Student Loan Debt vs. Retirement vs. Savings – Dave Answered

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Student loan debt advice for Dave

David asked:

I make $40,000/year due to a layoff and switch of careers. I contribute 8% to my 401k and I get a 4% company match. I have no credit card debt, no mortgage (I rent a house with roommates), no car payment. I got engaged this past December which gave my savings a beating. I have $1,000 in an emergency fund as a result of listening to Dave Ramsey and reading his total money makeover book. I am getting my MBA at night after work. This masters is being funded through Direct Education student loans. I have established an account that has around $9,000. My guess is within the next 12-18 months they won’t give me student loans anymore because I will make good money (hopefully from a raise/bonus in July). I was going to use this money to pay for school when the student loans stop OR if they keep giving me them then I would pay it all to lower my student loan debt. Not sure how I should be doing this strategically as I am very debt adverse. My only other savings account has around $700 in it with the purpose of saving to pay for a wedding band and honeymoon because I am getting married in the fall of 2010. Right now I save $500 from my net paycheck and have started splitting ~300 to the big student loan savings account and ~200 to the small honeymoon/wedding band savings account. What would you be doing in my situation? Would you stop 401k to use the money to throw into the savings account for the student loans?

I just started graduate school, but I am using student loans to do it. When I finish I will have around $30,000 in student loan debt. I have an upcoming wedding in the fall which means I am having to put money to the side to pay for the upcoming wedding band and honeymoon out flows because I do not want any more debt than my student loan debt. I wanted to know if you were in my situation what you would be doing with short term cash out flows within the year and a $30,000 debt to start paying on in approximately 2 years and having only a $1,000 emergency fund?

Pay student loan debt, fund retirement, or build savings

Unless you comment back to the contrary I will assume your student loans are subsidized.  It would help to know your student loan interest rates?

You have $9,000 in a savings account designated to pay for future schooling, and this $9,000 is money you earned and are saving in a high yield savings account… is that correct or is this money collected from previous student loans?

Also, if you become ineligible for future student loans due to income limitations, will the $9,000 cover the costs of your schooling from here forward, or will you need to build more savings in this fund?  I also suggest checking out other options for high yield savings account rates.

Here is what I would do Dave:

  1. Maintain the $9,000 college fund – I’m assuming you already do, but just make sure it is kept in a high yield savings account for interest benefits and ease of liquidity.  You mention the aid possibly coming to an end… if you can afford to fund your own education from your salary I say do that.
  2. Keep funding your 401k – Continue to make a large enough contribution to your retirement savings that will allow you to take full advantage of the company match… you do NOT want to leave this money on the table.
  3. Build your savings – The dispersal of your positive cash flow is where things start to get a little cloudy.  I think you should continue to disperse $200 toward the wedding fund so you can pay cash for your wedding expenses.  The other $300 should go into the college fund if $9,000 is not enough to pay for the remainder of your schooling… especially if you are nearing the income cut-off for student financial aid.  If the $9,000 is enough then start putting the $300 into your Emergency Fund – this fund should built up to at least 3 months living expenses.
  4. Pay student loan debt – This is actually the last thing you will want to worry about in your situation.  Student loan debt is usually borrowed at very low rates and based on your income up to $2,500 of it should be deductible.  In a perfect world you would have saved before starting school, sought out a few scholarships, and paid cash.  Since that is not your situation then I would focus on the first 3 pieces of advice and worry about repaying the student loan debt once these other priorities are taken care of.

Of course each person should choose a plan of attack based on the factors influencing their unique situation… there is no right answer for everyone.  Always consider the wisdom of God’s word when making financial decisions, it will never steer us wrong.

Dave, for your case I think it is definitely important to focus on accumulating as little new debt as possible, building savings, and continuing to fund the 401k match amounts.  Also, make sure not to spread yourself too thin – it sounds like you are taking on a lot right now, make sure you are making time for your loved ones… especially your fiance!

What do you think?

Did I miss any glaringly obvious advice for Dave?  What would you do if you were in his situation?

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1 Olivia

Once Dave marries, his housing situation will change. I assume he and his wife will get their own apartment. That will increase housing costs. How does his finacee feel about the way he’s financing his education? Is she coming into the marriage with a job, assets, student loans? They’ll have to tackle those things together. It might be good for them to work out a joint, after marriage, spending plan. In thinking ahead, it might also be wise to consider how children change the situation. Will they go to one income, etc. How will loan repayment work then?

2 Nick

Has Dave considered having a set amount of money transferred from his checking account into his savings account each paycheck?

3 Paying Back Student Loans

All the answers for Dave are pretty good so I won’t add to it but for those who want to go back to college right now… here is some advice: The best thing for people wanting to go get an education is to do what ever it takes to avoid private student loans. Those types of loans are high in interest and can literally ruin a person’s credit and way a life right off the bat. My 8k in private ballooned due to interest compounded monthly during school to 30k over the years in school. Choose a cheaper college and carefully choose a degree. Fill out the FASFA form and try to get grants to help pay for your education. Don’t waste your time and money on a worthless degree where you won’t be able to get a job when you finish with your studies. If you are already in large debts with student loans then pick up a second job if you have to so that you can knock down the principal quickly or you may never see the light of day. The government ones are much better because they offer repayment options and flexibility, private ones do not. Just my 2 cents ~Jayme

4 her every cent counts

In a semi-related question…

If you want to go to grad school and have the cash to pay out of pocket, do you think it’s better to do this or take out a loan for school and let the cash continue to grow (hopefully) in various risk assets. I’ve saved up about 100k and want to get an MBA, which will probably cost that or more. I’m thinking I should do all loans, but I’m not sure if a bank would let me go that route if they know how much I have in savings. Do I have to reveal that and does this make any sense?

5 Matt Jabs

Why would you borrow if you have the money? To be frank, that is not wise. First, you will not have to part with all $100k up front, you’ll just pay as you go. If you continue working at least part time you also buffer the amounts needed to pay for schooling with the income.

Where do you have the $100k now? Is it invested somehow, or is it liquid? If I were you I would invest half of it in peer to peer lending which is paying an average return of nearly 10% (I’m earning closer to 11%,) and keep the other half liquid for future schooling costs.

Hopefully this $100k is separate and distinct from your Emergency Fund, do not commingle those monies, have a separate account for each.

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