Student Loan vs Car Loan

[snshijuptr]

Hello All! So as most of you know I've been a long term poster here and a sporadic blogger. My husband and I are in decent shape financially for young married graduate students and are working toward several goals at the moment. We already have a 6+ month e-fund and are putting away $5K a year in retirement. Currently we are both graduate students, but my husband also works full time.

So here is the specific situation. In January DH's Student Loans come due, $13K at 6.8%. In April, my lease runs out. In May/June we are expecting a baby!! DH will work from home over summer and part time next school year. We will have $15,000 saved by January ostensibly to buy a car. Here are my options:

1) In January, start paying the student loans. In April, buy a car and pay cash.
2) In January, pay off the student loans with cash. In April, finance a car.
3) In January, start paying the student loans. In April, live without a car as long as possible. In May/June, have the baby. Later, buy a car and decide what to do with the cash.
4) In January, pay off the student loans with cash. In April, live without a car as long as possible. In May/June, have the baby. Later, finance a car.

I'm willing to hear other plans people can think of. My original plan was to go with #1, but now I'm leaning more toward #4.

There are two final small factors in our decision. My in-laws are paying DH's undergraduate loans for him, and they are all serviced together. Paying separately might be a pain in the butt. Also DH is currently waiting for the California bureaucracy to pay $2,000 toward his student loans for his teaching service. We are not entirely sure which loans they will apply it to. We cannot get a clear timeline for when this payment will apply (it has to be cleared in the state budget). There is a small chance that in 2 years he could requalify for this program, but for now his school is too nice.

[MonkeyMama]

Congrats!

I have 2 immediate thoughts:

#1 - Why finance a car? Buy something you can pay cash for. Wait, if need be.

#2 - Having a baby often comes with unforseen expenses (medical, time off work, unexpected need to be home with baby, etc., etc.). I would personally hold onto as much cash as possible until baby is about one year old. (Several financial experts advise hold onto cash until the second the baby is born. I strongly disagree. Then all I read is about mothers cash strapped with no options, because they have no cash, they realized they couldn't work, emotionally, or that they had medical bills coming in for many months, etc., etc. Ask any new mom how it is going financially).

I wouldn't pay the student loans, and I would wait as long as possible to buy a car. I'd personally set my sights on something far more used and modest to make it work. (For reference, the car I bought when my baby was several months old was a 4-door sedan I paid $800 for. I wanted a minivan and even had the cash, but we waited it out 3 years to be sure. The $800 car had many years left in it when we sold it. It had actually been newer than the 2-door sports car I sold for $3000 - couldn't fit a baby in it. Just had a lot of miles, and wasn't as sporty). Anyway, even setting your sights down to $10,000 may give you a lot more breathing room and keep you out of debt.

Once things settle down after baby, consider paying off the student loan.

[bjl584]

I'd be more inclined to start paying on the loans and buy a car for cash. The SL's have a tax advantage in that you may be able to write off part of the interest.

If you think that you can live without a car (which I couldn't), then by all means, do it. Start paying the loans, let your savings build a bit longer, then buy something.

Are you planning on buying brand new? Here is another option, take say $8000, get a nice used car, then take the remaining $7000 and apply it toward the SL's, then refinance them. This way you have a fully paid for car and a lower payment on the SL's.

[snshijuptr]

My hope is to get another Honda Fit. I love my husbands car and would really love to get another. If we can handle only having one car, I might sign up for our campus ZipCar which is very inexpensive to give us a bit of flexibility. If we can wait until Fall, Honda usually offers .9% financing on their previous year models which would be less than our savings accounts earn.

@MonkeyMama - I'm not too worried about having cash on hand. We have a 6 month e-fund which we added $10K to to cover both immediate baby expenses and the forseeable increase in monthly expenses after having a baby.

@bjl584 - We are firmly in the 15% tax bracket which means that our tax advantage on our student loans moves the equivalent APR from 6.8% to 5.78%. With our good credit, we can easily finance a car, new or used, for less than that. We only have federal Stafford loans so we cannot refinance our loans. We can only consolidate them which keeps the interest rate the same.

[disneysteve]

I would definitely not do 2 or 4 on your list because they involve taking on new debt.

Personally, I'd do 1 because "live without a car" is not in my vocabulary. However, if it is something that really could work for you, then 3 isn't a bad way to go. If you find after a few weeks that only having 1 car is becoming a problem, then go out and buy one then. After you pay cash for a good used car, you can put the remainder of the savings toward the student loan.