans into one since it will make it 56K total, which for a piece of mind feels like I'll never pay off!

Obviously yeah if I take out the 16.9K, I could do this rather quickly...I'm up for a slight raise in April as well so my income will go up probably 3-5%, bonus may go up as well.

I think my plan was to try and save about 10K then apply that to the 38K each time I have 10K. This allows me to at least have some money for emergency until i get to 10K at least...and i always plan to try and keep my checking above 2K. I figured if I did this I could have the big loan paid off in like 12-15 months (I'm factoring in my bonus pay that I get quarterly and if I don't have rent payments of course). Do you guys think this is a smart way to do things or would you just take the extra money and apply it right away?

Take that same 18k and apply it to larger loan and it will cut the payment in half... making more effective use of your money.

I would take raises and apply them to the EF/house fund (and not worry about the debt so much).

The 8.5% rate on the one loan might be a tad much, so pay down that loan first. The other two are not high at all, and whether you pay them down gradually or in a lump sum the month before you apply for a mortgage won't make much of a difference.

The snow ball technique (Dave R*ms*y) where you pay smallest principal balance first works well for people with a cash flow issue. You do not have cash flow issue, you have a "I need my money to start working for me" issue. To do this best, I would set aside money for retirement and house, while also paying down the debt.

$6000 in annual bonuses towards the 38k debt has this off the books in less than 6 years. I would get regular budget working towards house and retirement first.

[thegoat]

Jim,

I'm going to at least put 6% for 401K to get matching.

As for the terms I think they go as follows:
38K - 15yrs 392/mo

16.9K - 20yr - 135/mo
19K - 20yr - 149/mo

The second group there (135/mo + 149/mo) my parents are helping pay for 2 years and then I will take over those.

My salary is 62K/year + 5K bonus + RSUs which ends up being another 5-10K.


noppenbd - Yeah I didn't think I would really be able to get consolidate the private loans, I've seen a few places give me some offers but it wasn't really going to save me much.

[jIM_Ohio]

Originally Posted by noppenbd

Sorry, but I don't get the idea of putting money into a "moderate" investment earning a possible 6-7% (taxable) while you are paying 8% on a student loan (some interest will be tax deductible). Plus you are not guaranteed of getting 6-7% every year, or even on average over a period of time. Why not take the guaranteed return of paying off the student loans?

Here is why-

I think we would agree a 3-6 month emergency fund is a good thing? OP has the cash flow to fund this account as well?

My suggestion was

3 months cash for primary EF
3 months in moderate growth fund (this is still part of EF)

My guess is it will take OP around 2 years to reach this level of 6 months expenses set aside.

In those same 2 years would will be
a) setting aside 10% for retirement (pay yourself first, start this habit now)
b) rounding up student loan payments (to start paying down the debt)
c) applying bonuses to the 8% loan.

My assumption is in 2 years OP could then look for a more short term approach to solving a specific need (maybe OP feels need to pay that debt down).

But my philosophy for giving advice is always start long term planning (retirement and EF) before fixing short term problems. Long term planning requires a person create habits (setting aside 10% of income needs to be a habit, not a goal). Habits are tough to break. If you only look to solve short term problems, the long term one will come up and bite you (retirement or house savings, for example).

[jIM_Ohio]

Originally Posted by thegoat

Jim,

I'm going to at least put 6% for 401K to get matching.

As for the terms I think they go as follows:
38K - 15yrs 392/mo

16.9K - 20yr - 135/mo
19K - 20yr - 149/mo

The second group there (135/mo + 149/mo) my parents are helping pay for 2 years and then I will take over those.

My salary is 62K/year + 5K bonus + RSUs which ends up being another 5-10K.


noppenbd - Yeah I didn't think I would really be able to get consolidate the private loans, I've seen a few places give me some offers but it wasn't really going to save me much.

If you do consolidate, verify the repayment terms are not extended (from 15 yr to 30 year or 20 yr to 30 yr). This is what I meant by know the situation- make sure you compare both rate and term if consolidating.

[Slug]

As will almost always be the case, you're getting a variety of answers. Here's my thoughts:

1) Agree to pay yourself first. Get the 401k going and at least get the full match. Then open a Roth and put in what you can for now. At least it's open - that's the first step.

2) You make an emotional point about not wanting to consolidate the 2 smaller loans b/c it would be about 56k, and that would feel insurmountable. My emotional reaction to that is don't be stupid. You can consolidate at a potentially lower interest rate in July which will lower the amt. you end up paying in the long run. You absolutely should consolidate.
And then pay the minimum on this new loan until completing step 3.

3) Attack the 8.1% loan. It's a killer. I speak from experience. I'm still paying off my MBA. It hurts, but the money's great :-)

4) Remember the Roth I mentioned in point 1? Yeah, well you can use the money in a Roth to put towards a first home purchase with no penalty. I'd rather you didn't and you saved separately for your first home but just know that you can pull that $ without penalty.

5) Emergency fund for you I would keep at about 5k in an internet bank just gaining the measly interest they're currently paying.

Again, this is just 1 person's opinion. You're smart enough to ask others for help so you'll probably do just fine...

[noppenbd]

Jim,

I agree, 6 months expenses in an EF is a good thing. I just wouldn't put EF money in a market-based investment. Usually the time when you would need an EF is when the market is down (like now for instance). Getting the EF up to 5K (6 months expenses) before paying down the debt is ok with me. The point where I don't agree is dividing up the resources into all these small categories. For me it doesn't work; I guess it depends on a person's temperament. I like the "serial" approach, you prefer "parallel". I also don't see 15-20 year loans as a "short-term problem", especially with interest rates heading up after the next year or so. The OP is 24 years old, and is not in the house market right now. In that case, I say get the loans out of the way now while expenses are low (optionally after getting 5k in the EF), before starting up a family, buying a house, etc.

[jIM_Ohio]

Originally Posted by noppenbd

Jim,

I agree, 6 months expenses in an EF is a good thing. I just wouldn't put EF money in a market-based investment. Usually the time when you would need an EF is when the market is down (like now for instance). Getting the EF up to 5K (6 months expenses) before paying down the debt is ok with me. The point where I don't agree is dividing up the resources into all these small categories. For me it doesn't work; I guess it depends on a person's temperament. I like the "serial" approach, you prefer "parallel". I also don't see 15-20 year loans as a "short-term problem", especially with interest rates heading up after the next year or so. The OP is 24 years old, and is not in the house market right now. In that case, I say get the loans out of the way now while expenses are low (optionally after getting 5k in the EF), before starting up a family, buying a house, etc.

A 20-80 fund or 40-60 fund is what I have in mind. A person could find many balanced funds which never have had a down year, and average between 5-7% returns over time.

This can really help increase savings- like for a new roof, new car, new hot water heater or just cover the fact that a renter's costs will rise annually, and 2% interest rates may not cover that (so EF would need to be increased each year).

I use PRPFX for any savings beyond 3 months expenses, and that only has about 25% exposure to equities. It is probably less than that-
25% is in gold, I think another 6% is silver. I think 25% is in swiss francs, another 5-16% is cash, and the other 28% is split between US bonds and US equities.

[cptacek]

I would start my 401k, like Jim said, to start the habit. It shouldn't be a goal, but a habit. Almost like brushing your teeth. Also, if you get a match, you earn 100% immediately. (put in $400, they match $400, so you earned 100% on that money right away). 100% > 8.1%, so this one wins.

Then I would pay off the 8.1% loan. Agree with Slug, if you can consolidate the other two loans to a lower interest rate, even if the combined amount on the loan gives you heartburn. You ALREADY owe that much, at a higher interest rate. Consolidating it to a lower rate should make you feel better!

I guess when you first start out, you want to have definite "serial" goals and start to meet them, as one poster stated, but as you mature in your financial life, you can start to handle "parallel" goals.

[thegoat]

I think I'll start the 401K pronto to at least have that going parallel with paying down the 8.1% loan. Then maybe once I've paid down a certain amount with the 8.1% loan, I'll start adding to a EF/House fund which later I'll probably split into two.

[maat55]

If your living at home, I would do as you plan to get debt free as soon as possible. It appears you could within two years or so. Being debt free with your income at your age, you will be able to save alot of money fast for your home and etc.

Debt free is a lifestyle same as debt burdened. Most people except debt as a way of life, you don't have to. Good luck.