Author Topic: Easy question on getting out of debt, need your advice  (Read 2985 times)

jostreet

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Easy question on getting out of debt, need your advice
« on: December 02, 2015, 10:30:20 AM »
I'm a graduate student making 20k per year and my spouse makes 70k. We have $19,500 in federal student loan debt (and that's it) that we are quickly trying to pay down. We've currently been paying 2k per month on these loans and believe that we can have it paid in full within five months if we dip into our emergency fund. Our emergency fund is right at 20k in a low interest savings acct.

However, as I get closer to paying it down I can feel the burn. I see two options: I can continue to pay 2k per month until we can pay about the last 7k using our savings acct in about five months or I can place our entire saving on the debt and be completely debt free. This seems like a simple question.

Please feel free to share your opinion and reasoning for why you would do what you suggest.

Thanks.
« Last Edit: December 02, 2015, 10:33:25 AM by jostreet »

GizmoTX

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Re: Easy question on getting out of debt, need your advice
« Reply #1 on: December 02, 2015, 10:34:35 AM »
What % are you paying in interest on the debt?

jostreet

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Re: Easy question on getting out of debt, need your advice
« Reply #2 on: December 02, 2015, 10:37:31 AM »
Currently, 10k of these loans are subsidized with interest at 4.5% that is in deferment until I finish school and the rest (9.5k) are unsubsidized at 6.8% that has been accruing, although I have the interest paid down.

BigHaus89

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Re: Easy question on getting out of debt, need your advice
« Reply #3 on: December 02, 2015, 10:37:39 AM »
It depends on what you're comfortable with. I personally would use the savings to pay the debt off and then contribute $2k a month to build savings back up. If your income situation is stable, I don't see much risk in doing this.

nereo

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Re: Easy question on getting out of debt, need your advice
« Reply #4 on: December 02, 2015, 10:57:19 AM »
... hopefully you've already taken the step of applying your extra payments towards the loans with the highest interest rates...

Let's see how things play out using our friend "math"
5 month payoff plan with $2k/month + $7k at end of 5 mo period:
Interest Accrued $9.5k @6.8%: $162
Interrest Accrued $10k @ 0% (subsidized): $0 (assumes you remain in school for next 5 months)
Total interest accrued: $162


Pay-off now plan:
interest accrued = $0
opportunity cost: EF and the safety it provides.

Nereo's plan (use $7k now from EF to pay down 6.8% loans while still paying down $2k/mo)
Interest Accrued: ~$21 (over 1.5 months on 6.8% loans- subsidized loans @ 4.x% are at 0% until graduation)

Bottom line:  You're not talking about a lot of interest on that debt, and you could get into trouble if you use your EF and then get into an emergency and need to use credit cards to pay it off.  I would avoid emptying your EF just for that reason.  However, if you plan on using $7k of it sometime, do it now on that unsubsidized 6.8% loans and then watch as your loan balance shrinks and you hardly pay any interest at all. 

Lady Fordragon

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Re: Easy question on getting out of debt, need your advice
« Reply #5 on: December 02, 2015, 11:27:13 AM »
... hopefully you've already taken the step of applying your extra payments towards the loans with the highest interest rates...

Let's see how things play out using our friend "math"
5 month payoff plan with $2k/month + $7k at end of 5 mo period:
Interest Accrued $9.5k @6.8%: $162
Interrest Accrued $10k @ 0% (subsidized): $0 (assumes you remain in school for next 5 months)
Total interest accrued: $162


Pay-off now plan:
interest accrued = $0
opportunity cost: EF and the safety it provides.

Nereo's plan (use $7k now from EF to pay down 6.8% loans while still paying down $2k/mo)
Interest Accrued: ~$21 (over 1.5 months on 6.8% loans- subsidized loans @ 4.x% are at 0% until graduation)

Bottom line:  You're not talking about a lot of interest on that debt, and you could get into trouble if you use your EF and then get into an emergency and need to use credit cards to pay it off.  I would avoid emptying your EF just for that reason.  However, if you plan on using $7k of it sometime, do it now on that unsubsidized 6.8% loans and then watch as your loan balance shrinks and you hardly pay any interest at all. 


Agreed! 

jostreet

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Re: Easy question on getting out of debt, need your advice
« Reply #6 on: December 02, 2015, 11:31:57 AM »
Thanks guys, I agree with you @nereo; I can pay off the unsubsidized in full now and then pay down the subsidized monthly while maintaining a major portion of our EF. Great advice!

Dicey

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Re: Easy question on getting out of debt, need your advice
« Reply #7 on: December 02, 2015, 11:50:26 AM »
Might as well lock this thread, nereo nailed it!

Dezrah

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Re: Easy question on getting out of debt, need your advice
« Reply #8 on: December 02, 2015, 12:30:50 PM »
(I was working on this reply while other people came in and said it quicker than I could.  Good advice that you should go with.  Iíll just share the part that is different than what has already been expressed.)

I personally like to think of the Emergency Fund in terms of how vulnerable you are to a crisis.  If youíre a young, healthy couple with no children, no pets, can walk to work/school, and you have a pantry full of food and a closet full of clothes, then youíre simply less vulnerable and could probably keep barely anything in an emergency fund.

But if you were someone who had a variable income, multiple children, a few pets, an unreliable car, and a tendency to self-medicate your emotions with shopping, then the odds that something could go wrong with one of these goes up and youíd probably want a very large Emergency Fund.

Some of these are factors are within your ability to control, some arenít.  Evaluate your level of risk and do whatís right for you. Then take steps to make yourself more and more crisis-proof, like reducing regular expenses, getting the right amount of insurance, building your skills, keeping yourself physically and mentally healthy, etc.

GizmoTX

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Re: Easy question on getting out of debt, need your advice
« Reply #9 on: December 02, 2015, 12:33:46 PM »
Also, have your emergency fund money earning at least 1% in an online savings account. Synchrony, Ally, & CIT are all good.