Author Topic: Reader Case Study – what should I be doing with all these student loans?  (Read 2872 times)

slb59

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Hi,

My husband is in his 3rd of 4 years in a doctoral program, and together we have  a six-figure student loan debt. Right now, it just doesn't feel like we can do much until he graduates. However, in another post, someone told me you all could bleed money from stone, and I wanted to post this just in case they were right. I could certainly use all the help I can get!

We have two kids, and finally live in a low cost of living area after spending 8 years in DC (incidentally, where we racked up the student loan debt). We're doing way better than we were, but it still doesn't feel like we're getting anywhere.

Gross Salary/Wages: $6542
Pre-tax deductions: $383 for healthcare, $36 dental and vision, $87 healthcare FSA, $435 daycare FSA
Other Ordinary Income: $200 in the summer to $1050 during the school year (his graduate stipend and two side hustles)
Adjusted Gross Income: $5,801-$6,651

Taxes: About $968/month per the calculation sheet, though I have $1200 taken out of my paycheck

Current expenses: 

401k- $327.78/month (plus a $261.82 employer match – full match for first 3%, half match for additional 2%)
Mortgage - $730 P&I, $85 property tax, $91 home insurance
Car insurance - $79
Car payment - $227 (more details in Liabilities)
Car/Home Maintenance and Repair - $220
Charitable contributions - $210
Internet - $49.99
Phones - $33
Student Loan payment - $500 (see Liabilities for more info)
Tai Chi - $204 (a non-negotiable for my husband)
Kids’ Activities - $20 (averaged out cost of play museum and zoo memberships)
Childcare - $640 ($160/week mid-August through early June, $40 to hold the spot over the summer while my husband watches them)
Dining - $36 ($9/week to have dinner at church Wednesday night so my kids can go to music class, ban on all other dining out for now)
Coffee Shops - $10
Trash/Recycling - $16
Electricity - $175 (varies from $150-$250 depending on how much we run heat/AC)
Sewer/Water - $170 (varies from $150-$200 depending on if we use the sprinklers)
Groceries - $400
Gas/Fuel - $180
Netflix - $8.55
Pets - $85
Other Shopping - $100
Christmas/Holidays/birthday gifts - $67
Life insurance - $140
Tuition/Other Education - $150
Savings - ~$400 (varies from $120-$1200 depending on expenses and income for the month)

Assets:
House - $185,000
401ks - $57,000
Savings - $3,500

Liabilities:
Car loan –$6,546 at a 3.04% rate with 2.5 years left. It's a 2005 Honda CR-V

Student Loans: $126,995 total
  • $2,500 with a 10 year term, currently deferred with a 5.31% rate
  • $11,590 with a 10 year term, currently deferred with a 5.84% rate
  • $15,696 with a 10 year term, currently deferred with a 6.21% rate
  • $23,785 with 29 years remaining, currently deferred and all interest subsidized (6.875% rate when in repayment)
  • $22,890 with 29 years remaining, currently deferred with a 6.875% rate
  • $3000 with 10 years remaining, currently in grace period with a 5.84% rate
  • $22,885 with 22 years remaining, currently in repayment with a 6.625% rate; putting $183.10 minimum payment towards it
  • $24,609 with 22 years remaining, currently in repayment with a 6.625% rate; putting $191.41 minimum payment + $126 towards it

Specific Question(s):
1)   I’ve cut down everything in my budget I can think of, is there anything that still seems high?
2)   Here’s our current plan, does it seem the best way to go? We will pay $500/month towards student loans and throw all surplus income into savings until we hit $10k. After that, we’ll put the bulk of our money towards student loans and a couple hundred towards savings. Once my husband graduates and gets a full-time job ($45-$65k annual salary), we’ll refinance both of our student loans into 7 or 10 year terms, and put the bulk of his salary into paying them down.

If we refinance just my student loans right now, we won't have any extra money to put towards savings.

Thank you!!!

slb59

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Thank you!

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Re:   budget, the thing that leaps out is the life insurance payment, which based on the price I'm guessing is whole life. 

It's a mix of both, $100 towards $100k each in whole life, $40 for $250k each in term.

We got it when I was pregnant with our first to cover childcare and college costs for 2-3 kids so if both of us died, whoever got our kids wouldn't be financially burdened by them, plus so the kids wouldn't have to deal with student loans AND dead parents. But...yeah...it's probably too high, especially since they'll earn interest and we now have some equity in our home.

I'll talk to DH about cashing in on the whole life and using that and our savings each month to fund 529s instead, then reducing the term value in a couple of years when the kids are a little older and we have more assets.

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Electricity and sewer/water both seem very high, esp for a LCOL area.

Our water/sewer has been over $100 even with the sprinkler system turned off. After you posted that, I checked from a year ago and it was only $40-$70.We have a suspect dishwasher and two suspect toilets, will monitor the water meter to see which is causing problems and get it fixed.

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Taxes seem really high given your income and two kids -- might want to adjust withholding to make sure you aren't giving the gvt a no-interest loan.

Done :)

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If he hasn't seen it already, your DH might want to check out www.theprofessorisin.com for advice on applying for tenure track jobs. 

Yes! We just found her a couple of weeks ago, when he found a too-good-to-pass-up job and decided to throw his resume at it just in case. Awesome resource.

Bracken_Joy

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I know you say the tai chi is non negotiable, but is there a way to defray the cost? $204 is HUGE money compared to most of your budget items. Example: http://www.frugalwoods.com/2014/07/23/how-does-free-yoga-help-our-financial-goals/

So maybe the tai chi isn't negotiable, but can you do it somewhere else, on your own, volunteer there to pay for it, teach classes on the side to get free access, etc?

$85 on pets seems high, but totally depends on age/size/diet/number of pet(s). See if you can get that down though. We found out with our older dog (14) we shouldn't be feeding her a super high protein diet anyway, it was hard on her kidneys, so now part of her food we make at home and part is wet food (she has no teeth). Ends up much cheaper that way. The canned food we buy her we found through Amazon subscribe and save, so not only is it already cheaper by the flat, but then we get 15% off and free shipping. Anyway, talk to your vet, explore your options.

Zikzin

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List your student loans from smallest to largest and start snowballing it. I noticed some are currently deferred and some in repayment, how about if you defer the big ones and start the repayment on the small ones?  You have a total of $500.51 with your current payments right now, if you use that towards the smallest balance which is the $2500, you'll knock that one off in 5 months, then rollover to the $3000 and so on.

You can also shave another $200-300 on some of your discretionary expenses and accelerate it faster (etc. coffee/other shopping/gifts/pets/maintenance&repair/tuition other education)


Bracken_Joy

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The biggest thing with the loans is to ensure that the ones in deferral do not have the interest capitalize into the principal. Personally, I would make that the priority, and then either snowball or avalanche.

Snowball: smallest dollar amount loan first
Avalanche: highest interest rate first.

Avalanche is the most financially beneficial, but snowball frees up cashflow first and tends to be better for people psychologically (celebrating wins more often in the beginning). You know yourself best to know what will work for you.

slb59

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I know you say the tai chi is non negotiable, but is there a way to defray the cost?

I love your ideas, but this is one I'm just stuck with. He's attached to this particular school's philosophy, isn't able to teach classes at his experience level, and has already negotiated a lower rate. Tried online classes and hated it. He's been wanting to do Tai Chi since before we started dating (15 years ago?), and this is the first time he's actually been able to make it work with his schedule. It's also the first time in years he's found an exercise program he likes, and it helps with stress management. So, I'll just call it money spent towards reducing future healthcare costs and let it be...

I might look into free yoga for myself, though :)

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$85 on pets seems high, but totally depends on age/size/diet/number of pet(s). See if you can get that down though.

What is KILLING us on this is the heartworm/flea/tick medicine the vet says to get (Revolution/Frontline). My DH wisely turned down the $500 meds ($250/cat) at the vet, and found them online for $200 ($100 per cat per year). Since they're so expensive, we just didn't give it to them for awhile, but then started noticing bugs driving the cats nuts and flea bites on our legs.

What do you all do about this? I've talked to non-Mustachians with pets, and they all get recommended the same meds and either take the risk and don't use it at all or pay a small fortune at the vet. It's not even like they're outdoor cats, we just leave the windows open a lot to cut down on electricity costs (and save about $400/year).

Food and litter is maybe $20/month.

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The biggest thing with the loans is to ensure that the ones in deferral do not have the interest capitalize into the principal.

I've gone back and forth on this. Originally, I was JUST paying interest so nothing would capitalize, but that meant the rate at which I earned interest didn't slow down. More recently, I've been doing the avalanche method.

I was planning on letting the interest capitalize when these go into repayment, because I figured paying $100 principle at 6.75% interest would knock $100 off the principle plus save me $6.75 for every year it took to pay down the loan. If I pay $100 in interest before it capitalizes on my 6.21% loan, I would prevent an additional $100 in principle and save $6.21 for every year it took to pay down the loan. Therefore, it makes more sense financially to only put cash to the highest interest loan.

Now, feel free to tear my math apart, please.

I have googled this issue a dozen times in a dozen ways and am yet to find a good, clear answer. Lots of people say don't ever let your interest capitalize, and lots of people say it's the best strategy to always just pay the highest loan, but I couldn't find anything comparing the two alternatives and I was left to my own mathematical devices. Never a good thing :)

Bracken_Joy

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Okay, I will admit- I had the same problem with the googling re: interest capitalizing! I ended up taking the advice not to let it, but I honestly don't have enough confidence in my own math to justify that path definitively.

Re: the Tai Chi. I can see the concern, but just remember, as pointed out from this article: http://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/ that the $200 you're spending per month is living on borrowed money. It's a very face-punchy article, but can be very inspiring at the same time.

Re: pets. We were able to go online and get a rebate from Heartgaurd. Otherwise, Costco seems to have the best price on it. For foods especially, check things like amazon subscribe and save, the petco subscription service, anything that gives you a discount on a recurring product.

MrsCtank

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Realistic vet here also in debt. My advice, drop revolution. Its a wonderful product but HW disease in cats is rare, even in outdoor cats in the deep south US - #1 heartworm territory (I live in the state that's #1 in HW in dogs). Also if your concern is fleas you likely don't need revolution and frontline as they both target them. Look into advantage or cherstin instead, or if you can give them a pill comfortis.

slb59

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Thanks!!

We just got a Costco membership, I'll be sure to check out drug prices there. Good to know I don't need to be stressing so much about the heartworm, thanks for the alternative drug recommendations!






Sibley

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You should look into consolidation/refinance on the student loans at some point. May or may not make sense for your situation, but with those interest rates it's worth looking into. Plus, making 1 payment vs. 8 is a lot easier! However, wait until you're out of deferment on the loans, and make sure you won't lose any benefits you might want to take (forgiveness, etc).

slb59

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Re: Reader Case Study – what should I be doing with all these student loans?
« Reply #10 on: October 14, 2016, 07:50:23 AM »
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Okay, I will admit- I had the same problem with the googling re: interest capitalizing! I ended up taking the advice not to let it, but I honestly don't have enough confidence in my own math to justify that path definitively.

My mom is a tax accountant and works in a CPA office. They do a lot of financial planning. She also took on our undergraduate loans and is in the final year or two of paying them off and is mustachian to her core. I asked her what she did about interest capitalization, and kicked myself for not doing it earlier.

Her answer..."Well, what I do is pay a little on the interest each month and the rest on the principal." But she had no idea mathematically if that was the best approach.

It doesn't help my situation (or yours), but it makes me feel a very little better that someone who deals with money and math for a living and safeguards every penny she spends didn't have a better answer, either.