Author Topic: Should I pay off my student loan or maintain savings account?  (Read 4087 times)

spolicas

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Hello Mustachians,

I came across the MMM blog about 6 months ago and love it! I'd like to get some feedback from the community regarding paying off my student loan using money from my savings account or to continue with making monthly payments. Over the past few years I've been chopping away at my student loans by paying extra and have about $9k left. At the same time, I've been slowly building my emergency fund (about $16k). My goal is to get the emergency fund up to $25k. However, I want get rid of the student loan (6% int.) to free up cash. What should I do?

ShoulderThingThatGoesUp

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Re: Should I pay off my student loan or maintain savings account?
« Reply #1 on: April 28, 2016, 06:56:49 AM »
What do you have going on that you need a $16k emergency fund? With the information at hand I would be inclined to say you should just eliminate your student loans today - 6% is serious. Maybe that is less advisable depending on your life situation.

Pooplips

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Re: Should I pay off my student loan or maintain savings account?
« Reply #2 on: April 28, 2016, 06:59:09 AM »
What do you have going on that you need a $16k emergency fund? With the information at hand I would be inclined to say you should just eliminate your student loans today - 6% is serious. Maybe that is less advisable depending on your life situation.

+1

nereo

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Re: Should I pay off my student loan or maintain savings account?
« Reply #3 on: April 28, 2016, 07:03:35 AM »
OP - What's missing here is how much money you spend per month outside of student loans.  That's one important metric when deciding how large your ER fund should be (in addition to things like job security, medical insurance, other savings and ability to cut back when SHTF).

In the absence of this information I'd say: Yes, definitely eliminate your SL today. You'll still have $7k in an ER fund, which you can quickly re-build with your improved cash flow from not having loans.

spolicas

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Re: Should I pay off my student loan or maintain savings account?
« Reply #4 on: April 28, 2016, 07:27:19 AM »
The reason for the $16k emergency fund is a safety net as my wife just had a baby, so she is on maternity leave for the next few months.

Job is secure and we have good benefits. We currently save 25% of our pay into savings/retirement accounts (401k, Roth IRA, savings account)

Outside of student loans, our monthly expenses are around $4k (includes mortgage (3.5%) and car loan (2%). The next piece of debt I plan to tackle is the car loan ($15k left)...I know not very Mustachian.

I don't anticipate any events where we would need to use up the entire emergency fund, so that's why I was leaning towards using some of that money to pay off the student loan as it has the highest interest rate.

Thanks in advance for your advice and comments!

nereo

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Re: Should I pay off my student loan or maintain savings account?
« Reply #5 on: April 28, 2016, 08:13:57 AM »
The reason for the $16k emergency fund is a safety net as my wife just had a baby, so she is on maternity leave for the next few months.

Job is secure and we have good benefits. We currently save 25% of our pay into savings/retirement accounts (401k, Roth IRA, savings account)

Outside of student loans, our monthly expenses are around $4k (includes mortgage (3.5%) and car loan (2%). The next piece of debt I plan to tackle is the car loan ($15k left)...I know not very Mustachian.

I don't anticipate any events where we would need to use up the entire emergency fund, so that's why I was leaning towards using some of that money to pay off the student loan as it has the highest interest rate.

Thanks in advance for your advice and comments!
With a stable job and good benefits I would pay off your SL in their entirety now.  You'll still have $7k in an emergency fund, plus that could be stretched quite a bit by reducing your contributions to savings/retirement accounts).  Once the SL is gone you can increase the E-fund fairly rapidly because your cash flow will improve substantially.

You didn't specifically ask, but I wouldn't bother paying off a car loan at 2%.  Inflation alone will take care of the interest.  Instead, just keep investing and building up your E-fund to a level you are comfortable with.  If you're really debt adverse the mortgage would be a far more sensible target.

ShoulderThingThatGoesUp

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Re: Should I pay off my student loan or maintain savings account?
« Reply #6 on: April 28, 2016, 08:18:58 AM »
The reason for the $16k emergency fund is a safety net as my wife just had a baby, so she is on maternity leave for the next few months.

Job is secure and we have good benefits. We currently save 25% of our pay into savings/retirement accounts (401k, Roth IRA, savings account)

Outside of student loans, our monthly expenses are around $4k (includes mortgage (3.5%) and car loan (2%). The next piece of debt I plan to tackle is the car loan ($15k left)...I know not very Mustachian.

I don't anticipate any events where we would need to use up the entire emergency fund, so that's why I was leaning towards using some of that money to pay off the student loan as it has the highest interest rate.

Thanks in advance for your advice and comments!
With a stable job and good benefits I would pay off your SL in their entirety now.  You'll still have $7k in an emergency fund, plus that could be stretched quite a bit by reducing your contributions to savings/retirement accounts).  Once the SL is gone you can increase the E-fund fairly rapidly because your cash flow will improve substantially.

You didn't specifically ask, but I wouldn't bother paying off a car loan at 2%.  Inflation alone will take care of the interest.  Instead, just keep investing and building up your E-fund to a level you are comfortable with.  If you're really debt adverse the mortgage would be a far more sensible target.

I agree. If you don't want to reduce your ER by half, keep it at $10k and shovel all extra funds at the student loans until they are gone. It won't take very long.

(Have you gotten the medical bills for the birth yet, or do you know what they are? That part might be worth considering in terms of how much cash to keep around. But usually you have a while to pay medical bills.)

Fishindude

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Re: Should I pay off my student loan or maintain savings account?
« Reply #7 on: April 28, 2016, 08:22:35 AM »
First off, you have done great.  Good job!
Soon as you get your savings to the point you are comfortable, i'd pay off the loan and get that behind you.  With that out of the way you can rebuild your savings pretty quickly.

asiljoy

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Re: Should I pay off my student loan or maintain savings account?
« Reply #8 on: April 28, 2016, 08:48:53 AM »
Another plan of action just for funsies. You'd probably be able to refinance that loan at Sofi or one of it's competitors for a lower interest rate. If you can get below 3% for the interest rate, I'd let the loan ride and max out retirement accounts instead if you aren't already doing that.

If you're concerned about long term, monthly cash flow, then yeah, definitely pay off the loans.

spolicas

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Re: Should I pay off my student loan or maintain savings account?
« Reply #9 on: April 28, 2016, 10:16:13 AM »
Thank you all for your input, it's very much appreciated. The medical bills from the baby have been paid off already, so thankfully that is out of the way.

You all have confirmed what I was hoping to hear. I plan on paying off the SL balance in full and over the next few months I can replenish my emergency fund with the savings from not paying the SL. Once I get the emergency fund back on track, I'll put some extra towards the mortgage. I agree with your comment on letting the car loan payment ride out since the interest is only 2%. I hadn't considered that before, but it makes sense.

Our 401k's and IRA aren't maxed out yet, but we've increasing it every chance we get until we hit the thresholds. We're both 31 right now and have FI goal of 50. I know we have a long way to go to hit our goals, but reading this blog and advice from the MMM community keeps us motivated to cut costs and live more efficiently.

Thanks!

Dicey

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Re: Should I pay off my student loan or maintain savings account?
« Reply #10 on: April 28, 2016, 10:57:50 AM »
I see you've come to a conclusion, but here's another two cents. Why not pay half of them off now and focus on maxing your retirement accounts for the next few months? Once you get comfortable with a lower EF, you could throw another chunk at the SL's at the end of the year or even next year. I also agree with attempting a SoFI loan to lower the rate.
As to paying down the mortgage, that's a whole 'nother issue. There is much discussion about it on other threads. Look around and make an informed decision if/when you do so. Nereo's sound advice re: the car loan also pertains to the mortgage. A low, fixed-rate mortgage is also a great hedge against inflation.

Finally, congratulations on the baby and a healthy financial start in life. Good for you!

phred

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Re: Should I pay off my student loan or maintain savings account?
« Reply #11 on: April 28, 2016, 12:27:16 PM »
If I understand correctly, you've gone from a two income household to a one income house because wife is on leave.  Your emergency fund will cover four months of current expenses.
It is my opinion that your emergency fund is not large enough should something happen to you.  In a real emergency can you and yours move back in with parents?  Do you have term insurance to provide for wife & child?
Babies cry a lot the first nine months.  If you took a second job then you could build up the e-fund to six months worth, and then put these extra earning to paying off student loan.
When does wife plan on returning to work?  How much will child care be?  Can mother-in-law come to watch child?

spolicas

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Re: Should I pay off my student loan or maintain savings account?
« Reply #12 on: April 28, 2016, 01:15:23 PM »
If I understand correctly, you've gone from a two income household to a one income house because wife is on leave.  Your emergency fund will cover four months of current expenses.
It is my opinion that your emergency fund is not large enough should something happen to you.  In a real emergency can you and yours move back in with parents?  Do you have term insurance to provide for wife & child?
Babies cry a lot the first nine months.  If you took a second job then you could build up the e-fund to six months worth, and then put these extra earning to paying off student loan.
When does wife plan on returning to work?  How much will child care be?  Can mother-in-law come to watch child?

You make some good points. Yes, we've temporarily gone from a two income household to one. She's due back to work in June. If a true emergency were to emerge, my parents live about 30 minutes away and could live with if necessary. We do have term life insurance that covers the remaining mortgage. My mom will be watching the baby while we are at work for about the first year, so daycare expenses are on hold for now. We have a pretty great support system around us!