Author Topic: Looking for input on my budgeting and question on how to tackle my student Loan  (Read 2099 times)

winterymixx

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(To skip to the nitty-gritty start reading at the last paragraph)

So I guess let me start of by saying that I used to be terrible at managing my money and have in the last year begun to turn things around at 25 and make some pretty dramatic changes.
It would probably best to start where all of my financial troubles began which probably applies to most people, college. So I didnít come from a wealthy family to begin with which meant financing the entirety of my college education on my own. This became far more costly than I had anticipated. I was able to get some scholarships and grants to help pay for tuition and then got some students loans to help cover some of the remaining living expenses. This included rent, food, clothing and transportation. If I had left it at that then my current financial situation would be much better then what it is today. However, obviously this is not what occurred. Many of my friends in school came from families that allowed them to afford more lavish lifestyles footed mostly by their parentís income. So foolishly I decided to live beyond my means to match their lifestyles.

This included:

$900.00 a month in rent in a high rise apartment

$200.00 per month Comcast bill split 4 ways ($50)

$400.00 per month food bill from eating at restaurants and not making food

$100.00 per month cell phone bill

$100.00 on gas per month

$100.00 month avg. on clothes

$1500 Snowboarding trip every year

$500-$1000 on Summer trips per year

All of this while barely working during school and taking mostly unpaid research internships. These expenses were compounded even more since I spent an extra year in college after transferring majors to a genetics degree. Luckily I didnít transfer my spending insanity when I purchased my car and bought a used Hyundai Tiburon when I was in high school for $3k in full that had lasted me through college. But at the time I justified all of the extra expenses with the notion of ďWell once I get out of college Iím going be making $60k to $70k per year starting out because everyone is just going to be lining up to hire me once I graduate.Ē Years of living beyond my means had me rack up $41,385.71 @ about 4% interest in student loans and $1500, $3000, and $10,000 in credit card debt (ouch).

Total Debt = $55,885.71

Not only that, but as you may have already guessed my fantasies of employment had not coalesced as I had thought they would. After graduating I spent a year working in a pharmacy as a technician making $11 and later $12 an hour with 30 hour per week schedules. When my loans became due I was able to make the minimum payments to avoid them going into default but my financial situation was going nowhere and was living on PB&Jís. I needed to make some changes fast and the first one I needed to make was getting a job that I didnít loath with better compensation.

Luckily sometimes I can be persistent and I stuck to it in my job applications. I finally found a job I got through a friend in honeybee research which I absolutely love. This new job left me with a monthly after tax income of $2,156 (based on a two biweekly paychecks. The 1 or 2 times a year I get 3 paychecks in a month, the third one is a bonus that goes straight to pay off debt). So with new income in hand the first order of business was to get my spending under control. This lead to drastic reductions in spending over what I was previously doing in college. My new spending profile includes:

$450 on rent per month (Cut my largest expense in half at a savings of $450)

$7 internet per month ($50 split 7 ways at my new group house)

$30 Utilities per month ($200 split 7 ways)

$30 Cellphone plan (using Republic Wireless)

$40 Transportation

$250-$300 per month on food (I still need to reduce this a bit)

$400 per month spending money (Gym, going out, short trips and bad consumer purchases). I can still reduce this some.

This leaves me with a monthly savings rate of about $900. I was even able to turn something that could have been a financial disaster into even more savings. When my car broke down, instead of taking a loan out for a new car I decided to bring my bicycle out of the closet. Now, all of my transportation expenses are my $0 per month bicycling expense and about $40 on public transport. So immediately after having my luck turn around with this new job I began to make large dents in my credit card debt. After a year of making payments, I am happy to say that I eliminated the $1500 credit card, the $3000 credit card and reduced the last one down to $5000 all while having an emergency fund of $2000 saved up. Another aspect that has greatly helped me was that after never missing a payment I found my credit score has gone way up to 690! With this new knowledge I went out and found a 0% APR credit card with 0 transfer fees for the first year and transferred the remaining credit card debt to obtain a reduced interest rate of 0% from 19.9%. I also have begun to take Masterís Program in Bioinformatics that my work is completely covering so that in the future I can build up in even better salary. So now that the credit card debt is winding down to a close I have begun to make plans on how to reduce my student debt on how to get rid of it.

How to tackle my student debt:

So the first steps I took with my student debt were to enroll in the Income Based Repayment Plan (IBR) so I can make minimum payments and concentrate on the credit card debt. Also I consolidate all my federal loans into 1 account for easy management. So this leads me to the question that I have seen come up a few times on this forum of should I pay off the student loan or should I invest. But for me I found a new variable in this problem. I currently work for the state government and if I continue to work in the public service for 10 years I will be eligible for Public Service Loan Forgiveness (PSLF). This has led me to come up with the plan of continuing to make minimum payments to my student loans and invest in a ROTH IRA Index Fund through Vangaurd. My reasoning is that right now the returns on investing are a greater return value than my 4% loan. But what happens if I change careers and I am no longer eligible for PSLF? This is where one of the great attributes of a ROTH comes in hand. If this would occur the ROTH (if I am correct) allows me to withdraw my principle penalty free. I can then use the principle from my ROTH account to pay off the student loan debt all the while I was making interest off that money. My other option is to just continue to throw all of my savings at the student debt like I did with the credit cards. I just wanted to ask Mustachian what they think about my new plan.

Fatmouse

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Great job turning your situation around!  You have lots of good options here.

My fiancť and I have been asking ourselves similar questions, sorting out his education debt.

He is also eligible for PSLF, but it is not part of his plan because:
- he might change jobs to a non-PSLF eligible job
- it was possible for him to eliminate his student debt in 5 years (3 years to go now!)
- his interest rates were high-ish (6.8 to 7.9%) so it was better to pay off the student loans than to invest
- his IBR payment wasn't much lower than the standard 10-year repayment schedule, so there would not be much left to forgive at the end of 10 years

For your situation, given your pursuit of a higher degree, note that changing jobs and potentially having a higher income (which would increase your IBR) might affect your decision.

You note that you could take money out of a Roth to pay down balance later, if PSLF doesn't work out.  Seems logical enough! 

Personally, though, I think there are so many variables with PSLF that it isn't really very practical to plan your life around it.  Out of caution, frustration, and even laziness, I would take the straightforward approach of just paying down the debt as fast as possible, if in were in your position.

Good luck!

Suit

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I'm also curious what other people think about the PILF plan that you have because I'm in the same boat. My student loans are bigger than yours but right now I'm of the same mind-set you are, which is that I'll pay the minimum and if I change jobs or PILF goes away then by the time those things happen I'll have enough to pay the loans outright from investments if I want. I don't know that I would use my Roth money to pay it off though, I'd rather leave that money alone for as long as possible.

myrax

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Congratulations on paying off so much debt! In my experience, PSLF only makes sense when your annual salary is less than your total debt. If you owe triple digits, and work in a field where you will never make much money, it's an awesome deal. However, if you expect your annual salary to exceed the 41 grand you owe during the first few years of PSLF, your IBR payments will be large enough to essentially pay it off in 10 years.  In your situation, I think you would be better off paying off the debt aggressively. It is a guaranteed return and it frees you up in terms of job options.

I was in a similar situation to you a couple of years ago- I qualified for PSLF, and was making minimum IBR payments and paying off a 0% credit card that I had used to finance a cross-country move in order to get my job. I ended up paying off my debt early instead of going for PSLF, for three reasons:

1. I got a promotion, so my annual salary exceeded my total debt. Since I was still in my first couple of years of IBR, I would have almost paid off my debt in about 10 years regardless of forgiveness.

2. I met my partner and got married- and to continue qualifying we would have had to consolidate our debt into one account. He doesn't qualify for PSLF, and with our combined incomes, we wouldn't have qualified for IBR. However, I understand that PSLF and IBR have sorted out the weird things that marriage used to do the programs, because it created problems when couples divorced.

3. The Department of Education transferred my consolidated loans to Sallie Mae. They were so unethical and difficult to deal with, I decided to pay off my debt ASAP, because I would have done anything to get them out of my life. (I also filed a complaint with the Department of Education, but that doesn't do much).

In the end, I don't think doing IBR/PSLF hurt me, but I realized it works best for people who have a pretty good idea of where they'll be in terms of a job and relationship status for 10 years.

I think you have a good plan- just realize that there is a lot that can derail PSLF. I would also consider keeping the Roth investments, and trying to pay down the loans from investments that are not tax-advantaged. If you get a better job, it will be pretty easy to kill the loans with monthly payments, if you keep your present standard of living.

winterymixx

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After reading some of the comments here to my post I think I have decided that I will just go full 100% pay off.  Some of the comments here have gotten me to think about what my new IBR payments might be once my current income goes into effect.  Initially when I locked in my monthly payment rate for IBR it was based off of a pitiful $18,000 per year at my previous job.  This amounted to a monthly payment of about $10.00.  So I went and found an online calculator to input my new income and just as myrax said my new payment schedule will be roughly the same as the 10 year standard repayment.  So at this point I am just going to take the safe guaranteed return and try to pay of my loan in 4 to 5 years.  I will at least be able to make some investments to my retirement.  This is due to me being fortunate enough to work for an organization that contributes 7.25% of my base salary to my 401k regardless if I contribute anything at all.  Thanks everyone for your input.