Author Topic: Case Study: 240K in student loans  (Read 7429 times)

JuSp02

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Case Study: 240K in student loans
« on: January 27, 2014, 12:01:16 PM »
My husband and I both went to flashy graduate schools in order to score high paying jobs, and now we have to pay off all the loans we took out while living in an expensive city. Two years ago, we had zero assets and our loans were over $340K. Today, they total $237K. Our goal is to increase our net worth as quickly as possible, which includes mostly paying down our loans, but also includes maxing out our retirement accounts and continuing to invest. Since we are married and earn so much, we also pay a ton in taxes. We have one dog and no children yet. I think we are doing pretty good considering our incomes, but we could definitely do better. Here's the break-down. 

Income: $343,000

Current expenses:
$2800 - (mortgage, pmi, property taxes, condo association fees) - I wish this number was lower, but it beats paying rent and the property values around our offices are very high
$2000 - monthly loan payments (this is approximate as we always pay much more than the minimum)
$35 - two cell phone plans (heavily subsidized by our employers)
$500 - groceries (so high because we live in a high COL area and love beer; although my husband has home brewed in the past, he doesn't have time for it right now)
$250 - eating out (we have cut back on this so that we only eat out for social reasons)
$200 - misc expenses
$40 - transportation (we walk to work and have no car, buy we do spend some money on public transportation, cabs, and zipcar)
$40 - internet
$72 - gas
$10 - electricity
$10 - netflix
$10 - dog supplies
Total: round up to $6,000

Assets:
$330,000 - condo
$70,000 - 401Ks
$13,000 - investments in index and mutual funds
$4,000 - cash
$900 - health savings account
Total: $417,900

Liabilities:

Mortgage:
$296,000 at 4.5% plus PMI

Student Loans:
$17,000 at 7.9%
$69,000 at 6.8%
$103,000 at 4.5%
$18,000 at 4.3%
$30,000 at 2.3%

Total: $533,000

Current Net Worth: -$115,100

Our goal is to have a $0 net worth in 12 months, and to pay off all of our student loans in two years.

We have no IRAs yet so maybe that should be our next step.  We're not motivated to pay off our mortgage quickly as the interest we pay is one of the few tax deductions we can take.

Our biggest struggles right now are that all of our friends and family are spend happy consumers.  It's sometimes difficult to be *that* person.  Also, we have a few close family and friends weddings scheduled this year around the country and have to attend, but attending requires expensive plane tickets and hotels.  Our parents also live in different states and get pretty angry if we don't visit them at least once a year. 

curler

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Re: Case Study: 240K in student loans
« Reply #1 on: January 27, 2014, 12:32:45 PM »
Not a comprehensive answer, but a couple of thoughts:

Given your high income, you have a lot to play with here.  It sounds like you gross around 28K a month.  Of that you should be fully funding a 401(k) each, at around a total of 3K/month, bringing your income down to 25K.  I'll assume about 55% taxes (depends on what state you live in), which brings you down to a net income of 11K/month.  You've outlined about 4K/month in expenses, other than your student loan payments.  That leaves you with 7K/month to pay off the loans.  Put all that money towards your loans every month.

I'd take your 13K investment, and throw that at the 7.9% loan right now.  Between that and 1 month's worth of extra income, you can have that loan taken care of by the end of February. 

Given your income (and eligibility for a 401(k)) I don't believe you can do either a deductible IRA or a Roth-IRA.  There are non-deductible IRA's, but I don't know enough about them to know if they are worth while; my impression is that they are not.


The Bearded Bank Builder

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Re: Case Study: 240K in student loans
« Reply #2 on: January 27, 2014, 01:16:42 PM »
Hello JuSp02, welcome to the forum.

First off, congrats on your very high combined income! With that half of the equation of financial independence taken care of, you can look towards the expenses side.

Is your list of expenses an estimate or are you using a program like Mint to track them? Anything you could be missing in your list, such as medical/life insurance, travel, clothing (might already be in your misc. category)?

Most of the items in your expenses are very reasonable already. Of course groceries, eating out, and miscellaneous could probably be reduced (I understand the high COL, I live outside of San Francisco), but honestly at your income level I would be happy if I could take a couple hundred dollars combined out of these categories.

The real budget killer here seems to be the condo. Just doing some quick mental math, it seems like the monthly payment on a $296k mortgage should be around $1,500. Does this mean the pmi/taxes/association fees run you around $1,300/month? Having a $296k mortgage seems reasonable in an expensive city, but the extra expenses are very high. Have you considered aggressively paying your mortgage at least until you are no longer paying PMI? You would need to pay $32k more of the principle to get to that point.

Other than that, I will echo curler in saying that the loans are priority number 1, particularly the 2 with the highest interest rates.

I can empathize with you on being surrounded by spenders, both family and friends. You just have to be brave and do what you need to do to reach your goals. Your real friends will respect that you are doing what is best for you even if it differs from their lifestyles. What are your long term goals by the way? You mentioned paying off your loans and increasing your networth, are you trying to retire early or just gain financial independence? Looking at the big picture and remembering what you are doing this for will make you realize that the obstacles you face (like having to be *that* person now and again) aren't so difficult to overcome.

JuSp02

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Re: Case Study: 240K in student loans
« Reply #3 on: January 27, 2014, 07:36:56 PM »
Hmm, well forget I said that about the IRAs.  We're open to paying down PMI more aggressively.

We're using Mint. The list is a pretty good estimate of our average expenses, but also account for cutting out some optional expenses that we can easily cut (e.g. the occasional clothing splurge when we both have more than enough clothes). Our monthly mortgage payments also include some pretty high property taxes (an amount gets included in our payments each month to be added to an escrow account, then the bank takes care of making tax payments for us).

Our long term goal is to get to FI as soon as possible. We're not sure if we'll retire early, but it would be great to be able to if we wanted. Leaving the rat race is sounding more and more appealing to us these days.

Thanks for the encouragement about staying strong with family and friends! Talking about money is so unacceptable in our society. We've told a couple of our close friends so that should help keeping us to stay on top of our goals.

G-dog

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Re: Case Study: 240K in student loans
« Reply #4 on: January 27, 2014, 08:25:09 PM »
How long before you get out from under the pmi?

Are you sure you "have to" go to the weddings?  Family visits?  Can't they visit you?  Any friends or family you can stay with on any of these trips (save on hotel)?  Any frequent flyer options?

Paying off $100k of debt so far is fan-f'ing-tastic!

You don't have a car - do you have a garage or parking space you could 'rent' to a neighbor?

Can you get a rewards checking account? Often pitiful interest, but it is >$0.  You typically need a minimum balance, but with your income I think that would be easy.

Your grocery & eating out seem high for two, you may be able to trim more without feeling completely deprived.

With your track record, you will soon be debt free.  You've been very aggressive and very disciplined in reducing your debt.  Once you get past a certain point, you will be amazed at how quickly you move from being in the red to being in the black!

horsepoor

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Re: Case Study: 240K in student loans
« Reply #5 on: January 27, 2014, 09:10:55 PM »
I'm curious about how much the PMI actually is per month?  If, for argument's sake, it is $140, you could consider that to be even worse than paying an additional 5% interest on a portion of your mortgage.  If it's $280, that's 10% per year!  You're only $34K away from dumping the PMI, but you're paying the 4.5% mortgage insurance, plus an additional 5% premium that will not decline as your equity approaches 20%.  That makes it more than 9.5% with my assumption (and maybe it's more, I know PMI went really high a couple years ago), so it is effectively your highest interest item, and therefore most beneficial to pay down first.
« Last Edit: January 27, 2014, 09:15:10 PM by horsepoor »

TheValentines

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Re: Case Study: 240K in student loans
« Reply #6 on: January 27, 2014, 09:13:21 PM »
Holy cow! What do you and your husband do for a living?

mollyjade

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Re: Case Study: 240K in student loans
« Reply #7 on: January 28, 2014, 09:05:40 AM »
Are you sure you "have to" go to the weddings?  Family visits?  Can't they visit you?  Any friends or family you can stay with on any of these trips (save on hotel)?  Any frequent flyer options?
I'd make a very strong argument for visiting family once a year. At the rate you're able to pay off your debt, $2-3 thousand dollars of plane trips will only delay your debt payoff date by a month at most. Obviously, it's a different story if there are nonmonetary reasons to avoid visiting family.

As for weddings, I'd start by examining your priorities. What do you want to achieve by FI? What, say, five things matter most to you? Do relationships with family or friends fall within those five things?

foobar

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Re: Case Study: 240K in student loans
« Reply #8 on: January 28, 2014, 10:32:15 AM »
As long as you don't have any deductible IRAs (it gets messy than) what you do is open a nondeductible IRA and then roll it into a ROTH. Yeah it is beyond stupid.

The condo seems high but I bet there is like 300 bucks of tax and a 600 dollar condo fee in their also.  You might check to see if you can do one of those dual loans (normal one and then a home equity) to avoid paying PMI.  You would have to do a bunch of math to see if it make sense

 

Given your income (and eligibility for a 401(k)) I don't believe you can do either a deductible IRA or a Roth-IRA.  There are non-deductible IRA's, but I don't know enough about them to know if they are worth while; my impression is that they are not.

Numbers Man

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Re: Case Study: 240K in student loans
« Reply #9 on: January 28, 2014, 01:42:11 PM »
Based on the numbers I'm seeing on the expense side is that your spending is under control. Max out the $17,500 per person for the 401(k) and max out the HSA $6,550. If your employer contributes to the HSA you can only contribute the $6,550 less the employer contribution.

snuggler

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Re: Case Study: 240K in student loans
« Reply #10 on: January 28, 2014, 02:33:21 PM »
JuSp02,

A couple of thoughts. First, I've been in a similar situation ($200k in student loans and single). The good news is that it is not so tough to get out of it when you have a high income, which you do. That is awesome!

Have you extended your repayment plan as much as possible? I know it sounds counterintuitive when you are trying to kill them as quickly as possible, but it helps, because it lowers your minimum payment on ALL of the loans. Thus, if you have enough discipline to still kill the loans aggressively, you can throw more money (the money that used to be directed towards your minimum payment on the lower interest loans) at your highest interest loan. This was really helpful for me in accelerating my debt repayment.

I'd also forego all taxable investing until you have your high interest loans paid off. Anything you pay towards them is a GUARANTEED return, whereas taxable investing is not guaranteed. Even if it were guaranteed, 7-10% is great, which means that paying off loans with a guaranteed return of 7-10% is amazing. I didn't start taxable investing until all of my loans were under 3%. I agree that you need to max the tax-deferred space, but I'd forego anything besides a 401k and a backdoor Roth until you only have low interest loans and a good emergency fund.

Finally, I'd shave the budget even more. I live in a high COA area and am very socially active about eating out (people always accuse me of being a foodie), and I managed to trim my eating out budget to $100 a month. We also eat extravagantly and spend $300-400 max. You can shave those down. You probably buy extravagant wedding gifts (I know because I feel the same expectation given my high income), so try to cut that back. Get something more personalized instead- they will remember it better anyway. Stay at a friend's place or Holiday Inn when you do go to a wedding, and use credit card bonuses (see Fatwallet threads or Million Mile Secrets) to get some free miles to fly to weddings.

Do you have life insurance? How much do you contribute to your 401k each month? It looks like a few things are missing from your budget, which might explain the discrepancy between the $2k and $7k left over each month...

bugbaby

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Re: Case Study: 240K in student loans
« Reply #11 on: January 28, 2014, 05:50:05 PM »
My guess would be that, even maxing 401ks & high state taxes, you should still net about 13-15K/month unless you're overwithholding taxes.  If your expenses are really 6k/mo (including the 2k to loans) leaves additional 7-9k for debt. You should easily demolish the 7.9% loan in 2months, unless you calculate PMI payments for 2 months to be even higher than that interest.

desrever

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Re: Case Study: 240K in student loans
« Reply #12 on: January 29, 2014, 12:11:45 PM »
You ARE doing well considering your income. The #1 thing you can do in your situation is to stay focused on the goal of getting out of debt, and don't lose these instincts once you are out of debt and in full-on accumulation mode -- you will start to feel absurdly rich, and you can't let this tempt you into buying expensive crap you don't need. Don't buy a new car or a boat or do a lavish remodel or buy more house than you need or get into first growth bordeaux. Resisting that can be harder than it sounds, when your checking account seems to have more money in it every time you look.

If you like the people, go to the weddings; you can afford this. Buy tickets ahead of time, and look for opportunities to co-schedule other vacations. The wedding season will slow down after a few years. At your income level, the marriage penalty is pretty severe. You are probably spending more each year in additional taxes than your own wedding cost. Food for thought :) Go to your friends weddings.

That monthly housing payment is hiding some huge expenses (what is the breakdown of mortgage principal / mortgage interest / PMI / Condo fees / property tax)?

MrsPete

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Re: Case Study: 240K in student loans
« Reply #13 on: January 29, 2014, 02:25:41 PM »
At first I was startled by your shockingly high numbers, but you seem to be paying down your loans at a fast rate.  Clearly you're doing something right.  In addition to continuing what you're doing, I'd suggest:

- Do the math and determine whether it's better for you to pay off the loans first or get rid of the PMI insurance first.  Go with whichever one will save you in the long run.
- As you're kicking yourself for living in a high cost of living area, consider that your transportation costs are lower than mine (and I live in the land of low-low everything).  In that one category, you'd see your costs go up if you were to move.
- I'm sure you live where you  live because that's where you can earn a high paycheck.  Ask yourself, though, as you plan for the future, is this where you want to stay after you retire?  If the answer is, "No, we want to go somewhere cheaper", begin to investigate where you'd want to go.
- You say you over-spend on groceries.  Investigate non-grocery store places to shop.  For example, I shop at a couple ethnic food stores, an expensive-but-has-great-sales gourmet food store, a health food store, and a salvage food store.  And the internet.  Start to pay attention to your options, and you'll find ways to save here and there. 

Most importantly, don't worry about being "that couple".  Make your own decisions and stick to them.  When it comes to the weddings, ask yourself just how important it is to YOU to attend -- you won't find a one-size-fits-all-answer to this question.  Consider just sending a gift.  Invite your family to visit you. 

TJ79

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Re: Case Study: 240K in student loans
« Reply #14 on: January 29, 2014, 05:23:14 PM »
Lots of good advice here.  I'm new to the forum too, and this is my first opportunity to actually add something to the community.  It's worth considering refinancing with sofi.com to reduce the rates of your 7.9, 6.8 and 4.5% loans.  I'm in a similar situation (recent b-school graduate, relatively high income, lots of debt) and refinanced $110k worth of debt with SoFi last summer. 


I also second the advice to get into the miles and points game...it can cut down on your travel costs dramatically.
« Last Edit: July 07, 2014, 04:54:16 PM by TJ79 »

clutchy

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Re: Case Study: 240K in student loans
« Reply #15 on: January 29, 2014, 05:51:50 PM »
your plan looks decent enough. 

The good news is that your shovel is huge; keep scooping away that debt!!

the bad news is that you are paying back loans w/ 40-50% money.  Meaning you're losing a bunch of it to taxes...  $237K in debt will take about $340K in earnings to pay off. 

once you're done you'll love that income!


G-dog

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Re: Case Study: 240K in student loans
« Reply #16 on: January 29, 2014, 08:14:28 PM »
Re: weddings/ visits
I was reacting to the phrasing " have to".  I just wanted to encourage OP to challenge that if it is an assumption. 
Do it because you want to or decided to, vs. have to or should...

My stubbly 2 cents...

TomTX

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Re: Case Study: 240K in student loans
« Reply #17 on: January 29, 2014, 08:41:27 PM »
At that income - the condo makes sense if that's what it takes to live by where you work. Commutes suck.

Really, you guys are doing a really good job. Sure, there are areas to tweak - but you're keeping your lifestyle reasonable compared to your income. Kudos.

Onto some tweaking/optimizing.

Personally, I hate PMI. Run the numbers - convert PMI into an "effective" interest rate, based on the $$ you would need to pay down to get rid of PMI, and the tax savings it would cost you.

Then start focusing on individual debts - typically highest interest rate first. Probably something like:

Student Loan 1
PMI
Student Loan 2
Etc.

I wouldn't bother with non-401(k) investments at this point. Keep a healthy emergency fund, and put the rest toward killing debts.

Frankly, if you guys keep up the focus, you should have all your debts cleared in a few years.

Jappe

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Re: Case Study: 240K in student loans
« Reply #18 on: January 30, 2014, 02:34:36 AM »
You're doing great OP!

For family and weddings: Some people here suggest if you really should be going, but I say: yeah you should go. For weddings it's a good idea to think: "Would my husband or I like to have them at our wedding" If that's a yes for at least one of you, then you should visit theirs as well.
Also with family, once you're out of debt and piling in the money you don't want to look back and realize you became strangers to them to win like a month of debt-paying. Cause with that combined income two plane-tickets isn't that huge of a cost if you look for deals and keep it to once a year.

The two of you make great money and even though there is a big pile of debt, it should be gone in probably 3 years (house excluded) if you keep it up like you do now. And then the money will start going up like crazy in savings and investments.

JuSp02

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Re: Case Study: 240K in student loans
« Reply #19 on: February 05, 2014, 08:05:26 PM »
Long over due response:

Thanks everyone for all of the suggestions! It's great to get an objective opinion. Even though we have been doing pretty good, it just never seems like it's good enough when the number is so large.

The twist in all of this is that neither of us is passionate about our job, and a career change to what we want to do would probably bring us to a combined income of around $100,000. (For reference, we're both lawyers and definitely won the job lottery. A lot of our classmates, even some with much better grades than us, are making a small fraction of our income. In this economy, and other reasons, I would not recommend law school, but that's a different post.)  We're not planning on making any changes for the time being, but it's unlikely that we will be reaping too much of the gains of our very high paying jobs after our debt is gone. That being said, $100K is still a lot of money.

Snuggler - the suggestion about extending repayment dates so we can more quickly pay off our highest interest loans is a great one, and I hadn't thought of it before. We'll definitely call our banks tomorrow.

TJ79 - we looked into sofi, but neither of us likes variable interest rates and their lowest fixed rate is 4.99%, while also preventing us from being able to knock out higher interest rate loans. We're still considering it tho.

We pay close to $2,000 in PMI each year. I knew it was a lot, but since it gets taken out monthly I hadn't bothered to calculate it until now. It ends up being just over 6% (and, as PP pointed out, growing each month as we pay down our mortgage).

Our condo fees are pretty high, but average for the area. We do have a nice gym so there's that.

We're investigating better grocery supply places, and have been experimenting with cheaper cooking from scratch (such as making bread - I had no idea how stupidly easy it is). Alcohol definitely contributes to a lot of our food expenses. It's one thing we're not ready to cut back on. We might have to start home brewing again.

As far as the weddings go, one of the brides changed her mind and decided to have the wedding in her hometown, which is only a four hours drive away. We'll have to rent a car for the weekend, but we have family we can stay with so that will cut costs down significantly. The other wedding is scheduled in one of the most expensive parts of Europe. As much as we both really want to go, we would have to spend a few, or several, thousands of dollars. None of the other people in our circle of friends can make it so we've decided not to go either. Instead, we've decided to hold off on all optional trips (i.e. non-family "mandated" or cheaper good friend weddings) until we pay off all our loans.

Based on everything, our new plan of attack now is to pay off our 7.9% in 2-3 months, and then start attacking our PMI and our 6.8% loans.

horsepoor

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Re: Case Study: 240K in student loans
« Reply #20 on: February 05, 2014, 08:23:09 PM »
We pay close to $2,000 in PMI each year. I knew it was a lot, but since it gets taken out monthly I hadn't bothered to calculate it until now. It ends up being just over 6% (and, as PP pointed out, growing each month as we pay down our mortgage).

That's on top of the mortgage interest rate for that $34K, so it's actually a 2-fer.  You're killing over 11% effective interest and growing as the gap in becoming PMI-free dwindles.