A difficult decision about student loan repayment

by Karen on January 24, 2009

Once we became credit card debt free, we had an extra $200 a month available. We decided to put some of that money toward retirement savings every month, so we only have $100 left to work into the budget.

Yesterday, Tony and I looked at our budget, and talked about where we’d like to put the money.

We have a huge amount of student loan debt (about $60,000 all told). My plan has always been to pay off credit card debt first, and then move on to my private student loans. Private loans account for about 1/3 of our student loan debt, but they carry about a 7% average interest rate. We also have about $40,000 in federal student loans with a much lower interest rate (about 4%).

When I think about all of that debt, I feel so overwhelmed. To make it easier on myself, I’m focusing on one loan at a time — for now the private loans (about $22,600).

I plugged some numbers into a loan repayment calculator to figure out some scenarios. The numbers are disappointing.

  • If we continue paying our current amount ($200 a month), it will take us 10 years to pay off my private loans.
  • If we put the extra $100 toward student loan debt (my original plan), it will be 8 years before the private loans are paid off.
  • Even if we could come up with $500 a month to put toward the private loans alone (while continuing to pay the minimum payment on federal loans), it would take about 4 and a half years to pay off just the private loans. Then we’d still have to pay off $40,000 in federal loans.

“Don’t worry,” people tell me. “Your income will go up.”

The problem is, it probably won’t. Right now I work full time, and Tony makes the equivalent of a part-time salary teaching. Sometime after he graduates, we want to have children. At that point, our roles will switch. He’ll bring in a full time salary, while I work part time (hopefully from home). So we’re looking at quite a while before we see a significant increase in our income.

Tony and I had a long talk about our short- and long-term goals. As much as I want to be debt free (and believe me, I really want to be debt free), at this point in our lives with our limited income and the economy a wreck, my gut is telling me that saving is more important.

Once we’re settled somewhere that we know we want to stay long term — and we have an emergency fund in place — our focus will shift. At that point, we’ll be able to put everything we have into debt. But for now, I want to have as much money stashed as possible.

So we made the decision to continue making minimum payments on student loans for the next year and a half while we beef up our savings. After that, we’ll reassess our financial situation. Hopefully we’ll have enough in savings that we can hold off on saving and shift our focus to debt.

I’m disappointed that we can’t do both, but I’m also confident in our decision. When I look at the difference an extra $100 a month will make in our savings, I feel calm and reassured. I don’t feel that same calm when I see the minor change in our debt that would result from paying an extra $100 a month on it for the next 18 months.

I also don’t regret putting $100 toward retirement every month. If we don’t plan for our future, no one else will. Putting $100 away for retirement every month makes me feel incredibly empowered.

The important thing is that we’re doing what works for us. The best part? Liquid savings is, well, liquid. If we change our minds, we can always pull that money out of savings and put it toward student loans.

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1 Sadie January 24, 2009 at 10:27 am

I’m finally glad to have my BA student loans less than $6,000!!! It was $15,000 at one time. My smartest move, getting my Masters with tuition paid by my employees and private scholarships, taking 5.5 years to complete the courses while working full time and still paying on the BA student loan during my forbearance period. While 1/2 time enrolled in school the loan payments and interest were suspended, however I still made a payment, even if only $20 a month, and that was directly on the principle. I completed my Masters got a new job making $8,000 more a year. Well worth the 5 1/2 years w/o extra debt.
And I see student loan debt as good debt, it was worth it, well used and has a decent interest rate, much better then a loan on a new car…the deceprecition on a student loan should be nothing as long as you work in a field were the degree is relavent (I know people who wasted $10,000 for a specialized degree and now work where only a HS is needed)

2 Kacie January 24, 2009 at 3:16 pm

Good for you! I agree, sometimes it’s way better to have a beefy savings account than just a little bit less debt. I think it’s smart that you’re changing it up a bit, even though you would like to be debt-free asap.

It wouldn’t be a good idea to be without a significant emergency fund for a decade, especially since you want to live off of one income.

I could tap our emergency fund and pay off our car today. Sure, we’d be out of debt, but we’d also be broke and just asking for trouble. I feel much better about leaving our savings alone and plugging away at debt with other funds.

3 Megan January 25, 2009 at 7:02 pm

Hey Karen! Wow, tough subject. Suze Orman had a show the other night about how student loans are getting out of contol. It was a little frightening to see what could happen. First of all, I think it is an extremely good idea to increase your savings right now rather than trying to make a small dent in the loans. Reason being that the loan companies will allow you to defer payments for a time period if you are to be unable to pay (which could happen if you didn’t have an emergency fund), but the interest compounds and you end up astronomical amounts of debt 2-4 times the original amount. Having the savings will help you not have to deal with that problem. $60,000 may seem like a lot now, but it is nothing compared to $180, 000…or worse.

Also, I’m not sure if you’ve read Dave Ramsey and Financial Peace University or not. He has a way of really getting you focused about getting rid of debt however you can. Sometimes that means taking small jobs to make extra income, selling anything possible, etc. When the debt eats away at you like I have experienced you will do anything you can to get rid of it. I worked full-time, went to college full-time, and also worked small odd jobs to get out of debt and build my savings. One thing that really helped was having steps to follow. For you, having your emergency goal would be #1. Know what the number is that you would be comfortable with so you have a target. Do everything you can to get there NOW! Then, kick into high gear and knock out the private loans, then regular… or however best fits your life. In a previous post you talked about getting rid of them in 2 years. I think that is completely possible with a lot of hard work.

I know this debt is daunting, but you can do it! Get your goals in order, focus with gazelle intensity, and have faith!!!

4 The Ory's January 26, 2009 at 10:45 am

We found ourselves with a similar decision this year. I really would like to get those loans paid off, but as you said, having the savings makes more sense at the moment. We’ve decided to focus on savings, and then can transfer a large chunk toward the student loans if we find ourselves in the position of having sufficient emergency fund money with some to spare. Definitely a tough decision!

The Ory’s’s last blog post..Thursday Tally

5 Angie January 26, 2009 at 10:47 am

I second the Dave Ramsey thought. We will pay off $65,ooo in debt in May. Our student Loans were about $49,000 of that. It’s taken 5 years, which was impossible in the beginning… but I’m so glad we made that decision. We started on a combined salary of about $35,000. We’ve always had little side jobs too, it’s helped – not so much with putting money on debt, but to pay for trips home & christmas. That way we don’t get off track with our budget.

Now, in May we can really start saving for our retirement – at a very rapid pace. We are 30 & 26… so it might be a later start, but we’ll be able to put away quite a bit by the end of the year.

What’s important is to do what works for you. What stresses me out was having that debt hang over my head. Retirement was so far away (in my mind) that I had years and years to take care of it. And here we are, months away of finally getting to take care of it too!

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