Author Topic: Student Loan: Pay it off first?  (Read 2328 times)

onemorebike

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Student Loan: Pay it off first?
« on: April 25, 2013, 08:28:54 AM »
This morning I was looking at my rental income from the past year and our savings account. I was considering focusing our efforts for the next year in paying off my wife's nursing school debt.

It started at about $45,000 three years ago and now we only have $19,000 left to pay off (both at around 4% but 12,000 of that can change at the whim of Wellsfargo).

The short on our financials:
Our only debt is two mortgages (one rental that brings in about $600 a month and is separate from the savings outlined below) and student loans. We both make a decent income but have children so only "save" about $1000-$2000 per month depending on the month. (I can't wait for public schooling! :) )
We have enough of an emergency fund, and truly, if we totally dialed back our expenditures we could live off of one salary in a pinch.

So the big question is, it seems like if I took some of the money from the rental account (About $5,000 extra, as it is above what I think I need to deal with any major issues on the house) and used our savings for the next twelve months to pay off our student loan debt we could be clear and free from what was once a very large payment every month.

So, do we focus our attention to this emergency and pay those off or do we build our savings account and/or investments?

An important factor here is that recently I decided not to apply for a most awesome job that I think I could have easily gotten (though my current job is also most awesome) because of a decrease in pay - the main culprit? These loans and responsibilities of children. This could help alleviate that burden in the future making those decisions more quality of life based instead of $$ based.

Thoughts?

Another Reader

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Re: Student Loan: Pay it off first?
« Reply #1 on: April 25, 2013, 08:58:04 AM »
What type of rental, how old, and in what condition?  What will the property likely need in the next year?  How much currently in reserves?  Personally, I like well funded rental reserves.

In your shoes I would consider diverting the money going to savings to get the student loans paid off faster.  However, you don't mention retirement savings.  Is that included in the $1,000 to $2,000 going to savings?

onemorebike

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Re: Student Loan: Pay it off first?
« Reply #2 on: April 25, 2013, 09:01:51 AM »
Good questions!

The rental is covered in terms of having padding for repairs.

That savings is on top of what we contribute to our retirement (although, we could probably do a better job of contributing to these).

-onemorebike

icefr

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Re: Student Loan: Pay it off first?
« Reply #3 on: April 25, 2013, 09:05:37 AM »
I would consider directing your extra monthly cash flow to paying off the student loans, but at 4%, I would probably make sure I was stuffing a good amount of money into my 401(k) first since that's a 25% immediate tax break.

AJ

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Re: Student Loan: Pay it off first?
« Reply #4 on: April 25, 2013, 09:38:38 AM »
If I was in your position, I would do exactly what you've outlined. Yeah, 4% is a great rate all things considered, but mentally it is nice to be free from payments.

This will be a controversial question but: do you have access to credit you could use if something big needed fixed on the rental? If your cash flow is good (and it sounds like it is with saving $1-2k) and your jobs are reasonably secure, then (IMO) it isn't as important to that extra $5k sitting around "just in case" over and above your normal reserves.

Catbert

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Re: Student Loan: Pay it off first?
« Reply #5 on: April 25, 2013, 09:41:21 AM »
If that 5k is part of your rental repair savings account I would wait until you have the loans paid down to about 5k and then take the money from your rental repair savings account to pay it off.  That way you need it in the meantime for rental repairs its available.  You can replenish it quickly when the student loans are paid off.

I wouldn't cut back on 401k/IRA contributions to pay off a 4% loan.  I probably would cut back on other savings which aren't tax advantaged.