Author Topic: Pay off student loans or credit cards first?  (Read 6642 times)

MWOverlander

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Pay off student loans or credit cards first?
« on: September 02, 2014, 10:14:40 PM »
Hello! My name is Cody and I'm new to the Mustachian lifestyle.  Unfortunately for myself, I've gotten myself into a good bit of financial strain before discovering this way of life.  Slowly, but surely though I have faith that I'll get this turned around with proper habit changes.  So, here's my current situation... I'm currently in debt $56,375 between my two student loans, three credit cards, and two cars.  This doesn't include my wife's loans which will go into repayment next year.

My student loans:
Lender #1 - $1739 at 6.8% fixed
Lender #2 - $2372 at 3.5% fixed

My CC debt is at $15,000 at avg 16% amongst three cards.

Auto loans:
Car #1 $16000
Car #2 $21306 - Will most likely sell in the near future.  I'm provided a company car with my employer, so this vehicle just sits in my driveway.  If I'm no longer and employee here I can always purchase a good used vehicle.

I know it's obvious that my CC debt has the higher interest, so I should work on those payments first.  However, I hate having the feeling that if anything where to happen to either my wife or I to where we couldn't work, that the student loans will be there ... no matter what.  I've hated having the loans from day one.  Ideally with my "budget" I have setup I'll get my student loans paid off in November just based off our net income.  With the way I've been in FIRE mode as of late (recently sold $1400 of unused stuff laying around the house) I should be able to finish these off quicker. 

Does it make any sense at all to go after the low, fixed interest student loan over the higher variable cc debt? 

Any suggestions are appreciated!

Thanks,
Cody

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Re: Pay off student loans or credit cards first?
« Reply #1 on: September 02, 2014, 10:27:15 PM »
Ouch! Those are big numbers, but at least you're here, right?

Some financial gurus, like Michelle Singletary at the Washington Post (whom I admire), recommend paying off the loan with the lowest balance first so that you can feel a sense of accomplishment and then roll that monthly payment over into your next loan. BUT the math is not in favor of it. You will, under that scheme, pay more in interest over time, especially because student loan interest may be tax deductible.

That said... I paid off a low interest student loan just because it felt good and for the same reasons you mention. My grandfather read my blog and rewarded me with a thousand dollars :-). Paying off debt is good. There is no wrong answer! Welcome to the forum!

MWOverlander

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Re: Pay off student loans or credit cards first?
« Reply #2 on: September 02, 2014, 10:34:04 PM »
Ouch! Those are big numbers, but at least you're here, right?

Some financial gurus, like Michelle Singletary at the Washington Post (whom I admire), recommend paying off the loan with the lowest balance first so that you can feel a sense of accomplishment and then roll that monthly payment over into your next loan. BUT the math is not in favor of it. You will, under that scheme, pay more in interest over time, especially because student loan interest may be tax deductible.

That said... I paid off a low interest student loan just because it felt good and for the same reasons you mention. My grandfather read my blog and rewarded me with a thousand dollars :-). Paying off debt is good. There is no wrong answer! Welcome to the forum!

Thanks for the quick reply! Yeah, unfortunately young and dumb hit my wife and I hard.  Two new vehicles, and a Jamaica and Mexico vacation that we didn't have the money for after all bit us in the rear.  We are here though, so thats a big start!  Thanks for the words of wisdom.

My wife's salary will increase significantly next July/August ($250 - $400K annually depending on where we go), so long term I think we will be able to achieve FIRE, but I want to get a good boost going before we have to go into her loan repayment (~$5000+ monthly).  So, thats the rear beast that I'm no looking forward to! :P

MDM

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Re: Pay off student loans or credit cards first?
« Reply #3 on: September 02, 2014, 10:38:16 PM »
My student loans:
Lender #1 - $1739 at 6.8% fixed
Lender #2 - $2372 at 3.5% fixed

My CC debt is at $15,000 at avg 16% amongst three cards.

Does it make any sense at all to go after the low, fixed interest student loan over the higher variable cc debt? 
In short: no!

A $15,000 debt at 16% compounded monthly creates a new student loan (in effect) every year from the interest alone: $15K * [(1 + 16%/12)^12 - 1] = $2584.

Put everything you have toward the CC debt.

rmendpara

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Re: Pay off student loans or credit cards first?
« Reply #4 on: September 02, 2014, 10:41:54 PM »
No. Mathematically, you come out ahead paying down the credit cards first; however, they are relatively small balances, so if you would feel enjoyment/encouragement from paying off something... pay off the smallest loan, then the 2nd smallest, etc. Mathematically, you come out behind doing this, but some people need the motivation and "wins" along the way to stay motivated.

$250-400k in the next few years? Wow. These debts are peanuts, but if you spend even $1 over an income like that, you'll still be in debt.

Joel

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Re: Pay off student loans or credit cards first?
« Reply #5 on: September 02, 2014, 10:43:10 PM »
I don't like leaving money on the table. I would pay the highest interest first.

Dicey

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Re: Pay off student loans or credit cards first?
« Reply #6 on: September 02, 2014, 11:23:03 PM »
Hell NO! Variable interest is a hair on fire emergency. Student loans are way less so. Tomorrow morning, start calling your CC companies to try to get your interest rates lowered. Tell them you received a nice balance transfer offer, but you'd rather give them first shot. If that doesn't work, start looking for 0% CC offers. Kill that CC debt as soon as possible. Next, get rid of the extra car by the end of the month. I had company cars for most of my career and only made the mistake you're making once. While you're at it, look for a cheaper car for your wife. It's too expensive.*

Look into consolidating your SL's. If that makes sense, do it!  Along the way, I'd build a small EF. Include monthly expenses plus a buffer for SL payments if that feels better to you. Yeah, you've dug yourselves a nice shithole, but you can clean it up with focused effort.

*If anyone's paying attention, I just told someone else to keep their expensive car. Different circumstances.

arebelspy

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Re: Pay off student loans or credit cards first?
« Reply #7 on: September 02, 2014, 11:57:00 PM »
My wife's salary will increase significantly next July/August ($250 - $400K annually depending on where we go), so long term I think we will be able to achieve FIRE

Long term?  You should be able to FIRE after only a few years with income like that!

Your current debts are pretty paltry compared to that income.  I'd worry more about setting in a mindset of being happy with a moderate spending level, so you have the ability to bank most of that money and the freedom to live as you want afterwards.

Too many people with high incomes get trapped into high spending and have a harder time FIREing than people with much lower income.
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surfhb

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Re: Pay off student loans or credit cards first?
« Reply #8 on: September 02, 2014, 11:58:57 PM »
Yeah.....with that kind of income you barely have debt.    Get it done next month :)

MWOverlander

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Re: Pay off student loans or credit cards first?
« Reply #9 on: September 03, 2014, 04:03:18 AM »
Thanks for replies!

I thought about looking for a zero interest cc for like 15 months and transferring the balances over. My mom had actually recommended me that, buy it was off my radar cause I'd had never gotten myself in this situation before. In the six years we've been married I've always used a credit card to pay everything (bills, groceries, eating out, gas, etc) and paid the statement in full at the end of them month. It wasn't until we decided to go on out of country vacations last year that put us in this downward spiral. 

I'm def adjusting spending habits. I'm also downsizing what I don't need for a minimalist lifestyle.

The car thing sucks. My wife had a perfectly fine paid for vehicle that her father decided it was time to get rid of and leased her a new one in our second year of marriage. After the lease we decided to purchase the car. My car is crazy too. I had a truck that was paid off, buy I was spending $400 a month in gas driving to work and it needed about $3500 in repairs. So I traded it in on a new gas sipping KIA (which I love) and two months later I got a job promotion that came with a company car and cell phone.

I'm already getting my wife on board with getting rid of my car. We want to start a family in the next year, so we are trying to get financially fit before that happens.

Thanks for the help!

Cody
« Last Edit: September 03, 2014, 04:48:37 AM by CodyAsh »

MWOverlander

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Re: Pay off student loans or credit cards first?
« Reply #10 on: September 03, 2014, 04:06:07 AM »
Yeah.....with that kind of income you barely have debt.    Get it done next month :)
I wish that were true along with her income spike next year comes $350,000 worth of student loan repayment. But if we are strong and tell our money what to do, then we can make it work.

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Re: Pay off student loans or credit cards first?
« Reply #11 on: September 03, 2014, 07:27:26 AM »
The car thing sucks. My wife had a perfectly fine paid for vehicle that her father decided it was time to get rid of and leased her a new one in our second year of marriage. After the lease we decided to purchase the car. My car is crazy too. I had a truck that was paid off, buy I was spending $400 a month in gas driving to work and it needed about $3500 in repairs. So I traded it in on a new gas sipping KIA (which I love) and two months later I got a job promotion that came with a company car and cell phone.

I'm already getting my wife on board with getting rid of my car. We want to start a family in the next year, so we are trying to get financially fit before that happens.

Thanks for the help!

Cody

This thing about the father is a BIG red flag to me. If you keep letting your FIL dictate your lifestyle, you'll always be broke.

Maybe let your wife settle into her new career before getting pregnant if she is going to be your primary wage earner. I'm seeing "start a family" and "start a job" as being nearly simultaneous in your timeline.

MWOverlander

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Re: Pay off student loans or credit cards first?
« Reply #12 on: September 03, 2014, 07:45:28 AM »
The car thing sucks. My wife had a perfectly fine paid for vehicle that her father decided it was time to get rid of and leased her a new one in our second year of marriage. After the lease we decided to purchase the car. My car is crazy too. I had a truck that was paid off, buy I was spending $400 a month in gas driving to work and it needed about $3500 in repairs. So I traded it in on a new gas sipping KIA (which I love) and two months later I got a job promotion that came with a company car and cell phone.

I'm already getting my wife on board with getting rid of my car. We want to start a family in the next year, so we are trying to get financially fit before that happens.

Thanks for the help!

Cody

This thing about the father is a BIG red flag to me. If you keep letting your FIL dictate your lifestyle, you'll always be broke.

Maybe let your wife settle into her new career before getting pregnant if she is going to be your primary wage earner. I'm seeing "start a family" and "start a job" as being nearly simultaneous in your timeline.
I appreciate the concern! That was four years ago, and it was the first and last time that happened.

We have a good relationship with our parents, but we've made ourselves clear that we make our own decisions now.

Dicey

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Re: Pay off student loans or credit cards first?
« Reply #13 on: September 03, 2014, 07:51:08 AM »
Thanks for replies!

I thought about looking for a zero interest cc for like 15 months and transferring the balances over. My mom had actually recommended me that, buy it was off my radar cause I'd had never gotten myself in this situation before. In the six years we've been married I've always used a credit card to pay everything (bills, groceries, eating out, gas, etc) and paid the statement in full at the end of them month. It wasn't until we decided to go on out of country vacations last year that put us in this downward spiral. 

I'm def adjusting spending habits. I'm also downsizing what I don't need for a minimalist lifestyle.

The car thing sucks. My wife had a perfectly fine paid for vehicle that her father decided it was time to get rid of and leased her a new one in our second year of marriage. After the lease we decided to purchase the car. My car is crazy too. I had a truck that was paid off, buy I was spending $400 a month in gas driving to work and it needed about $3500 in repairs. So I traded it in on a new gas sipping KIA (which I love) and two months later I got a job promotion that came with a company car and cell phone.

I'm already getting my wife on board with getting rid of my car. We want to start a family in the next year, so we are trying to get financially fit before that happens.

Thanks for the help!

Cody
Does your wife like the KIA? Perhaps you could keep it and sell hers...

I agree with frugalparagon about delaying starting a family for at least a year or two until you're on better financial footing. This shit gets exponentially harder when you have kidlets. OMG thats a lot of student debt! Wow! I hope she's a doctor with a high-paying specialty, cause she's going to have to do a lot of it to repay her investment. How will you manage those loans when she's on maternity leave? What if she doesn't want to go back to work full time after the baby? If you choose to stay home, what happens to the company car? Wow! Personally, that "detail" should have made it into your original post. Wow.

MWOverlander

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Re: Pay off student loans or credit cards first?
« Reply #14 on: September 03, 2014, 10:04:09 AM »
Thanks for replies!

I thought about looking for a zero interest cc for like 15 months and transferring the balances over. My mom had actually recommended me that, buy it was off my radar cause I'd had never gotten myself in this situation before. In the six years we've been married I've always used a credit card to pay everything (bills, groceries, eating out, gas, etc) and paid the statement in full at the end of them month. It wasn't until we decided to go on out of country vacations last year that put us in this downward spiral. 

I'm def adjusting spending habits. I'm also downsizing what I don't need for a minimalist lifestyle.

The car thing sucks. My wife had a perfectly fine paid for vehicle that her father decided it was time to get rid of and leased her a new one in our second year of marriage. After the lease we decided to purchase the car. My car is crazy too. I had a truck that was paid off, buy I was spending $400 a month in gas driving to work and it needed about $3500 in repairs. So I traded it in on a new gas sipping KIA (which I love) and two months later I got a job promotion that came with a company car and cell phone.

I'm already getting my wife on board with getting rid of my car. We want to start a family in the next year, so we are trying to get financially fit before that happens.

Thanks for the help!

Cody
Does your wife like the KIA? Perhaps you could keep it and sell hers...

I agree with frugalparagon about delaying starting a family for at least a year or two until you're on better financial footing. This shit gets exponentially harder when you have kidlets. OMG thats a lot of student debt! Wow! I hope she's a doctor with a high-paying specialty, cause she's going to have to do a lot of it to repay her investment. How will you manage those loans when she's on maternity leave? What if she doesn't want to go back to work full time after the baby? If you choose to stay home, what happens to the company car? Wow! Personally, that "detail" should have made it into your original post. Wow.
My wife is a third year emergency medicine chief. So yes, she is a physician. She'll be done with residency next May and I'll become the stay at home parent. She won't be able to stay home after maternity. That wouldn't make any sense to throw away 11 years of training, and would put us into an even larger financial downward spiral. Whether she wants it or not, she has the expectation of working for a long while ;)

Edit:
Sorry, missed the car part. She has a 2011 KIA sorento which we owe $5000 less than my KIA. She really like it and it has been a great vehicle. So it makes more sense to me getting rid of mine. If I become a stay at home dad then I'll turn in my company car and purchase a good used $5000 or less vehicle.
« Last Edit: September 03, 2014, 10:10:14 AM by CodyAsh »

whammer33024

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Re: Pay off student loans or credit cards first?
« Reply #15 on: September 03, 2014, 10:24:44 AM »
Yeah.....with that kind of income you barely have debt.    Get it done next month :)
I wish that were true along with her income spike next year comes $350,000 worth of student loan repayment. But if we are strong and tell our money what to do, then we can make it work.

what's that now?  this probably should have been mentioned earlier

MWOverlander

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Re: Pay off student loans or credit cards first?
« Reply #16 on: September 03, 2014, 10:29:07 AM »
Yeah.....with that kind of income you barely have debt.    Get it done next month :)
I wish that were true along with her income spike next year comes $350,000 worth of student loan repayment. But if we are strong and tell our money what to do, then we can make it work.

what's that now?  this probably should have been mentioned earlier
My apologies. I mentioned her potential income, I didnt think her actual profession mattered. It appears that it wouldve been helpful. This might actually be better used to start a journal in that forum, that way I can get all the info out, our challenges, and our plans.

MandyM

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Re: Pay off student loans or credit cards first?
« Reply #17 on: September 03, 2014, 10:42:15 AM »
I know it's obvious that my CC debt has the higher interest, so I should work on those payments first.  However, I hate having the feeling that if anything where to happen to either my wife or I to where we couldn't work, that the student loans will be there ... no matter what. 

I find it really interesting that you seem overly concerned about ~$3K in student loans vs $15K in CC debt when your wife is going to be on the hook for THREE HUNDRED AND FIFTY THOUSAND DOLLARS. Maybe your real concern is the upcoming SL payments?

Pay the CC, sell the car. Consider selling both and buying one used car with cash.

Also, your wife's profession doesn't matter, but her SL balance does.

LibrarIan

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Re: Pay off student loans or credit cards first?
« Reply #18 on: September 03, 2014, 10:52:15 AM »
Without knowing all the figures in your life, I'll throw this out there (although I admittedly wrote this hastily). What if you become a money badass and got all that debt managed (minus the student loans) prior to next year when her income will supposedly go up? If that is the case and you yourself are still employed, what about trying to live off only your income and throwing every penny she makes at her student loans? You could pay that off in less than two years if that's the case, even accounting for taxes.

Bateaux

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Re: Pay off student loans or credit cards first?
« Reply #19 on: September 03, 2014, 11:08:20 AM »
This an easy decision.   Your income will make this a breeze.  Sell a car since you are provided a company car.  Pay off the credit card debt first and cut up the cards.  Don't do that again.  Then attack the student loan debt for both of you.  The work down that mortage.  It's a lot but your income will handle it.  Take full advantage of tax deferred investments available and retire in 10 years.  You've got this.

MWOverlander

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Re: Pay off student loans or credit cards first?
« Reply #20 on: September 03, 2014, 02:52:04 PM »
I know it's obvious that my CC debt has the higher interest, so I should work on those payments first.  However, I hate having the feeling that if anything where to happen to either my wife or I to where we couldn't work, that the student loans will be there ... no matter what. 

I find it really interesting that you seem overly concerned about ~$3K in student loans vs $15K in CC debt when your wife is going to be on the hook for THREE HUNDRED AND FIFTY THOUSAND DOLLARS. Maybe your real concern is the upcoming SL payments?

Pay the CC, sell the car. Consider selling both and buying one used car with cash.

Also, your wife's profession doesn't matter, but her SL balance does.
I guess this why I shouldn't create a post like this near midnight. I haven't made myself clear. Her student loans are our number one priority....that is why I'm trying to figure out the best way to attack my current debt prior to hers starting repayment. I don't want to walk into her repayment period with $4k in student loans and $15k in cc.

Her student loans are what they are. It comes with the territory and field of work. If I can get out of current debt and continue living off our $65000 combined net income that we currently have (even after her pay increase) then we can focus on paying her $350,000 very quickly.
« Last Edit: September 03, 2014, 05:41:10 PM by CodyAsh »