Author Topic: The age-old newbie question: Student Loans  (Read 4341 times)

nonostash

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The age-old newbie question: Student Loans
« on: December 01, 2012, 12:43:40 PM »
Hi - Newbie here! :)  Been reading for a couple weeks and I'm excited about what the future holds for me and my husband. 

A little background: we started becoming aware of our age (32) and wreck of a financial situation and decided to do something about it.  We found Dave Ramsey's baby steps and have had success there, paying off about $12k in back taxes and CC debt in the past 9 months.  Our income has increased over this time and our spending has decreased (some - still have highly antimustachian commute, that I always realized was crazy, but now know is absolutely insane - working on this) so our rate of paying off debt has increased over that time.

We are working like crazy to pay off:
~ $14k in CC debt by June 2013
~ $14k in 2 car loans by Dec 2013

which will leave us with:
~ $20k in student loans (all at 2.39%)

I currently have 7% mandatory retirement contributions into public employee retirement system.  Other than that I have about $5k in an old 401k.  Hubby has no retirement savings.  We have a $1500 EF while paying off debt.

One of the aspects of the Dave Ramsey plan that leaves me wanting something more is the "pay off all debt, build a 3-6 month EF" BEFORE you begin saving for retirement.  My Math brain tells me this may not be the best plan for us, being almost 33 and virtually no 'stash.

So, I am thinking we should pay off the CC's & cars ASAP and then get maybe 2 months expenses saved, then split efforts between saving and paying off SL. 

Does that sound right?  Let me know if you need other info, I'll happily provide, just know that we are still very antimustachian at several levels (grocery, gas for commute, fun money), but we're making progress every month in killing debt and trying to reduce expenses.

Thanks in advance!




mlipps

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Re: The age-old newbie question: Student Loans
« Reply #1 on: December 01, 2012, 01:27:29 PM »
Nonostash: Some thoughts & questions...

-Congrats on your progress so far!!
-Dave Ramsey is great for getting out debt, not so great for his advice on investing.
-Do you have a mortgage or are you renting? Do you have any plans to buy a home at some point in the future?
-Do either of your employers offer a match for retirement contributions?
-Normally, I'd ask about your income to see if your student loan interest is deductible, but after 2012, if nothing changes, it will only be deductible for 5 years after graduation. Even so, that student loan interest rate is insanely low. Is it fixed or variable?
-Why don't you calculate the two extremes. Use a paycheck calculator (I like the one from ADP) to see if you put the absolute max into your retirement funds to just have enough to live off of, how much would you be contributing? On the flip side, how much can you put towards loans if you put nothing into retirement? Probably, if your interest rates are fixed, you're best off just paying the minimum, but some people are averse to debt, so that's a pretty personal decision. At least looking at the two sides would let you see trade off in black and white.

nonostash

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Re: The age-old newbie question: Student Loans
« Reply #2 on: December 01, 2012, 03:08:55 PM »
Nonostash: Some thoughts & questions...

-Congrats on your progress so far!!
-Dave Ramsey is great for getting out debt, not so great for his advice on investing.
-Do you have a mortgage or are you renting? Do you have any plans to buy a home at some point in the future?
-Do either of your employers offer a match for retirement contributions?
-Normally, I'd ask about your income to see if your student loan interest is deductible, but after 2012, if nothing changes, it will only be deductible for 5 years after graduation. Even so, that student loan interest rate is insanely low. Is it fixed or variable?
-Why don't you calculate the two extremes. Use a paycheck calculator (I like the one from ADP) to see if you put the absolute max into your retirement funds to just have enough to live off of, how much would you be contributing? On the flip side, how much can you put towards loans if you put nothing into retirement? Probably, if your interest rates are fixed, you're best off just paying the minimum, but some people are averse to debt, so that's a pretty personal decision. At least looking at the two sides would let you see trade off in black and white.

Thanks! We're pretty excited about it!  I've been the one dragging hubby along with all this, but he's coming around little by little and motivated by how much we've paid off so far.

- I'm glad to have found MMM because I feel DR was a great starting place for us, but we don't really want to baby step our way through our entire financial lives.

- We rent.  No immediate plan to own, due to the debt we're paying off, no down payment, enjoy having the apartment complex come replace the dryer when it breaks (a couple months ago), and not working in careers/locations that we see ourselves settling down in. 

- No match for either of us. My husband is essentially self-employed, works as a massage therapist at several locations (1099's) and private clients (need to look into how this is documented, actually - we just track what they pay him and claim as income on Schedule C, I think... I'm wanting to learn more about this so I can do our taxes.  We currently have a tax guy since I have had a home-based side biz for last few years). 
- - I work in public sector so my mandatory 7% is put away into PERS, but I don't really consider this system as a guaranteed source of retirement income for us, as I only have about 1.5 of the 5 years to be "vested" and don't see myself retiring from this line of work to get their "2% at 55" carrot they dangle.  Most likely I would end up rolling my contributions into an IRA after I move on to what I want to be doing.  For now, I'm grateful that I have this job and the health insurance with it. 

- I'm not sure our exact income as it varies with my husband's work, but for 2011 we grossed $78k, I think this year will be a little more. The SL's are through the government... I guess they're variable as they've fluctuated between 2-3% since I've had them (going on 9 years now... ugh!).

- I guess I'm debt adverse in the sense that it makes me sick to have it. Mostly the CC's & cars though.  The low interest rate SL doesn't make me that sick, other than the fact that I didn't really need SLs to get through school, only in order to avoid the "starving student" lifestyle because I thought I "deserved" luxuries I couldn't afford because I was "working so hard in school".  What a brat! LOL

- Right now we are putting about $2500 toward debt.  The minimum payment on the SL is $137/mo.  I'm not sure exactly what you're suggesting I calculate and compare... the amount we could make on investments if we saved the ~$2363/mo vs. pay off SL as fast as possible (~Oct 2014) then invest the entire $2500/mo going forward??  Just trying to wrap my head around what numbers I'm looking for...

Thanks for the cheers and questions!  Would love to hear more advice! :)



mlipps

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Re: The age-old newbie question: Student Loans
« Reply #3 on: December 01, 2012, 05:27:04 PM »
Sorry, I guess I wasn't totally clear w/that last point. Maybe this will make it more clear. If you put $1 into your 401k, your paycheck will probably only be reduced by about 0.60, depending on your witholdings, etc. So say you're able to live off of $4500/month (just a totally made up number). How much can you divert into your 401k every month and still be able to live? For me, this was very motivating as adding another $100/month into our 401k (for example), only reduced our take home by about $55. With an interest rate that low, I'd probably put a little extra towards the payment, say $200 or $300, but put the rest into a 401k or IRA. Everyone is different though.

PJ

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Re: The age-old newbie question: Student Loans
« Reply #4 on: December 01, 2012, 07:49:43 PM »
... other than the fact that I didn't really need SLs to get through school, only in order to avoid the "starving student" lifestyle because I thought I "deserved" luxuries I couldn't afford because I was "working so hard in school".  What a brat! LOL
 
Welcome, nonostash!  I just wanted to say that I really related to this comment.  I don't have official SL's, just that I took withdrawals from my RRSP (I'm Canadian) under the "Lifelong Learning Plan" and also managed to run up credit card bills during my time at school.  But I really didn't need to do both, I could have buckled down to live a cheap student lifestyle ... and now I'm paying the price, literally!  Wishing you good luck as you try to figure out your best route forward!

nonostash

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Re: The age-old newbie question: Student Loans
« Reply #5 on: December 03, 2012, 12:26:38 PM »
Sorry, I guess I wasn't totally clear w/that last point. Maybe this will make it more clear. If you put $1 into your 401k, your paycheck will probably only be reduced by about 0.60, depending on your witholdings, etc. So say you're able to live off of $4500/month (just a totally made up number). How much can you divert into your 401k every month and still be able to live? For me, this was very motivating as adding another $100/month into our 401k (for example), only reduced our take home by about $55. With an interest rate that low, I'd probably put a little extra towards the payment, say $200 or $300, but put the rest into a 401k or IRA. Everyone is different though.

Yes! That makes sense, thank you.  For some reason I was so focused on a Roth IRA in my mind that I was not even thinking of the benefits of pre-tax investments.  I can contribute to a 403(b)  at work and plugged in some numbers to that ADP calculator you recommended.  And you're right - that's very motivating to see how much we can save and not have our take-home pay reduced by as much!! 

Getting a little ahead of myself, but it seems the most I can contribute to the 403(b) is $17,500 in 2013.  And is $5,500 the max that my husband and I can contribute to an IRA?

Thanks again for some new things to think about!

nonostash

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Re: The age-old newbie question: Student Loans
« Reply #6 on: December 03, 2012, 12:27:42 PM »
... other than the fact that I didn't really need SLs to get through school, only in order to avoid the "starving student" lifestyle because I thought I "deserved" luxuries I couldn't afford because I was "working so hard in school".  What a brat! LOL
 
Welcome, nonostash!  I just wanted to say that I really related to this comment.  I don't have official SL's, just that I took withdrawals from my RRSP (I'm Canadian) under the "Lifelong Learning Plan" and also managed to run up credit card bills during my time at school.  But I really didn't need to do both, I could have buckled down to live a cheap student lifestyle ... and now I'm paying the price, literally!  Wishing you good luck as you try to figure out your best route forward!

Hi PJ, thanks for the encouragement!  It's a good thing we *learn* from our mistakes, right?!

PJ

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Re: The age-old newbie question: Student Loans
« Reply #7 on: December 03, 2012, 12:29:19 PM »
Yup!  What we need is a new mindset about wants and needs, about money and what role it has in our lives ... working on it!

Skinnyneo

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Re: The age-old newbie question: Student Loans
« Reply #8 on: December 03, 2012, 04:00:16 PM »
Hi nanostash,

I was in a similar situation a few years ago.  I had some credit card debt and about 25k in student loans.  No car though as I live in Japan and don't need/can't afford a car.  Basically I'm also very debt adverse because debt means you have fewer options.  I know a lot of people say "if your students loans are at a low interest just pay the minimum and start saving/investing." 

That doesn't sit well with me and everybody gets to feel differently about debt.  When I was holding that debt it chained me to my job.  If I lost my job I wouldn't have been able to make the minimum payments or if I had saved or invested instead of paying off the debt if I'd lost my job I might have had to sell my investments at a loss to cover my life.

Basically if you hate debt even if it's at a 0.00% interest rate like me I'd order my debt by interest rate and just pay until its all gone.  Then I'd build up an emergency fund and start investing. 

Again everybody will have different advice on this but for me this really worked and now I'm out of debt and investing worry free.

nonostash

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Re: The age-old newbie question: Student Loans
« Reply #9 on: December 06, 2012, 12:52:01 AM »
Hi Skinnyneo,

Thanks for the insight.  I agree with the feeling of being chained to my job because of debt.  I know Mustachians look at numbers and cold hard facts, but it's hard for me to get excited about starting to save for retirement knowing that even when everything else is paid off we will still have $20,000 worth of student loans hanging over our heads. 

I ran some numbers in the ADP paycheck calculator and my debt snowball spreadsheet and even if I contribute the maximum amount to my 403(b) at full-time job and put about $500/mo toward student loans, it will take us another 30 months to pay them off!!  That is compared to approx 9 months if we just continue to buckle down and throw all our "extra" money at them. 

My husband and I will both turn 33 next month.  If we wait another year and 9 months or so to start saving for retirement (pay everything off, then invest), vs. wait another year (CCs & cars paid off) then start investing while paying down SLs - how much will that 9 month period really affect us in the long run? 

grantmeaname

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Re: The age-old newbie question: Student Loans
« Reply #10 on: December 06, 2012, 06:51:07 PM »
That depends on what the market does. If the market returns 8% and you miss it by paying down 2% student loans instead, you'll be out 6% of $20,000, which is $1200 if you accept very sketchy back of the envelope math. (Actually, it would be a little less, because only a little of the money goes in at the beginning of that year, and some at the end, and some in between.)