Student Loan Quick Payoff

[RainyDayFund]

Hi folks, I am brand new to this site as of 3mins ago. I found it stubling across some personal finance sites, glad to be here. On to my question. At the moment I have student loan debt like most other college grads. Private loans + federal loans, I am looking at somewhere in the neighborhood of $73,000. I have two loans that are at 9.5% (private loan), one that is 7.5%(private loan) and the rest are 4.5%(private loan) and the federals are 2.5%. I am looking to aggresively pay down the loans within 5 years. At the moment I make $40k/yr, I contribute the 6% max in my 401k and I also have a Roth IRA that I contribute 4% to as well. I have zero credit card debt.

Should I pay the minimum on the federal and double payments on the private loans? I am also in the process of saving my remaing $250 (after bills) for an engagement ring. I have also threw my resume on cragislist for weekend work. Any suggestions of how I can aggresively pay these loans down while still maintaining a health savings for an engagement ring?

Thanks in advance

[artwest]

Welcome RainDayFund!

Good job on not having any credit card debt.

The first thing I would do is quit contributing to the ROTH IRA until you are out of debt.

I would ignore the interest rates, list your loans from smallest amount to largest amount. Make minimum payments on all but the smallest loan. Pay as much money as possible on the smallest loan. When that is paid off, add that payment to the next smallest loan and keep doing that until all loans are paid. The return to investing in your ROTH IRA.

[RainyDayFund]

Thanks a ton for your insight Artwest. I can see where you are coming from by having me stop contributing to the ROTH.

[riverwed070707]

I agree with Artwest except that I'd put them in order of interest rate and pay them highest to lowest. My favorite debt calculator is whatsthecost.com. Find the snowball tool and put in your loan amounts, min payments and interest rates plus the amount you have to spend on debt each month and it will tell you exactly what to pay toward which debt, how long it will take you to pay it off and how much you will have spent in interest during that time. You can play with the numbers to see how big of a difference even an extra $50 makes.

Good luck!

[RainyDayFund]

Wow, that finance calculator is amazing. Thank you for taking the time to share that with me and others.

[Slug]

I would still nominally contribute to the Roth. Yes, it's unlikely to beat a guaranteed 9.5% by paying off the loan, but it's a good habit to be always contributing even if you take it down to $20/mth. It will stay on your mind and in your habits.

[RainyDayFund]

Thanks for that pointer Slug. Its appreciated.

[dczech09]

Personally, I do not think retirement saving should be sacrificed to pay off student loans. Now I am not saying that you should be putting like $1,000 per month into retirement; I'm saying put some amount in that gives you a healthy addition to your savings, but also allows you to pay down debt.

For example: I am putting about $300 per month into my Roth. Yet at the same time I am putting about $500 per month to student loans. I have no other debts aside from $25,000 in student loans so I am pretty happy with my decision.

Ultimately wouldnt you just hate to FINALLY pay off the debt and having nothing in retirement savings? That would kinda make me feel like a loser. Personal finance is not just about getting out of debt; it is about balancing priorities and goals.

[DRILLINDK]

Max out all tax free/deductible contributions!!!! You do this by maxing out your 401k, Roth IRA, HSA (if eligible). This is "pure" money, even before the government can get it's hands on it.

Then, with your AFTER tax money, pay down your student loan debt starting with the highest interest rate one first!


Also, go to a few local banks and see if you can take a lower interest loan out to pay off the high interest student loans. I did this exact strategy, finally finding a bank that gave me a rate of 5.9%. Much better than the 8.9% I was paying before!

[danieldroga]

I would like to welcome you here. Feel free to ask questions. About your post, I also have to agree with artwest. You need not to worry about the interest rates.

[RainyDayFund]

Everyone here is extremely helpful. I do appreciate all the insight. I have been looking for a forum where there are insightful, helpful and respectful people for so long. I think I have found it here. Thanks!

[ez1]

Originally Posted by DRILLINDK

Max out all tax free/deductible contributions!!!! You do this by maxing out your 401k, Roth IRA, HSA (if eligible). This is "pure" money, even before the government can get it's hands on it.

Only thing I'd be cautious about with this suggestion is that you need to know your tax bracket now and what you think your tax bracket will be when you retire. The original poster said he makes 40k now? Given the excellent attention paid to saving, planning, etc., I expect him to be quite wealthy when retiring, thus making his marginal tax rates much higher at that point. I would think contributing to a 401-k is not that good an idea. Sure, you shield money from taxes now, but then you have to pay taxes when you withdraw. There is absolutely no net savings in taxes by doing that unless the tax deductions now would somehow affect you in other ways (like Alternate Minimum Tax). The argument that your 401-k earnings also grow tax-free is moot, because you pay taxes on them. Do the math - it doesn't help.

The Roth IRA is absolutely perfect for your situation, where you pay your low rate of tax now and then pay no tax on what it earns or your withdrawals.