What should I do with my money? $153,884 student loan debt and windfall

[Ellabean]

Hi there! I recently discovered MMM and have been reading methodically from the first post. I'm in Nov 2013, so no spoilers! ;)

I want to do a full case study, but it's taking some time to pull together the numbers... which means that I'm not in touch with our finances. I'm working on that.

My husband and I have ridiculous, stupid amounts of student debt. I work in the nonprofit sector, and my student loans will be forgiven after ten years (yay), at which point we will pay tax on the forgiven amount. Because we are on the income-based repayment plan, our monthly student loans factor in both our earnings and our combined (ridiculous) debt.

We barely break even every month. Which is a whole separate issue (we have two kids, a mortgage, high property taxes, and we commute in cars that we own outright).

Here's my question:
We have $30,000 in stocks (aside from our retirement savings) and about $6,000 in savings. What do we do with this money?

Here are the loan details:
Mr Bean
Loan      Principle balance Outstanding  interest rate   monthly payment right now
Loan A   $20,516.36   $20,551.65   3.25%      $77.35   
Loan B   $29,092.97   $29,143.02   3.25%      $109.68   
Loan C   $6,808.71   $7,172.57   6.55%      $25.67   
Loan D   $1,742.46   $1,965.92   6.55%      $6.57   
Loan E   $5,759.57   $6,498.56   6.55%      $21.72   
                  
        $63,920.07              $65,331.72                  $240.99   (his total monthly payment)
                  
Ellabean (loans will be forgiven after ten years):                  

Loan         Principle balance Outstanding  interest rate   monthly payment right now
Loan A   $23,428.33   $23,566.66   3.00%      $88.33   
Loan B   $11,582.90   $11,651.30   3.00%      $43.67   
Loan C   $8,093.15   $8,395.99   4.75%      $30.51   
Loan D   $16,522.84   $17,742.05   6.88%      $62.29   
Loan E   $24,715.13   $27,196.96   6.88%      $93.18   
                  
        $84,342.35         $88,552.96              $317.98    (my total monthly payment)



Do we throw the entire 30K at his loans? Pay off just his 6.5% loans? What about a cash cushion? Should we leave some money in stocks because our savings are low? Should we keep the money where it is for retirement or move it to a Vanguard account? Right now it's in a different special fund. Does the money do more good paying off our loans or being invested for the future? And does it hurt us to pay off some of his loans and still pay the same amount on our loans total, which means that less will be forgiven after ten years for me and twenty years for him?

Thank you for your thoughts.

--Ellabean

[nobody123]

If your loans are going to be forgiven in 10 years, I would focus on paying his off.  I would look at how much you would net from selling your stock (after capital gains taxes, if any).  Pay off the 6.55% loans now, and keep the rest as an emergency fund.

[garion]

If your loans are going to be forgiven through PSLF, you won't need to pay tax on the forgiven amount.

[trashmanz]

So the stocks is the windfall in the title?  Wondering if it was a gift or how long you have owned etc for tax purposes?

[nanana13]

Agree that if you're going to throw money at the loans, it should be the husband's. However, with the fact that you have two kids and a mortgage, you definitely need a cash cushion. Do you have an emergency fund, already? If you do, then I would pay the husband's loans as such:

1) Knock out all of the smaller loans (as you can see from below, each month that goes by, your principal balance is increasing due to unpaid interest that is being capitalized). In this case, snowball method makes sense.
2) For the remaining loans, snowball method wouldn't make sense. You should put the rest toward loan B (which has the higher proportionate interest rate due to larger balance).



Hope this helps!

[vivophoenix]

I would look into refinancing his higher interest loans first and then decide what to do

[nanana13]

Forgot to add that if you don't have an e-Fund, then make that a priority. However, do not keep your e-fund in stocks as they are too volatile.

[Kwill]

I'd pay off his 6.55% loans for now and then work on getting the monthly expenses down.

But I'd also think about paying off your loan D at 6.88%, just if it were me, because it's just such a lot of money at a relatively high rate of interest. It should be forgiven in 10 years, but I would be thinking about all the "What ifs?"

I don't think you would want to dump all $36000 on your loans at once because you have to figure you may owe some taxes on the stock sales, and also it sounds like your monthly expenses aren't completely under control yet. But $20000 would make a big dent and leave a cushion for later.

I hope this doesn't count as a spoiler, but a home equity line of credit (HELOC) is one of the MMM ways to provide flexibility in a budget while still throwing all available cash at debt. Because the debt is an emergency. I don't have a HELOC because I don't own a home, but this is what I hear.

The idea is you just dump everything on the debt, and then it's like you're getting a really good interest rate of 6.55% or 6.88% even because that's the future money your money is saving you. If you went totally with that idea and only saved a little bit of cash for later, you could knock out his loans C & D & E and your loan D with what you have on hand. Then you would have an extra $116 per month to throw at another loan. And if you follow through with a case study and actually take the advice, you might have another several hundred dollars per month to throw at loans.

[Ellabean]

Thank you! The stocks were a gift from my mother, and we've had them about six months.

I like the idea of using about $20K to pay my husband's high-interest loans off and down. I did see that about a HELOC on MMM... we could do that for an emergency fund.

I'll be posting later for a full case study. I know where we have problems, but we need some friendly face-punching ;)

[asiljoy]

I'd really look into refinancing your husband's loans if your credit is good at all. If you don't want to refinance, I'd pay off your husband's higher interest loans first for two reasons. 1) The loans could be knocked out increasing your monthly cashflow and 2) they're the highest interest, so it saves you the most money in the long run. You can then redirect those payments snowball style, or because the interest rates are relatively low on the rest of your husband's loans, save newly freed cash flow in a retirement account or emergency fund; just don't spend it on random crap.

I wouldn't pay any more than you needed to on your own loans if they're going to be forgiven and I wouldn't feel guilty about that. It's a part of the deal you made when you signed on for the loans. Everyone is aware of the terms, it isn't like you're being sneaky, sneaky or anything.

[Malaysia41]

Like others have said, definitely pay off the three 6.55% loans in your husband's name.

When you say that your loans will be forgiven 'after 10 years', do you mean 10 years from now? If not, how far into that are you / how much longer on those?

What I'm seeing is that your monthly payments on *your* 6.88% loans don't cover the interest charges. So you're not paying them down? Does that interest accrue? Sorry I'm not a student loan expert. If in fact, at the end of it all, you are forgiven for the balance and accrued interest and are not taxed on the forgiven amount, then obviously, don't pay those down.

But I think it's worth a look to see how much you'll be paying in interest over that ten year period and double-check what gets forgiven.  Especially the loans at 6.88%. 

As for your husband's debt at 3.25%. If you keep those loans, then any extra income should go into investments and NOT lifestyle inflation. When you get a raise, either pay down his loans or put that money in your investment account (maybe in a lazy portfolio of low cost ETFs).  At 3.25%, over the long term, you'll do better with that money in the market. Second best option: pay off that 3.25% debt. Third most terrible option: upgrade your car or buy that new corningware whatever-a-ma-bobby-thingy.

Personally, for all extra income, I would split it somewhat between option 1 and 2. When extra $ comes in, divert $2 to investments for every $1 to accelerated loan pay down, or 1:1 - whatever you're comfortable with. But that's a sleep-at-night personal preference thing, for loans where the the interest rate is low.

As for e-fund, I'm an advocate of using credit cards and lines of credits. I see no good reason to keep say, $20k in a savings account when you have so much debt. If I had a solid line of credit at a reasonable rate, I'd keep  3 months of expenses in the bank in cash tops.

My 2 cents.

[StacheInAFlash]

When you say that your loans will be forgiven 'after 10 years', do you mean 10 years from now? If not, how far into that are you / how much longer on those?

My thought exactly! Are you at year 1, 5, or 9 in your quest to have your loans forgiven? And what is your current income and your potential income? Living for 10 years in fear of making more money due to its effect on your IBR payment plan is no way to live.

[Catbert]

You really need to check out the tax consequences...IIRC since the stock was a gift (as opposed to an inheritance) your basis is whatever she originally paid for the stock.  The amount subject to cap gains could be a significant portion of the 30K.  If the 30K on top of your regular income would still keep you in the 15% tax bracket, no problem since you cap gains rate would be 0%.  If all/some of it would be in the 25% bracket then your cap gains rate will be 20% (at least I think it's 20%). You may want to spread out the selling over 2 years to minimize taxes. I realize I'm not explaining the possible tax consequences clearly, but all the more reason to figure out how it will apply to your situation. 

Assuming you sort out the capital gains issue, I would pay off your husband's  highest interest SLs.  I'd hang to the rest of the money/stock until you've got a budget sorted out. 

[Ellabean]

We make combined about $106,000-- $46,000 for me, $60,000 for him.

Where I am in paying off the loans is tricky... depending on whether on not universities count as nonprofits (they are 501(c)3s, but I've heard different things about whether or not they count). So I could be back to year 1, or I could be in year 3.

It's true that IBR is a disincentive to making more money... but we owe so much money.

I will probably make around the same amount for the next few years. I have a nine-month old and a four-and-a-half year old, and my hours are great. On the downside, I have a 30-minute commute to work and an hour-and-a-quarter commute home (I pick up both kids at the end of the day). My husband works longer hours and has a a longer commute (45 minutes)... but his hours are good for his profession. These things make it harder to imagine changing jobs.

Why aren't we saving more?
1) daycare
2) student loans
3) mortgage
4) paying way too much for food (we are working on this)
5) commuting
6) being consuma suckas (kindle books, Starbucks, retail therapy... NO MORE!!!)
7) expensive utilities

We live in the cheapest house in our neighborhood, in the only functional school system in our city. So moving is not an option.

[asiljoy]

I'd make it a priority to figure out if you qualify or not. Consumer Finance Bureau put out a decent guide for how to get started.
http://files.consumerfinance.gov/f/201308_cfpb_public-service-toolkit.pdf

Here's the employment certification form they talk about:
https://www.saltmoney.org/Assets/PDFs/Forms/Discharge-and-Forgiveness-Forms/employment-certification-for-pslf.pdf

[Ellabean]

Thank you!