Author Topic: Double checking that I'm on the right track with student loan repayment...  (Read 5188 times)

joeypants

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Hi all,

Just want to double check that I'm not overlooking some glaring error in logic or financial planning in how I'm approaching paying off my student loans. I'm prioritizing paying off student loan debt instead of investing heavily. I'd love any thoughts on how to be more efficient in my finances. Here's a brief overview of my financial situation:

Me: 32 years old
Net Monthly Income: $4660, after all healthcare, Roth 401k, taxes, insurance, etc.
Roth 401k contribution: $400/mo. into VFIFX, for now, with no employer match. Employer will match 50% up to 6% of my income starting in December. I will be increasing my contributions next year, still figuring out the percentage, though.
Total current monthly expenses: ~$2600
Savings per month: ~$2000
Savings rate: ~43%
Emergency Fund: $20,000 in a "high interest" online savings account... at 1%. This is a little more than 7 months of expenses. Seems a little high to many people, but I work in a fairly volatile industry and layoffs are common. Finding a job isn't too difficult at this point in my career, but I highly value the peace of mind this provides, especially after having gone through a layoff last fall.

I'm in the middle of tackling student loan debt and also voluntarily help my wife with her student loans as I can, though it's not absolutely necessary that I help her. My rationale for helping my wife is that while she makes her minimum suggested payments on her own from her job just fine, that will only last until we have kids someday, at which point she'll probably have to stop working (we have no family nearby to help) and I'd take over paying her loan payments with my income. So I'd rather help her knock down her debt as much as possible now, while we can afford it, and before kids happen so that I have less debt to pick up from her later down the road.

Anyway, here's my student loan situation:

Loan 1: $2551.50 @ 3.4%. This is my lowest priority, as the interest rate is somewhat reasonable.
Loan 2: $11250.37 @ 6.8%. This is my top priority.

I am currently paying $1000 toward my Loan 2 every month (as well as the $30 minimum on Loan 1), and putting $500 toward my wife's student loans. The ~$500 remaining of our excess monthly income is reserved for unexpected expenses during the month, which has been needed lately. But if it goes unused, then it is used at the beginning of the following month as a cushion to get us from my paycheck at the end of the month to my paycheck in the middle of the following month without reducing principle capital in my checking account (I like to keep a baseline amount in it, just in case). Any remaining money from the $500 at the end of the following month goes to student loans.

Does that approach to our student loan debt sound reasonable? I go back and forth so much about just completely paying off my debt with our emergency fund, but I don't think I'm willing to take that risk.

Any thoughts?

Thank you!

Updating to add:
My student loan minimum monthly payment is $220, so I am overpaying quite a bit with this plan.
Besides our student loans, we have zero debt.
« Last Edit: August 04, 2015, 01:06:08 PM by joeypants »

ShoulderThingThatGoesUp

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Why are you contributing to a Roth 401k instead of a pre-tax one?

joeypants

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Why are you contributing to a Roth 401k instead of a pre-tax one?

I thought that might come up :) I'm contributing to a Roth because I didn't know what I was doing when I signed up for benefits at work. It's only been since the beginning of this year that I'm really buckling down on getting smart about finances, so I'm still learning. When I signed up for the Roth, I used the traditional thinking that I'll be making more later in my career than I am now... I would love to switch to a traditional 401k, but have no idea what that process involves and don't know if I need to wait until the next Open Enrollment period to do so or if I can make the switch at any time.
« Last Edit: August 04, 2015, 01:16:25 PM by joeypants »

ShoulderThingThatGoesUp

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Nothing legal that says you can't switch anytime - I know because my company lets me. Call HR and ask.

Cheddar Stacker

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Nothing legal that says you can't switch anytime - I know because my company lets me. Call HR and ask.

+1. You should likely switch to Traditional, but it's hard to know without knowing what your wife makes, if you file jointly, what your goals are, etc. Also, unless you are keeping totally separate finances in your marriage, I would try not to think in terms of his and hers, and think more about ours.

Without knowing how much her loans are, or what the rates are, it's hard to know if you're doing the optimal thing.

Here's a little exercise to show you how much that EFund is costing you:
20,000*1%=200/12=17 per month interest income
11,250*6.8%=765/12=64 per month in interest expense
So you are paying $47/month for peace of mind. And if you paid off the 6.8% SL you would still have 3.65 months of Efund ($8,750/($2,600-200)) and would have another $1,000 each month to replenish it.

In any case, I would look into refinancing the high interest debts if possible. If you can't do that, pay off the high ones and keep the low ones, and begin investing heavily into a Traditional 401k once you feel like your debts are low enough.

joeypants

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Nothing legal that says you can't switch anytime - I know because my company lets me. Call HR and ask.
+1. You should likely switch to Traditional, but it's hard to know without knowing what your wife makes, if you file jointly, what your goals are, etc. Also, unless you are keeping totally separate finances in your marriage, I would try not to think in terms of his and hers, and think more about ours.

Without knowing how much her loans are, or what the rates are, it's hard to know if you're doing the optimal thing.

Thanks, I'm going to get in touch with HR today about it.

Here's a bit more info for you...

My wife's income is very low, around $15k/year, gross. No benefits. She's looking for a new job that pays better.
We file jointly in the state of Washington.

Her student loan info:
Loan 1: $11660.24 @ 6.8%
Loan 2: $2768.17 @ 4.5%
Loan 3: $5071.23 @ 3.4%

We do keep separate finances, though we're not opposed to combining and absolutely have nothing to hide from each other. We've only been married for ~2 years, and we're still figuring it all out. My wife is, self-admittedly, bad at money management, so the money she makes at her job cover her student loan payments and is her spending money. I handle the bills, which I realize many people have an issue with, but I really don't mind, though. I'm going to have to cover them when kids come along anyway, so it doesn't bother me. Plus, this way, there won't be a huge shock when we drop to relying on 1 income to cover our needs when we have kids.

We're not opposed to combining checking accounts, just haven't figured out a way where we feel comfortable with it, knowing that she doesn't have great money management skills.

Thanks!

Cheddar Stacker

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Pay the minimums on all but the 6.8% loans. Either refinance the 6.8% loans, or pay them off quickly, both of them. Once they're gone (or refinanced) keep paying the minimums on everything and max out your Traditional 401k.

joeypants

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Pay the minimums on all but the 6.8% loans. Either refinance the 6.8% loans, or pay them off quickly, both of them. Once they're gone (or refinanced) keep paying the minimums on everything and max out your Traditional 401k.
So, essentially, keep doing what I'm doing. And switch my Roth 401k to a Traditional 401K.

Thanks for your thoughts! Anyone else have any thoughts or insights?

Cheddar Stacker

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Pay the minimums on all but the 6.8% loans. Either refinance the 6.8% loans, or pay them off quickly, both of them. Once they're gone (or refinanced) keep paying the minimums on everything and max out your Traditional 401k.
So, essentially, keep doing what I'm doing. And switch my Roth 401k to a Traditional 401K.

Thanks for your thoughts! Anyone else have any thoughts or insights?

Sort of. I also suggested maxing out the 401k vs. the $400/month, and wiping out some of those loans with your EFunds so you aren't paying $47/month for warm-fuzzies. Lack of job security is a real concern, so keep that in mind, but do you need 7 months saved, particularly when you could lower your required monthly debt service by wiping out one of those loans completely?

Either way, you're welcome and good luck with it. You'll be fine either way.

Zx

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Where are you getting 1% on your online savings?

I have savings with Capital One 360 at .75% and I thought that was the highest around.

RunHappy

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Where are you getting 1% on your online savings?

I have savings with Capital One 360 at .75% and I thought that was the highest around.

Ally bank has a .99% on their online savings.

Zx

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Where are you getting 1% on your online savings?

I have savings with Capital One 360 at .75% and I thought that was the highest around.

Ally bank has a .99% on their online savings.

Wow, how cool is that? Thanks for the tip.

joeypants

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Where are you getting 1% on your online savings?

I have savings with Capital One 360 at .75% and I thought that was the highest around.
I'm using Barclay's Online Savings account, but I've also heard good things about Ally.

MrsPfennig

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Why is your wife only earning $15,000/year with a degree? Is she looking for a better paying job?

kpd905

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When I signed up for the Roth, I used the traditional thinking that I'll be making more later in my career than I am now...

The real thing to look at is how much income you'll need in retirement, not how much you'll make later in your career.  Since that is what you'll be taxed on when withdrawing. 

RunHappy

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Where are you getting 1% on your online savings?

I have savings with Capital One 360 at .75% and I thought that was the highest around.
I'm using Barclay's Online Savings account, but I've also heard good things about Ally.

So far I have only used it to stash cash there and am very happy.   They have other products and services but I cannot speak on them. 

charis

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Where are you getting 1% on your online savings?

I have savings with Capital One 360 at .75% and I thought that was the highest around.
I'm using Barclay's Online Savings account, but I've also heard good things about Ally.

So far I have only used it to stash cash there and am very happy.   They have other products and services but I cannot speak on them.

Synchrony Bank online savings acct 1.05%

Zx

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Re: Double checking that I'm on the right track with student loan repayment...
« Reply #17 on: September 21, 2015, 10:36:11 PM »
Oh baby...1.05%...funny how that gets me excited ;)

Lanthiriel

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Re: Double checking that I'm on the right track with student loan repayment...
« Reply #18 on: September 22, 2015, 12:23:57 AM »
Here's my two cents as someone who's more or less been in your situation. I would start thinking about all of the debt as "our debt," no more hers versus mine, especially if you anticipate you will be the sole breadwinner some day.

There are two ways to tackle debt: Avalanche (pay off highest interest rate first) or snow ball (lowest balance first). The thing about student loan payments is that once you pay off a loan, it's gone. Poof! Money in your pocket every month forever. So while Avalanche may lower your interest payments, you might actually pay them off faster using snowball because you can, well, snowball the payments from the lower interest loans into your higher balance, higher interest loans. YMMV, of course.

Regardless of the method you choose, I think your current method is inefficient because rather than focusing on a single loan and knocking it out, you're spreading your extra payments (you always want to pay minimums on all loans, of course) across multiple loans. While in the end you'll still wind up paying everything off, I think you might find it more difficult and less rewarding than targeting a single loan.

If I were you, I would combine finances immediately. Then I would sit down with your wife and prioritize loans. Follow that plan til you're out of debt. Good luck!

Easye418

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Re: Double checking that I'm on the right track with student loan repayment...
« Reply #19 on: September 22, 2015, 08:29:23 AM »
Hi all,

Just want to double check that I'm not overlooking some glaring error in logic or financial planning in how I'm approaching paying off my student loans. I'm prioritizing paying off student loan debt instead of investing heavily. I'd love any thoughts on how to be more efficient in my finances. Here's a brief overview of my financial situation:

Me: 32 years old
Net Monthly Income: $4660, after all healthcare, Roth 401k, taxes, insurance, etc.
Roth 401k contribution: $400/mo. into VFIFX, for now, with no employer match. Employer will match 50% up to 6% of my income starting in December. I will be increasing my contributions next year, still figuring out the percentage, though.
Total current monthly expenses: ~$2600
Savings per month: ~$2000
Savings rate: ~43%
Emergency Fund: $20,000 in a "high interest" online savings account... at 1%. This is a little more than 7 months of expenses. Seems a little high to many people, but I work in a fairly volatile industry and layoffs are common. Finding a job isn't too difficult at this point in my career, but I highly value the peace of mind this provides, especially after having gone through a layoff last fall.

I'm in the middle of tackling student loan debt and also voluntarily help my wife with her student loans as I can, though it's not absolutely necessary that I help her. My rationale for helping my wife is that while she makes her minimum suggested payments on her own from her job just fine, that will only last until we have kids someday, at which point she'll probably have to stop working (we have no family nearby to help) and I'd take over paying her loan payments with my income. So I'd rather help her knock down her debt as much as possible now, while we can afford it, and before kids happen so that I have less debt to pick up from her later down the road.

Anyway, here's my student loan situation:

Loan 1: $2551.50 @ 3.4%. This is my lowest priority, as the interest rate is somewhat reasonable.
Loan 2: $11250.37 @ 6.8%. This is my top priority.

I am currently paying $1000 toward my Loan 2 every month (as well as the $30 minimum on Loan 1), and putting $500 toward my wife's student loans. The ~$500 remaining of our excess monthly income is reserved for unexpected expenses during the month, which has been needed lately. But if it goes unused, then it is used at the beginning of the following month as a cushion to get us from my paycheck at the end of the month to my paycheck in the middle of the following month without reducing principle capital in my checking account (I like to keep a baseline amount in it, just in case). Any remaining money from the $500 at the end of the following month goes to student loans.

Does that approach to our student loan debt sound reasonable? I go back and forth so much about just completely paying off my debt with our emergency fund, but I don't think I'm willing to take that risk.

Any thoughts?

Thank you!

Updating to add:
My student loan minimum monthly payment is $220, so I am overpaying quite a bit with this plan.
Besides our student loans, we have zero debt.

No need to double check.  I presume you make near $80k a year (yourself because you keep finances separate), you bank roll $2,000 a month NET? savings (AFTER investing?), and you have $14k Student Loan debt...   pay em off fast, which you are doing.

/end thread

and dude... pay your wife's shit off for her... she is making $15k a year.  That has to be nearing minimum wage.  Happy wife, Happy life.