Author Topic: Reader Case Study – Student loan debt plus little kids – where to focus money  (Read 2917 times)

threelittlebirds

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Some background, I am 27, husband is 28. We have a 3 year old son and a new baby due in 6 weeks. I am currently the SAH parent and work weekends around my husband’s schedule. I also just finished graduate school earlier this month and am waiting to sit for my certification exam.  I will be taking an unpaid maternity leave and hopefully returning to a new job.

Husband and I have both been students the majority of our marriage, with both of us completing bachelors and master’s degrees in our respective fields. 

Topic Title: Reader Case Study – Student loan debt plus little kids – where to focus money next?

Income: Husband brings home $2700/month after taxes, health insurance, 403b and HSA contribution. $51K/year gross

My income is variable –currently only working as needed -typically bring in somewhere between $200-600/month depending on work availability and demands of my coursework.  Average starting salary for my new degree is $85-90K.   

Total income: $2700-3300 (but budget for 2700)

Current expenses:
Mortgage   860 (with taxes, insurance, PMI included)
Phones   45 (recently switched to Republic)
Internet   41
Car insurance   64
Electric   100
Water   70
Husband student loan   262
My loans – currently in deferment but will be ~275
Credit card – minimum payment $25
Food budget 600 (have been working on this, son has food allergies, husband eats gluten free)
Gas 160

Total expenses: $2500/month once my loan payments begin

Assets:
Home - $125K
2005 Chevy Cobalt – paid off worth about $4200
2004 Pontiac Vibe – paid off worth $6100
Savings - $6800
Husband 403b - $3700
My 403b - $2900
HSA Balance $390

Total: $149K

Liabilities:
Mortgage – owe $110K at 4.25% for 30 years
Husband student loans – 37K at 6% (currently in IBR and public loan service forgiveness program)
My student loans – 20K at 6% average
Credit card – 1500 at 0% until next October

Total: $168K


Specific Question(s):

Once I am back to work after baby – hopefully in a new, better paying job with my new degree we are trying to prioritize where to focus our money first.  I will still aim to work part time around my husband’s schedule to be the stay at home parent during the week, probably until our kids are in school. Our current plan is:

1. Pay off credit card with $1500 balance (could do this from savings now, but at 0% interest and with birth and unpaid maternity leave in the next 6 weeks sitting on the cash until I’m back at work). Need to stop using this, has mostly school expenses and some convenience items on it. 

2. We have some necessary repairs to be done around our house that have been on the backburner we would like to take care of. Husband used to do construction work so can tackle these projects. 

3.  Start putting extra money towards my student loans – these are split into a few different loans, aiming to knock out a small loan with $1500 balance first to get rid of it. 

4. Increase retirement contributions – currently husband’s employer matches 50% up to 3% total. He is currently contributing 6% to get the match.  We are both fairly new in our careers, husband started 2 years ago after finishing school and working a series of part time jobs along the way to make ends meet. 

5. Save for college for kids? Right now we can’t afford to do this, will have to see where things shake out after I find a new job. 
 


Looking for advice for a plan of attack re: large student loan debt and meager retirement savings as of date. 

We are new to MMM, but have been mostly frugal out of necessity.  In the past several months we have paid off remaining car loan, switched cell phone service to Republic, and started trying to reign in our food spending.  Our biggest budget leak is picking up convenience food during the past few months due to my pregnancy and school demands, but I’ve been feeling well enough to meal plan and grocery shop more lately. 

EricMA

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I'll take a stab at it as I'm sure will others.

It sounds like you aren't in too terrible of a position and have been responsible with both your studies and your finances. The credit card balance is small in the grand scheme of things and it doesn't seem like you're abusing it the way many others do. I'd enjoy the 0% while it lasts; just don't keep piling expenses on there and forget about it until it's too late. Personally when I have 0% financing on something, I put $100 on it each month because there is something about "paying the minimum" that makes me uneasy. Still though, no sense in throwing money at this now.

It's good you're thinking about retirement early. While you certainly can do better than 6%, a guaranteed 6% would be pretty tough to turn down for me. I'd pile as much as you can into student loans. Considering you both seem to have advanced educations, your student loan balances are very reasonable. No reason you shouldn't be able to pay those off in short order and then focus on retirement. 

Keep working on trimming out the waste and focusing on the loans. I'm not sure what your "repair projects" are, but I'd tackle those in order of how serious they are. If they're back-burnered now they probably aren't too serious? Certainly don't let anything do additional damage to your house (like a water-leak that will slowly rot floors for example) just to pay down loans.

The one other thing you didn't mention but might consider is the mortgage. There are still plenty of mid 3% 15yr loans out there (I did one myself not too long ago). The difference in payment between a 15y and a 30 year (counter-intuitively) is not actually that different, especially on a smaller mortgage. You'd have the house paid off 15 years faster and could save >$40k in interest.

Good luck!

sb_NoVA

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If I was in your position, I'd shoot for a short term goal of paying down principal to get LTV to 80% and get the bank to drop PMI.  Check with your bank beforehand if this is something they would do if you got to 80% LTV. 

How big is your house?  Would it be possible to rent out a bedroom to generate some extra cash?  Since you both don't work at the same time, could you consider the possibility of selling 1 car?

I wouldn't necessarily advise refinancing.  It costs money to refinance and you have other things like student loans, credit cards, PMI, etc., that you could focus on. 

Señora Savings

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It looks like the two of you are doing pretty well, although given your plan to work nontraditional hours, I wouldn't expect your income to provide much relief.

Given your earnings potential, have you considered having your husband be a SAHP while you work full time?  This will decrease the total work being done by your family and give you time to spend together.  If you don't do that, you'll need to do some serious cutting and the thing that prevented cutting before (lack of time) will continue to be an issue.

My recommendations:
Potatoes and rice are gluten free, eat them instead of specialty gluten free products.  You don't say what your sons allergies are, but cooking from scratch should prevent them from being a big expense.  Once you're cooking for yourself these won't be the crutch that they are at restaurants

That's a ton of gas, fix it.  I like the one car idea; it takes some planning, but you can do it.

I'd switch your plan a bit

1) Keep the money to pay this off in savings, with it earmarked for that purpose, but don't bother with it until you have to.

2) I think time will be the issue on this one, I would have DH start this right away on weekends while you take time off low paying work to care for kid.

3) You're good with math and self control.  Pay off the highest interest loans first.  Once they're gone devote ALL the money you were putting into them to retirement.  Look into Roth IRAs.

4) Pay for your own education and retirement before you fund your kids education.  If something goes wrong they'd be better off going to state school than going to Harvard and sending checks to your nursing home.

threelittlebirds

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Thank you for the comments and suggestions! I'm going to try to address some of the questions so far:

Given your earnings potential, have you considered having your husband be a SAHP while you work full time?
We have considered this, and actually I was the full time worker until DH finished his degree 2 years ago.  While my earning potential is higher, while the babies are little this is a sacrifice we are willing to make for the lifestyle we value (extended breastfeeding, etc.).  We will probably reverse roles again once the kids are in school, we've thrown around the idea of my picking up more hours once the new one is out of toddlerhood. 
 
Potatoes and rice are gluten free, eat them instead of specialty gluten free products.  You don't say what your sons allergies are, but cooking from scratch should prevent them from being a big expense.  Once you're cooking for yourself these won't be the crutch that they are at restaurants

That's a ton of gas, fix it.  I like the one car idea; it takes some planning, but you can do it.


We have been doing terribly with our food budget, and this is one of the biggest areas we can improve on.  We do eat mostly foods that are naturally gluten free instead of specialty items. It is really picking food up on the way home from work/school that was killing us.  My son is allergic to nuts, easy to avoid when buying whole foods but trickier when buying processed items.

We have been throwing around the single car family idea, I only recently finished school that required I have transportation for clinical hours.  I'm hesitant to sell either car because they are both very reliable, get good gas mileage, and we have owned them for a long time and I know their maintenance is up to date.  My son and I also go to twice weekly playdates/meet ups (mostly free) at local parks, the library, etc. with other moms and kiddos and I'm hesitant to give this up. Once the newest kiddo can ride in a bike trailer, I will consider this more seriously.  Our gas costs should go down now that I'm finished with school, however because I was commuting 2-3 times/week and I will mostly be at home now. 

How big is your house?  Would it be possible to rent out a bedroom to generate some extra cash?

I wouldn't necessarily advise refinancing.  It costs money to refinance and you have other things like student loans, credit cards, PMI, etc., that you could focus on.


Our house is pretty small, meets our needs but not much room to spare.  We actually did have my sister live with us rent-free for several months in exchange for childcare while I was finishing school.  It was tight, we had no personal space whatsoever, and we only have one bathroom.  I don't think I would be comfortable with anyone other than family in our small living area.

We've thrown around the idea of refinancing, but honestly I like the comfort of a smaller monthly obligation that we can throw extra money at when we get to that point.  The interest rate is less than the student loans, so I was thinking we would tackle the mortgage once the crazy student loan debt was history. We have checked with the bank and the PMI will come off when the LTV is less than 80%. 

Keep working on trimming out the waste and focusing on the loans. I'm not sure what your "repair projects" are, but I'd tackle those in order of how serious they are. If they're back-burnered now they probably aren't too serious? Certainly don't let anything do additional damage to your house (like a water-leak that will slowly rot floors for example) just to pay down loans.

None of our needed repairs are extremely costly, we need to replace some siding on the garage, replace some entry doors, more insulation in attic, etc. Mostly they just require time, which we have been short on until lately. 

Thegoblinchief

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Some of the imported Dutch-style bikes can safely handle infants in carriers, if I recall. Look for brands that make bakfiets style bikes. They're spendy but still cheaper than a car!

It takes time to build up, but most cyclists can handle kids up to their body weight for up to 10 miles pretty handily. I can knock out 20+ mile rides but I won't claim that's easy :P

I'd prioritize the 6% loans myself.