Case Study: Buried in Student Loans

[dinko628]

Hi all,

I wrote this email to MMM himself a few weeks ago, but due to the sheer awesomeness of MMM and the amount of emails I'm sure he gets, he didn't write back, so with the new forums, I'm putting it up here for everyone. It's a bit lengthy, but I figured the more detail the better.

--The Story--
After reading the blog, I'm already looking into selling my (stupid, brand-new sporty) car and buying something much more affordable, as well as how I can squeeze some savings out of other areas (I bike most places as it is, although winters in Madison, WI have quelled that a bit). What I've run into are some unavoidable expenses that I haven't really seen addressed on the blog, so I'm not quite sure what to do about it: student loans.

It seems that all of your posts/situations talk about starting from 0 net worth, but that isn't realistic - most people start with a big chunk of negative net worth in student loans. I know there's the case study about Student Loans vs Mortgage, but that doesn't quite address my situation. Here's a bit of background:

I graduated from a private university in May 2011 and started working in July 2011 as a software developer making $78k/year (I know, right? Although, admittedly, I'm switching jobs into a position I'm more passionate about, so that might take a bit of a hit). Even after scholarships and financial aid, said university left me with an enormous amount of student loans (100k+!), which I'm now stuck paying a decent chunk of my monthly salary.

I want to cut down on expenses so I can start working on pulling my net worth out of the abyss, but as it stands right now, I literally can't get student loan payments less than $15k/year, so I was wondering if you had any suggestions/thoughts.


--The Details--
Current Monthly Salary - 6500 Gross, ~ 4500 Net
Rent: 450
Parking: 55 (I could do without)
Utilities: ~50 (varies)
Car Ins: 80 (would probably drop with a cheaper car)
Cell (lowest minutes/data): 75
Car Pymt: 610 (!) (looking to sell, see below)
Private Student Loans (min payments): 800
Public Student Loans (min payments): 450
Dance/Fitness: 100 (I work out at home most of the time, but for an aspiring dancer, classes are kind of essential)

Car:
2011 Chevy Camaro 1LT RS, 6500 miles
Approx value: 28k
Loan: $30k, Interest: 7.7%

Student Loans:
Private (Sallie Mae)
4 loans (principle, interest rate):
$23.5k, 9.25% (!)
$27.8k, 5.25%
$30.8k, 7.9%
$31.8k, 13.4% (!)

Public (AES)
Principle: $16k, Interest: 7.6%
(Fed Direct)
2 loans:
$13.2k, 5.6%
$15.4k, 6.8%

Credit Rating: 711

--The Plan--
What I was considering doing is selling/trading in the Camaro, using that money (plus a little savings/tax return) to pay down the 13% loan from Sallie Mae (considering 7.7% interest on $31k is better than 13.4% on $31k), buying a cheaper/more fuel efficient car outright ( or with minimal financing), and working on throwing extra money into paying off the highest-percentage loans first. The alternative is to pay off the car loan with the car sale and put the extra $600/month into student loans, paying off the 13%er hopefully by the end of the year.

I've done a bit of research/talked to Sallie Mae about consolidating into one lump at a lower interest rate (13% is criminal), but to no avail. Also, with the new car, new apartment, and a few other things, I've had a handful of checks on my credit rating, which is getting a little dicey, as well.

I'd be more than happy surviving on ~15k/year like you've described, and throwing heaps of cash into the loans, but my virtually unavoidable living expenses come out to ~30/year as it is :(. Welp?

--The Resolution--
[Insert awesome moustachian wisdom here :D]

[Mike Key]

--The Details--
Current Monthly Salary - 6500 Gross, ~ 4500 Net
Rent: 450
Parking: 55 (I could do without)
Utilities: ~50 (varies)
Car Ins: 80 (would probably drop with a cheaper car)
Cell (lowest minutes/data): 75
Car Pymt: 610 (!) (looking to sell, see below)
Private Student Loans (min payments): 800
Public Student Loans (min payments): 450
Dance/Fitness: 100 (I work out at home most of the time, but for an aspiring dancer, classes are kind of essential)

I'd be more than happy surviving on ~15k/year like you've described, and throwing heaps of cash into the loans, but my virtually unavoidable living expenses come out to ~30/year as it is :(. Welp?

My wife has more student loan debt than you, 175K grad school. And yeah, financing a depreciating asset at that interest rate was stupid. But I totally understand, I've done that more than once. I'm also a F-Body nut myself.

But I am not quite sure you've got a full grip on your expenses or something is missing from the picture here. If we remove your absurd car payment and student loans we come up with $810.00 a month which equates to $9,720.00 a year. Clearly you're spending money some other places, like on food, eating out, clothes, stuff like that you didn't mention.

Frankly you are bringing home 4500 a month, if you can live on under $2,250 a month that will give you another $2,250.00 to smack down those student loans with. But you're going to need to create a serious budget and get on the program and stick to it.

We had an over all picture of where our money was going, and thought we had a budget, but we had no real idea where all our money was going at the end of the month. So we sat down, and created a real budget, and then figured out our total cost of living for month to month and the year as a whole, and how much we could be putting towards student loan payments.

We were spending $3,311 a month. We have a $1,250 m/ rent. We've managed to shave that down to $2,250 ourselves by figuring out where our money was going and where we could cut it. For example, I just sold my Audi, and in another month, we're going to sell my wife's Trailblazer and replace it with a smaller more fuel efficient car.

If you're only making minimum payments on your student loans (still ignoring car payment) that's $1250.00 a month plus your 810.00, which comes to $2,060.00. Since you didn't mention the other things like food, entertainment, fuel, lets say that costs you another 400.00. So there you have it, $2,460.00 a month.

   $4500 a month
-   2460 living costs
-----------------------
    2040 left over
  -  610
----------------
   $1430 < that should be going towards your student loans, so where is that money going?

You've got the money to tackle this debt. If you're cost of living is 30K like you stated that leaves 54K that should be going to your student loans. Do you have other debts not mentioned here?

You do need to sell that car though. You're interest rate is mental. Do the math on just how bad of a deal financing that depreciating object is. Get a cheap car you can pay for in cash and bang around in. Don't finance another car.

I wish you the best of luck on your journey. And maybe someone else can provide further pointers to help you achieve your goals.

[MEJG]

Hi Dinko,
    Greetings from another 100k plus student loan debtor!!! you are not alone here.  I've got a few concrete tips but the most important thing, I think, is to endeavor to have an attitude that will force you to pay off those loans.  Focus on that and you'll be able to make choices that you need to without making excuses or wiggling out of them.

1) Really number one: SELL THAT CAR.  Buy a 10 year old manual small car with good gas millage from Toyota, Honda etc.  Change the oil yourself, drive infrequently use the excess from the sale to go straight at private loan #1.

2) Concentrate on your private loans in this order:
$31.8k, 13.4%
$23.5k, 9.25%
$30.8k, 7.9%
$27.8k, 5.25%

3) Consolidate your public loans with the direct loan consolidation plan.  It's running now until June and it takes your public loans uses a weighted average of your interest rates and then decreases it by 0.25%.  Then you can get another 0.25% off for doing automatic payments  through the direct loan servicer.  Put that payment on autopilot as an automatic payment at minimums (or round up to the nearest $10, but no more).

*extra tip - pay every pay period not once a month.  Interest is compounded daily on may student loans so the more often you pay the less interest you pay.

Get a handle on your budget.  Mikekey is right, your numbers do not add up.  Use Mint or even excel and find out WHERE your money is going.  Every penny above what you spend should be going into those loans (after a small 1000 emergency fund).  You need to get serious about this or you won't make big strides.

4) Get rid of your parking costs, get rid of the $75 in cell phone a month > go to a MNVO there's a great thread on them in the forum

5) Stop your dance classes for at least 3 months.  Make it into a side hustle, start teaching dance classes to others (adults or little kids) participate in FREE dance experiences.  After 3 months THEN re-evaluate the value of classes. 

6) Think outside the box - this is not for the irresponsible or the feint of heart.  Think about opening a new CC if you are responsible with CCs, one with 0% for the first 12 or 18 months.  Pay $5,000 chunks of private loan number 1 and then split the payment that was going at the loan between the card and the loan.  Do this to reduce the interest rate.  DO NOT DO THIS if there is any chance you won't pay off the balance.  The point it not to carry it until the introductory APR is over but to cycle through 5,000 in debt as many times as possible in those 12 months.

6) Think outside the box- sell your stuff

7) Think outside the box - get a side hustle with anything you can :-) Dance classes, dog walking some moon lighting.

Last tip, rethink your bank accounts and see if they make sense for you.  We've got a 3 account system which works better for us even though it seems to be more complicated. 

Account 1: Income Checking: all income goes into this account.  Student loans are payed out of this account automatically and so is the savings account (account 2).  Anything left over in it is put in an extra payment into the loans

Account 2: Savings account:  emergency fund in here - living expenses for the next month are automatically paid into this account via account 1.  at the end of the month living expenses for the next month are transferred into account 3.

Account 3: Spending Checking account: EVERYTHING but student loans are paid from this account.  Out monthly budget is transfered in from account 2 at the end of the previous month and we only have that amount to spend. period.

This works for us because we need a bigger efund than you (family of three with two pets), and we find ourselves spending money on our checking account if it's there but not over spending if there is a hard limit.  By only having access to account 3 we can't spend that extra $100 we made that should have gone to student loans.  It's a bit of Tom foolery but it helps us. 

So look at your banking and think about simplifying as much as possible, but making sure that the accounts are what work best for your and your particular quirks and situation.


Good luck and let us know how you do!

[arebelspy]

The two above posters nailed it with tons of detail.  I can't hope to improve on their answers, so I'll just focus on one snippet:

It seems that all of your posts/situations talk about starting from 0 net worth, but that isn't realistic - most people start with a big chunk of negative net worth in student loans.

Being Mustachian is more of a mindset than a state of being.  Once you get to that mindset, you won't let debt stop you, but rather you'll charge through it.  Whether you are currently 100k in debt, have no net worth, or 1 million net worth, your mindset should be the same.  The only difference between the latter and the two former is that you (likely) have hit financial independence and no longer have to work for your money.  But being in debt or having 0 net worth is no different - you pay down that debt, then you invest, rather than jumping straight to investing.

Work on the Mustachian mindset, and you'll power through those loans into savings.

Running some rough calculations, you should be financially independent in about... 12 years.  Less, with raises and such, or a better rate of return than my assumption (5%).  A bit more when life (such as possibly kids) get in the way.  Not too much more, because you won't give in to consumerism and lifestyle inflation that will try to go along with it.  Given that you graduated last year, that likely puts your retirement in your early to mid-30s.  Not too bad.

[sulaco]

Slightly OT, but did you happen to go to an engineering school about 60 miles away? If so, hello fellow Raider.

I left with about 85k in loans in 2003 (between myself and my parent), and just finished paying them off this past year. If your primary lender won't consolidate the loan, you might want to try a third party. I used Nelnet for my loans, Citibank was used for the parent loan.

My rates were very low (2.875% on 30k, 4% on 50k, and paid off 5k before it started accruing interst), so for several years, I just left them on the back burner, only getting serious about paying them off about six months ago, but then directing all additional money to the loans to pay them off quickly (including selling a bunch of stock).

If you get quarterly or annual bonuses, throw those at the loan as well. Debt snowballs work well in these cases where the loan values are actually pretty small (compared to mortgages and your income). You could probably make a stretch goal to pay off 1 loan per year.

Instead of replacing your car, have you considered taking the bus? I know that's not the cool thing to do in Wisconsin, but here in the PNW I ride the bus into town with people making well over six figures.  Most do it to avoid traffic or to promote conservation, but it can be very economical as well - and depending in the routes, time efficient. I know software engineers at Amazon and Microsoft who take the bus, so it's definitely not beneath high caliber engineers.

You may want to reconsider a job that will pay you less as well. The ultimate goal is to do wha's necessary to get to financial independence. You get that by avoiding debt, earning lots, and spending little. At this point in my career (hopefully six years to FI), I would stick with a high paying role in a place where I was respected, even if it wasn't where my interests lie, in order to meet my financial goals. That bein said, if I worked with jerks and was treated poorly I'd hop ship, even if it meant lower pay.

[Nancy]

I'm in a similar situation, starting from negative net worth. I think the mustachian thing for us to do is to pay off our debt as soon as possible. We can only do that by starting to live frugally right now. You can't retire early and drive a $600/month car. You have conflicting wants. Do you want to be free of debt or do you want luxury items?

Have you looked into consolidating your private student loans at an alternative private lender? I had a similar situation with Sallie Mae, so I investigated and received a much better rate for a consolidated student loan at Wells Fargo (I'm not advertising for them, but do some research other than talking to your current lender.) I take home $1K less than you a month, and I put $2.4K toward my loans each month. I have 20 months left. You can do it if you really commit! Set up a Mint account and set an audacious goal for your monthly student loan payments. Good luck!

[SpendyMcSpend]

I didn't read the entire thing yet, but the time for dancing and passionate careers is NOT NOW.  You need to keep the high-paying job for the next 3-5 years and pay this off FAST.  Do an extra job!  Do it!

[tannybrown]

Everyone's hit on the big points.  Remember that it's a marathon, not a sprint -- so as you pay off each sizable loan, I'd recommend doing something small to celebrate (maybe buying a ribeye to throw on the grill).  Little tricks like a progress chart on the refrigerator can help (or a graph in an Excel sheet).  Throw any found money (like bonuses, raises, tax refunds) right at the debt...watch out for lifestyle creep. 

Good luck and my guess is that you'll hit the finish line sooner than you anticipate.

[MacGyverIt]

Concur with the earlier responses including a better tracking of your expenses and I'm another proponent of using mint.com to track your debts/income/spending. Also recommend using a small notebook to track every single expenditure you make every day for at least a month. Tolls on the highway, gas, dry cleaning, Taco Bell, etc. Just looking at those nickels and dimes adding up in your own handwriting drives the point home.

Even with the partial list you provided (your list didn't include items such as grocery, internet and god forbid - eating out and cable?) there are cuts that can be made. Def drop the dance classes (at least until you reach a certain MAJOR goal like paying off the student loan debts, then reward yourself) and you can get a cheaper phone plan (metropcs or tracfone then use Skype/other VoIP for home-based calls). Log in to your various student loans and see how much you are paying every month on interest alone. Make these short term sacrifices and those numbers WILL start dropping!!!!!!

[dancedancekj]

Regarding the dance classes, from one aspiring dancer to another, what type of dancing are you looking to learn?
If hip hop, breaking, or one of the more modern dance styles, there are plenty of tutorials available online, as well as plenty of material to inspire you. If it's ballroom/Latin/swing there are also some tutorials available as well. There are also some ballet tutorials, as well as some online forums that could help with your technique as well regarding specific techniques or moves (for example, a tutorial on fouette turns http://www.youtube.com/watch?v=ME1EShO98CE For ballet, I've found that learning a good set of warmup exercises and basic floor, barr, and jump exercises helps to keep my basic skills decent, and I can rotate them per month based on what I need to improve on or get bored with.
Sometimes there are places with either free basic lessons, or very low cost lessons as well. You could even try seeing if placing an ad on craigslist for something a bit cheaper could land you some basic private lessons or group classes of some sort, or seeing if any of your friends would be willing to teach you.
I personally find that I'm a great mimic learner - watching various dance clips, learning the choreography, and then stringing the choreo together works to build my dance "intelligence". Try learning the beats of the Viennese waltz by watching a pair of professional dancers on YT do it. Get some ideas on a routine from that random bboy who dances to a Foster the People dubstep remix. The more dance you learn, the easier it becomes to learn.

Hope that helped, I am just kind of rambling now :)

[Ben]

Brad,

Congrats on your new stance and good luck as you pursue frugality! Remember, like anything else, frugality is a muscle and you want to take the right steps. Don't take an approach that is so extreme you are unable to sustain it for more than a month or two- cut back, set challenging but reasonably attainable goals, and if you find you can take it then ratchet it up another step.

You know you need to sell the car and find something affordable, you know you need to throw as much at the debt as possible, but the most important thing is that you are able to continue to fight and grow as you take the long road to zero net worth, and then financial independence.

Some of the ideas here are great but could quickly overwhelm you if you are new to the practice of frugality. Take the tips as you can, pick the ideas that work for you, and gradually build up strength! If dancing is important to you, try to find cost-effective ways of doing it, but foregoing all hobbies that bring you joy does not seem like a sustainable attitude to me. Just my two cents...

Ben

P.S. I believe you will need to pay the car loan off in full when you sell it, as it is secured debt. So you may not have much/any to throw at the student loan afterwards. Can anyone else verify if this is correct?

[onehappypanda]

P.S. I believe you will need to pay the car loan off in full when you sell it, as it is secured debt. So you may not have much/any to throw at the student loan afterwards. Can anyone else verify if this is correct?

Generally that's correct. If you sell it for less than you owe, you'll have to make up the difference on the spot. However, at least you won't be saddled to a huge payment every month, so you can take that extra monthly money and use it to pay off debts, which should save more money in the long run from not having to pay interest.

[Ben]

onehappypanda:

Thanks for answering that question! I agree that selling the vehicle is certainly the wise thing to do regardless. Incidentally, you may need to build up a cash cushion in case you sell it for less than you owe and/or need it to buy a replacement vehicle.

Used cars are generally more expensive now than usual, as there is a pend up demand for used vehicles after a couple of years of low new car sales.

Ben