Student loans vs saving

meghana1218 · September 2013

DH is done with law school in May. He has about 100k in student loans. What is the advice for tackling loans vs saving money (for down payment). We want 4 kids spaced out a bit so we would like to start sooner than later. Buying a house before we have kids is important to us. We plan to live on my salary and use his for saving and loan payment. What suggestions do you have? Many people are paying their student loans off like a mortgage (over 15-30 years), but that seems a little crazy to me! How much would you allocate for each? We plan to start paying off one private loanm(about 20k) ASAP. That will of course be a priority since it has such a high interest!

brij2006 · September 2013

Honestly, I would tackle the student loan debt first and foremost, and put as much money toward those as possible. Even if it takes 3-5 years, get those paid off first, then begin to save for a house (with the amount of money you were paying toward the SL's). Then buy your home and begin to have children. Especially if you would like 4 children. They are expensive, and having only a mortgage payment as any debt, it would help your family to be better off financially from the start.

hoffse · September 2013

A couple questions - does he have a job? Firm work? Public work? Non-legal work? What will his salary be? This matters a lot.

$100K for law school loans isn't that bad. I had about $75K for my law school loans, and I'm on a 9-year plan - the monthly payments are pretty affordable for me, and we are not pre-paying that because I got a crazy good interest rate on that loan (from my parents).

H, on the other hand, is going to graduate in May with around $165K in law school loans. Again, it's not terrible, but since I have loans too it's not great. We are paying the standard interest rates on his. As a result, we've decided to commit legally to the 30 year plan for him and then pre-pay when we can. What we have realized is that once my loan is done (8 years left), we can keep sending that same amount to his each month. That changes our life zilch but prepays his pretty quickly. In years where one of makes a bonus, we will also send at least half of it to his loans. We don't have a budget for bonuses, so again that doesn't change our bottom line at all. Doing that plan (estimating an extra $3K/year from bonuses) will lower his payment period from 30 years to 13. We are going to try to pre-pay on top of our plan to also get his under 10 years, but at least we aren't committed to it if any given month we need extra cash for one thing or another.

Here is a calculator I have used to figure out what various prepayment options do. It's a "mortgage calculator," but you can plug and chug any numbers into it to find out what his monthly payments ought to be:

http://www.decisionaide.com/mpcalculators/extrapaymentscalculator/extrapayments1.asp

If it were me, I would suggest committing to a longer repayment period and then prepaying as aggressively as you can. That way if the right house comes up and you need that extra $1,000 for the downpayment, you can take that extra cash one month and put it toward the house, rather than being obligated to send it to his loans. I do think prepaying the loans should be a priority, but it's nice to have some flexibility with it just in case. Do prepay the high interest one first.

Keep in mind that there are other things you need to fund, in addition to his loans and a house. These include:

-Retirement - there is no reason in the world why a young lawyer at a law firm shouldn't be fully funding both a 401(k) and a Roth IRA each year to the legal limit ($17,500 for a 401(k) and $5,500 for a Roth IRA for 2013). Unless he's going public, he should make enough to do this. It's also very important the he start as soon as possible, because odds are he will not retire with a pension from the private sector. He will need to fund his retirement entirely by himself.

-A 3-6 month emergency fund - very, very important, and given the state of the legal market I would make mine closer to 6 than 3.

-After the house, a slush fund for babies.... these suckers are expensive, and even with good insurance you need to be prepared for several thousand in hospital bills, etc. each time.

So now you can see why most lawyers do the 15-30 year plan. All of this takes cash. I would probably put commit him to a longer time-frame for repayment and then do the following, in this order:

1) Make minimum payments on his loans first, because these can't be discharged in bankruptcy

2) Put away $3,000-$5,000 to at least start an emergency fund.

3) Then fully fund his 401(k) and Roth IRA

4) Whatever is left (and really there should be plenty left), I would probably do 50% to a house fund, 25% to loan pre-payment, and 25% to my emergency fund to work on getting it up to 6 months.

5) Then babies, once your e-fund or house funds are complete.

This is probably going to take a little longer than you might like, but these other savings goals are so very important.

hoffse · September 2013

A few other pointers...

1) Your H will probably need several nice suits (at least 5 if he is a litigator or at a silk stocking firm that still requires suits every day for work).

2) Buying a BMW with his signing bonus is really stupid. I have a friend at another firm who spent 10 years trying to get out of credit card debt. She finally did last month and then promptly bought herself a Lexus SUV to celebrate. I immediately stopped feeling sorry for her.

3) Depending on your salary, you may come in under the income thresholds for the student loan interest deduction in 2014. That means that you can deduct interest payments (but not principal payments) off your taxes if your income is low enough. He will only have 4 months of work under his belt in 2014, so check this out. If you qualify, then try to pre-pay interest rather than principal during his first 4 months, at least until you hit the deduction limit. After that your income will probably be too high for this deduction, so prepay principal.

4) Don't use his loans for a bar trip. If you guys want to take a bar trip, make sure you save for it out of money you are earning, rather than borrowing. Mail his lenders a check for whatever is left of his loan funds the day he starts his job. That will prepay his loans a little, using money they loaned you.

5) Finally, the prevailing view on these boards is to get out of debt as quickly as possible. I agree with that for certain kinds of debt (like credit card debt), but not necessarily for professional school loans. If he is at a law firm, then odds are he will make a LOT more in 10 years than he will his first year (partner track and all). As in, his salary might triple or more. So if you need to wait until that time to pay the loans down aggressively, I think that's fine. It will give you more cash early on his career to fund things like retirement, which benefits greatly from having time to grow. The trick is to arrange your life early on so that you guys are not "living like a lawyer." Then when he's finally making that kind of money, you just won't know what to do with it. That's a fabulous problem to have.

Just my $0.02.

meghana1218 · September 2013

He has a job upon bar passage at a firm. He will start around 70k. We have an e-fund of 17,000 right now, I usually get bonuses so if all goes to plan, by the time he graduates we should have around 25-30K. So luckily we aren't starting from the very beginning! Also he has not taken our living loans since we got married, just tuition, so we don't have anything extra to send the lenders. We will use savings for a bar trip We will definitely fund his 401K but I hadn't planned on maxing it out. Probably 10-12 a year

meghana1218 · September 2013

Also how does the tax deduction work? I make 45K plus bonuses and will probably be making 50 by the end of the year. Granted H worked at a firm last summer so that puts our income in the 60s-70s. Should I put a large chunk of my bonuses toward his private loan (before he graduates) bc it will be tax deductible?

meghana1218 · September 2013

Oh and yes he will be a litigator. My dad is buying him a few custom made suits for his bday this year but we will probably have to get a couple as well!

hoffse · September 2013

OK that's helpful, thanks.

In that case I would do the following:

1) Hold onto the e-fund. Stash that cash somewhere that earns at least a little interest and don't touch it. 25K-30K should be plenty for you both to live on for 6 months (just extrapolating here since I don't know what you spend). If that's the case, then congrats! You're done with a big step!

2) I would still max out his 401(k). Make sure you both have a Roth IRA on top of that. He might not be eligible to enroll right away (for instance, I had to wait a year to do it), so if that's the case, you can use that extra income toward savings/loans, etc. while you are waiting to enroll. If he can enroll, though, he should. I can't stress this enough because by the time he retires you are likely to be used to a certain standard of living that's going to cost money. Max it out now so that you can take advantage of the many years for it to grow.

3) Split whatever is left maybe 75% house and 25% loan prepayment.

Again, the reason lawyers go on a long repayment plan is because our financial pictures really change 7-10 years into practice. You can, of course, prepay whenever you want. But you're going to wind up with a lot more money once he partners, and that's when most of us take care of those loans in earnest.

Ducktale · September 2013

I think pp gave good advice. I think paying off student loans ASAP is a personal choice. We did it because we needed to get rid of that monthly payment in order for me to be a SAHM. But if that were not the case, I don't know we'd be as aggressive. We bought a house before paying them off. It sounds like you're smart with money, so as long as you could have a good efund and could cover loan payments and living expenses in the event of a job loss, I would not wait until the loans are paid off to buy a house/start a family. Don't buy more house than you can comfortably afford, but again sounds like you are going to be fine.

Wulfgar · September 2013

I would do what my wife is doing, she didn't consolidate her student loans and is paying the minimum plus a little. That way you know that the student loans will be paid off in 10 years maximum and you can put the rest of his towards saving for a down payment on a house. Once you buy a house or his income increases you add more to your student loan payments.

Wulfgar · September 2013

I would do what my wife is doing, she didn't consolidate her student loans and is paying the minimum plus a little. That way you know that the student loans will be paid off in 10 years maximum and you can put the rest of his towards saving for a down payment on a house. Once you buy a house or his income increases you add more to your student loan payments.

Student loans vs saving

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