repaying student debt quickly vs. saving

[wree]

I just graduated from college, going to start a new job soon. I have some student debt to repay, and it is important to me to have build sufficient savings.

my question is: should I try to repay student debt off as fast as possible(like putting 30% of income or more for one or two years into paying it off, so I can do it quickly) and forgo saving up emergency funds or money to invest, or it is better to pay the debt off slower and start saving up money for emergencies and investing while I pay off the debt?

I would like to get at least a few months worth of cash to live on saved up to have in case of emergencies, but doing that will make me pay more for interest for student debt so I am having difficulty balancing the trade off.

[disneysteve]

Congrats on your graduation and welcome to the site.

What are the interest rates on your student loans?
Do you have any other debt such as credit cards or car loan? If so, what are the rates on those?
Does your new job offer a 401k and, if so, is there an employer match?

I would definitely set aside at least a small emergency fund of $1,000 or so before paying any extra on the loans. Once that is in place, what I'd do would depend on the answers to the above questions.

[wree]

I don't have any other debt, the interest rate is 5.25. I don't know yet about employer 401k.

[wree]

I have to pay 14K at %5.25 and 2K at 11%, and I am going to live on half my income.

I can't completely wrap my mind around the opportunity cost of paying off student debt in one year and living off half my income, or paying it off to two years by using 25% of my income.

If I pay it off in two years, then I can use the the other 25% I am saving to invest, or save,but I don't know if I can assume that the returns I would get investing it will exceed the cost of paying back my debt. I don't want to invest it and get returns lower than the interest rate that my loans have.

Also, I am not sure if I should try to acquire assets now while the economy is bad and some things are slightly cheaper and that will override the cost of paying more in interest on student loans, or if it is better to kill the loans in one year to open up money to put into acquire more assets next year.

Also, I am unsure about how much liquid assets I should keep on hand, some times I hear half a year other times more than a year.

[drfrink24]

Since 30yr mortgage rates are so low now, and housing prices depressed, you may want to buy a house first.

How long do you student loans stay at 5.25%? That seems pretty low for an extended time.

Also, a mortgage will reduce your AGI, which saves even more money.

401k match is usually a no brainer. If you don't take advantage of that, you're looking at free money going by the wayside.

I'd recommend:

Finding an AFFORDABLE house, (don't go crazy here) w/low % 30 year fixed
Pay the minimum on the student loans, since they are 5.25%
Build an emergency fund
Try to max your 401k match, if possible
Take your extra student loan payment you originally wanted to use, and put it to the highest % interest loan first -or- invest it, hoping to beat 5.25% (don't forget possible tax implications)

[wree]

I don't know what AGI is.

Other than the 2k loan, the loans are stafford loans, I am not sure if they stay the same or not.

I thought about getting a house with a 30yr fixed, but I haven't done so b/c I am not 100 percent sure on if I will need to move in the next few years and I don't want to have to deal with trying to sell it for several years.

Housing where I live is not really much lower, if any, (as far as I know). I'd have to throw about the same amount into a house(at this location) as I would have before this recession or depression or whatever it is now that our economy is in.

[Hot dog]

I would at least focus on the 11% loan first just put it all towards that cause that is an easy return on your money. are you living at home or have to rent? If you could stay at home for a couple years and start off debt free with money for a house down payment that would be awesome.

[boosami]

Moving expenses, security deposits, pro-rated pay, delayed paychecks, installation/service fees, tax witholding, insurance...

All of those things and more can surprise you when starting a new job or especially your first job out of school. If you aren't careful, too much spending and no savings leads to credit card debt. You can avoid that by being smart about the situation.

What I'd do if I wasn't quite sure about how much it would cost to live:
Pay the minimums on everything for a few months, and send any extra money at the end of the month to savings. Use the savings to handle those extra unexpected expenses instead of resorting to a credit card.

In a few months, your cash flow in and out will stabilize and be mostly predictable. When that happens, use any extra money to fund the 401(k) up to the employer match, then split what's left over to the $2k debt and savings. There will always be some irregular or unexpected expenses, so you should always have some money going into savings to avoid incurring more debt!

After paying off the $2k, focus on saving up 3 months of expenses in your savings. If you use some of it for irregular expenses, make sure you replenish it!

For months where it doesn't need any replenishing, put half the amount toward your Stafford loans, and half into another savings account (or just keep track of what's emergency funds and what's extra savings). Ultimately you can use the extra savings to invest, for irregular expenses, or for a large purchase.

Oh, and each year, increase your 401(k) contribution percentage until it's maxed out.

[jIM_Ohio]

I would do a broad financial plan which deals with the debt, retirement savings, personal savings and moderate spending all at once.

I would do 3 things
1) List gross income and net income.
2) List all expenses- rent, car payments etc... and make sure all expenses are accounted for
3) Spend less than you earn, and set aside 20% of gross pay for financial independance.

I would do things in the order I listed so you understand your budget.

The 20% for financial independance is from gross pay. Include the minimum loan payments as an expense in the budget.

Make sure 15% of your gross pay is contributed to a 401k or IRA for retirement. Do not waiver from this for next 20-30 years. 5% of gross pay should be used to do the following:
a) create an emergency fund of 3 months expenses
b) save for a new house
c) pay down the debt (especially the one at 11%).

I would NOT try to sell out and get debt free quickly- you outlined a 2 year plan to be debt free and this plan here might take 3 or 5 years to remove the 11% debt. As you get tax returns and do more detailed financial planning, you can probably accelerate the 5 year debt free plan to 3 years if you get smart about taxes and using 401k.

[drfrink24]

I don't know what AGI is.

From Wikipedia

Adjusted gross income (AGI) is a United States tax term for an amount used in the calculation of an individual's income tax liability. AGI is calculated by taking an individuals gross income and subtracting the income tax code's enumerated deductions, and is an important benchmark determining certain other allowed benefits.

[IVSPORT]

I just graduated from college, going to start a new job soon. I have some student debt to repay, and it is important to me to have build sufficient savings.

my question is: should I try to repay student debt off as fast as possible(like putting 30% of income or more for one or two years into paying it off, so I can do it quickly) and forgo saving up emergency funds or money to invest, or it is better to pay the debt off slower and start saving up money for emergencies and investing while I pay off the debt?

I would like to get at least a few months worth of cash to live on saved up to have in case of emergencies, but doing that will make me pay more for interest for student debt so I am having difficulty balancing the trade off.

I'm in an identical situation so I'm glad you started this thread and I can look at other responses to get an idea for what to do myself. I have about 15K in Stafford Loans with a rate of just over 6%. I am living rent-free and was hoping to get rid of the debt within a year but after reading this, I may plan on taking 2-3 years and focusing more on my savings account and an IRA I'm planning on starting (everyone please take a look at my thread just started about IRA vs 401K b/c I need answers).

[jIM_Ohio]

Getting rid of the debt will improve your cash flow
But cash flow is not doing anything for financial independance.

Best advice I can give you is do not look at cash flow as a way to fund your wants, use cash flow as a way to fund what you need for now, and make sure you need savings now for the future.

[osadg]

At a rate of 5.25% you may want to concentrate on your savings and your student loans equally. There is always going to be some financial suprise, and you should at the VERY least have an emergency plan set aside. Since your just starting out, you might want to look into a 60/40 solution. 60% of your gross monthly income goes to expenses 10% goes to short term & long term emergency funds, 10% to student loans, 10% to retirement, and 10% to fun! It doesn't work for everyone, but for some it's an easily livable solution. Just a thought.