Where do I start?

[Chartreuse]

Hi Everybody! Here's me:

Age: 29, single, childless
My salary: $47,840
Biweekly take home pay: $1200
Assets and savings: $4,000

Federal Stafford Graduate Student Loan debt: $59,000 at 6.8% interest


I'm trying to decide whether I should use everything I have and make as many sacrifices as humanely possible to pay my debt as aggressively as possible. At present moment, I could possibly pay roughly $1300 a month towards my student loans.

Should I devote myself exclusively to paying down the above, or should I also attempt to start saving for retirement by putting the max into a Roth IRA? Am I so deep in the whole that the long-term benefit of paying into a Roth IRA is outweighed in my situation by $5500 cut from student loan repayment and the interest that that loss of debt repayment will ultimately accrue? Should I just pay my loans for the next 5 years and then start saving for retirement?

Is there an optimal choice as far as income tax is concerned?

The situation feels so hopeless to me I'd almost rather hide from the loans as long as possible. I could stay on IBR forever, until 25 years elapses and the remainder of my debt would hopefully be cancelled, but that would really disincentivize ever earning a decent living, and doesn't offer any guarantee that I'll pay less instead of more in the long run.

I've even fantasized about opening a small business, using the loans to pay off my student loans, and then going bankrupt. I know this is a crazy and even unethical plan, but that's how desperate the situation is feeling.

What do you guys think?

Thank you!

[Commercial]

Does your job offer a pension? If not, I would definitely start contributing to a retirement account now.

If you have $1300 extra each month, I would add $100-200 per month to your emergency fund/savings, $200 a month to a roth IRA, and then put $900 per month to your loans. Once your loan is paid off, you can contribute even more to a retirement account but I wouldn't delay contributing completely.

[Chartreuse]

Where do I start?

Thanks for your reply.

I work for the State and I'm paying into some sort of retirement account. Supposedly, it's a good benefit, but I don't know how it works besides that I can't opt in or out. Really, it just feels expensive.

I should have never gone to graduate school.

[jpg7n16]

Hi Everybody! Here's me:

Age: 29, single, childless
My salary: $47,840
Biweekly take home pay: $1200
Assets and savings: $4,000

Federal Stafford Graduate Student Loan debt: $59,000 at 6.8% interest

I'm trying to decide whether I should use everything I have and make as many sacrifices as humanely possible to pay my debt as aggressively as possible. At present moment, I could possibly pay roughly $1300 a month towards my student loans.

I don't think I would take everything and pay off the loans, as you cannot reborrow them in event of an emergency. You need to keep some cash on hand.

You also need to step back a bit from the emotion and view your situation on a 10 year plan. Viewing all the debt at once is too stressful. Let's think of what will likely happen over the next 10 years:

You'll get raises every so often
You may get promoted
You could easily pay off the debt while funding a solid retirement plan

Did you graduate? If so, you now have a graduate degree and that could lead to higher incomes for sure.

Should I devote myself exclusively to paying down the above, or should I also attempt to start saving for retirement by putting the max into a Roth IRA? Am I so deep in the whole that the long-term benefit of paying into a Roth IRA is outweighed in my situation by $5500 cut from student loan repayment and the interest that that loss of debt repayment will ultimately accrue? Should I just pay my loans for the next 5 years and then start saving for retirement?

It doesn't have to be all or none -- ie. either pay off the debts and no Roth, or Roth and no debts. You can find a happy medium.

How about:
1) Build up cash to $5k on hand (for emergencies)
2) Contribute $400-500/month to Roth
3) Pay $800-900/month to loans

Then you're saving for retirement, and working on the debts at the same time.

Hopefully, you'll get raises over time and this will be much easier on the budget 3-5 years down the line. And you'll be able to pay more on the debts at that time, accelerating the process.

Is there an optimal choice as far as income tax is concerned?

You don't make enough to get a huge benefit from the tax deduction on interest. Fortunately, that means you're likely in a lower bracket today, making it more advantageous to fund a Roth.

Focus less on the taxes and more on a long term plan to remove the debt. One month at a time

I've even fantasized about opening a small business, using the loans to pay off my student loans, and then going bankrupt. I know this is a crazy and even unethical plan, but that's how desperate the situation is feeling.

And how would you respond when the bankruptcy judge asks, "What did you do with the money they lent you? And based on your income, you have sufficient income to pay on your debt, why are you trying to discharge this?"

It's not like you just click a 'reset' button and wipe away the debt (that paid for the education you now have, and willingly entered into). There's a judge and a whole process to sort things out. And based on your situation, it would likely be the court's decision to work out a payment plan to pay off your debts. I don't think you'd even qualify for a discharge.

IMO - that's highly unethical, and should not even be attempted. How bout we just try to find a way to help you pay off the debts you took out.

From: http://www.nolo.com/legal-encycloped...iew-29571.html

Who Can File

You won't be able to use Chapter 7 bankruptcy if you already received a bankruptcy discharge in the last six to eight years (depending which type of bankruptcy you filed) or if, based on your income, expenses, and debt burden, you could feasibly complete a Chapter 13 repayment plan. (For more information on these eligibility requirements, see Chapter 7 Eligibility & the Means Test.)

[snafu]

Good on you for having an Emergency Fund. Are you willing to answer a few more questions so that we can make practical suggestions? You need information about the pension plan you are contributing to as a deduction from pay. You need to find out whether you're *vested,* whether the employer is contributing on your behalf and the match. Also ask what the top ten holding are in your pension plan.

Do you have a budget or assigned sums to each of the categories of your expenses? How much for rent, utilities, food, car payments, insurance [car/rental], transportation [operation/maintenance, clothes, entertainment, cable/internet/cell etc.

How secure is your current employment? Realistically, what is the probability of increasing your income using your post graduate degree? Would you consider adding a part time job for added income?

[Chartreuse]

Wow! You guys are great! More details

Thank you Commercial, jpg7n16, and snafu for your thoughtful replies!

To answer some of your questions, here is a long and possibly painful response:

My current budget, which is aspirational in some areas yet still fairly realistic is:

Cell phone: $83 (I have no idea how to cut this down)
Utilities: $50
Driving: $150 (includes gas and insurance)
Groceries: $200
Dining and entertainment: $120
Miscellaneous: $100

For a total of $703/mo. For the time being, I'm helping my father restore his extremely dilapidated second property (of two total properties) in exchange for free rent. The living conditions are quite dismal but I'm happy to have the savings given the huge-debt, hitting-thirty, zero-retirement-savings situation that I've found myself in.

I expect this arrangement to last for some time, though not indefinitely. Perhaps I could make it last for three years.

As far as Roth v. Student Loans, I understand that I do need to save for retirement, but I'm not quite sure how to calculate which plan might leave me with the most money in my pocket. Of course, Roth is a great savings tool, but letting my debt run wild has huge risks (are the risks larger?). I'd really rather not be one of these folks who repays 200% of what they borrowed yet still owes 300% of their principle 15 years later.

So, even though the advice, across the board, is to do both repayment and Roth, I still feel compelled to just dive deeply and firmly into those loans. If I could pay them off in three years, wouldn't that be worth it? I could always save aggressively for retirement thereafter. It seems impossible to get a concrete sense of what might happen in either scenario. It seems like the interest on the loans is more expensive than the loss of the potential interest on the Roth, but I can't be sure.

More about myself. I graduated from law school last May. I currently work in public service (ahem, low salary for an attorney), so I would qualify for forgiveness in ten years, but that option seems unattractive to me for several reasons. First, I would have to stay in this line of work for all of that time; outside of my current position, there does not exist a plethora of options that would continue to me eligible. Secondly, any amount that would be forgiven would be taxable income which can be a substantial amount after all of that time of compounding interest. Third, you have to make 120 consecutive payments under that option, so in the event that I had some mishap and needed a three month forbearance, I would be ineligible. Fourth, you have to pay income taxes on any amount that's forgiven, which could amount to four or five more year's worth of payments ... etc. Honestly, I think that option is bull****; it's not a "plan," it's a solution for a rare group of people who just so have happened to do a particular type of work for a really long time. A nice surprise for those folks, but not a plan for anybody.

I would be willing to work a second job. The major problem with that is that I do have some chronic health issues, and for that reason, just working the job I have can be very, very difficult. I would love to have a Saturday/Sunday waitressing position, but I'm not sure how to make that happen or if it's very realistic. I do not have boundless energy, that is for sure. I'm looking into finding occasional side work, or jobs that I can incorporate fairly easily into my life, like house sitting or cleaning, but that has not yet been fruitful. As far as raises and things go, the agency I work for is not known for it's generosity.

Realistically increasing my salary using my degree: one could increase their salary by quite a bit in this profession, hypothetically. I do have a hand in the pot for a potential private practice gig, but I might not make more immediately. In fact, I could make less. Regardless, I do have an aspiration of moving over to that practice and starting a small business. I'm not sure if I would make tons more, but I could make the same and work less, or, I could stand to gain a lot.

Let's see, my state retirement plan. I'm just beginning to wade through all of this stuff. I'm not quite sure if this is a pension or an alternative plan; it's called a "deferred compensation plan." It looks like I'm free to make before-tax payments into the account. I think that I may not vest until I hit one year of employment (November), but I do think that my employer already contributes on my behalf. At least, my last pay stub says "PERA Retirement YTD $1641.30" as a before-tax deduction and then "PERA Retirement $2776.60 YTD."


Otherwise, I seriously cannot figure out how PERA works. The website is for absolute ****.

Questions:

1) Does the PERA account at all justify my desire to focus exclusively on loans?
2) Does *everyone* need an emergency fund? I feel like a credit card is an adequate life line in my situation.
3) What else can I do?
4) I need to figure out who "the top ten holders" are, I'll get to that. I'm still behind in this process, and that's Greek to me, but have I missed anything else?

Lastly, I am not at all serious about just shifting my student loans into personal loans and then filing for bankruptcy. For one thing, as ****ty as this whole thing is, five terrible years in repayment (I feel hopeful about repaying in five) sounds much better than the consequences of bankruptcy. I was only offering an example of the types of irrational thoughts that begin to surface when you're in this situation. Another example would be the two weeks I spent trying to develope winning lotto strategies. When friends talk about "going to law school" I tell them "WAIT, stop the wedding."

Thanks again, everybody! I look forward to your replies!

[snafu]

YES, everyone needs an emergency fund. Life happens, there are always unexpected challenges and getting into high interest debt has potential to cause more problems and reduce quick recovery. What CCs do you have and what are their current interest rates? For PT work would you consider tutoring for example? Banks hire a lot of PT staff. Do legal firms hire PT staff for weekends or evenings? In this area PT, evening, office cleaners earn reasonable income.

I suggest meeting with someone from HR or Payroll who can explain PERA, it does sound like you get some matching funds and it's important to take free money and plan for change in November. If you have the start of a retirement plan and are tagged with the albatross of a high interest SL, I would support a plan to focus on that paying your regular payment plus the most you can manage directly to principal. The fact that you are in a unique situation with free rent seems a golden opportunity. It would be a good idea to run the figures using Excell Spreadsheet to see how this works out using at least a sum equal to rent you would expect to pay. You could add in the tax benefit from the loan, any extra monies, PT work earnings, etc.

You need to check with Federal Stafford to verify their process so that the sum paid beyond required payment goes directly to principal NOT to pre-pay/make advance payments to the loan. As the principal reduces so does the time frame.

If you could borrow the sum owed from your dad and make payments to him at an agreed interest, at least SL would be more a family benefit. At the moment savings a/c rates are abysmal. In my view, the less paid in interest the better. I know you can make this work while you explore other professional opportunities.

[Baby_nurse]

When you are paying off debt, why would you risk running up MORE high interest debt with a CC instead of having an emergency fund? That doesn't make financial sense if you ever want to be out of debt.

Emergencies happen to everyone. The transmission goes out. You cause a fender bender. You have an unexpected illness or injury while working on that dilapidated property. The list is endless.