Author Topic: Should I pay down student loan debt with savings?  (Read 3395 times)

tattiebird

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Should I pay down student loan debt with savings?
« on: April 10, 2014, 12:35:51 PM »
I currently have about 12K in a credit union savings account, but my husband and I have about 19K in student loan debt. This is our only debt. Some of the loans have a very low interest rate (2.8%), but others have a higher interest rate of 6.9%. Is it worthwhile to spend some of our savings to pay down the student loan debt? How much of a reserve is a good idea?

dcheesi

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Re: Should I pay down student loan debt with savings?
« Reply #1 on: April 10, 2014, 12:42:03 PM »
This is ultimately a personal decision, based on your risk-tolerance. Three months expenses is usually considered an absolute minimum, and six months is better. 

I would definitely want to attack that 6.9% debt first, if possible. Even if you invested your reserves you wouldn't see sustainable returns much higher than that. If you can knock out one of those loans completely that would be great.

lb

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Re: Should I pay down student loan debt with savings?
« Reply #2 on: April 10, 2014, 12:55:56 PM »
Do you have a Roth IRA? If so you could use that for an emergency fund if you are worried about not having the savings. Reduce your expensive debt!

tattiebird

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Re: Should I pay down student loan debt with savings?
« Reply #3 on: April 10, 2014, 01:13:08 PM »
I recently started a Roth IRA, but there isn't much in it. I have 31K in a traditional 401K.  How would that work as an emergency fund? Also, I agree I need to reduce the 6.8% debt. I'm making extra payments, and I used the majority of my tax refund to take a major chunk out. My question is whether or not it's a good idea to dip into my savings to erase a major chunk, and if so, how much?

Thegoblinchief

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Re: Should I pay down student loan debt with savings?
« Reply #4 on: April 10, 2014, 02:11:25 PM »
Any debt over 5% should go as quickly as you can.

Depending on your details, switching to IBR may benefit you. This way the low interest debt gets stretched out and you can hammer out the high interest debt. Once it's only the low interest debt, leave it be and invest the surplus.

feelingroovy

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Re: Should I pay down student loan debt with savings?
« Reply #5 on: April 10, 2014, 06:18:17 PM »
How much of your student loan is at 6.9%?  Would it wipe out savings?

Likewise, how many months of bare-bones expenses does the 12k represent?

I have a pretty big emergency fund, but that's partially b/c  I am self-employed and the primary breadwinner.  You may not need the full 12k, especially if you could build it back up quickly.

Emg03063

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Re: Should I pay down student loan debt with savings?
« Reply #6 on: April 11, 2014, 07:49:32 AM »
Can you move back in with your (or his) parents if you lose your job, and is it an acceptable scenario to you?  If yes, keep enough in your emergency savings to cover to the end of your current lease, and apply the rest to your high interest debt, then rebuild the emergency fund.

Can you manage on one of your salaries, how stable are your jobs, and how long would you expect it to take for each of you to get reemployed if you lost one?

401k loans are a bad EF because you have to repay them immediately if you lose your job to avoid penalties.  If you both have 401ks and work for separate companies, you could always borrow from one to pay the loan on the other, if it ever came to that.
« Last Edit: April 11, 2014, 07:57:12 AM by Emg03063 »

tattiebird

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Re: Should I pay down student loan debt with savings?
« Reply #7 on: April 11, 2014, 10:18:23 AM »
I've decided to spend a portion of savings (about 5.5K) to totally knock out one of the high-interest loans. Then, I'm going to make triple payments on the other high interest loan, which should knock it out in about 7 months. After that, I can start building back up my savings, which will go pretty quickly since I'll have an extra $300 every month that I would have been spending on payments on the high-interest loans every month. I'll probably pay off the low interest loans by making normal or slightly higher payments.

Both our jobs are very stable (especially mine, and we could easily live off of just my salary and still save quite a bit). Since this is our only debt (we rent a month to month apartment and paid for our car in cash), I don't think we need as large of emergency fund. Worst-case scenario, we could sell our car or cash out a mutual fund my husband has. And yes, we could move in with my parents, but here is hoping it never comes to that.

feelingroovy

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Re: Should I pay down student loan debt with savings?
« Reply #8 on: April 11, 2014, 02:27:31 PM »
Sounds like a great plan.  It's always good when you can knock out a whole loan b/c that increases cash flow.