WWMMD: Student loan repayment options

kmurphy2131 · May 2015

I have found choosing a student loan repayment option to be one of the most difficult money matter decisions to make. Probably because I feel a little hopeless about them and it seems like a ton of money no matter how I slice it. The advice I have been given is to keep them on my current 25 year repayment plan, but I am starting to consider changing to the level 10 year repayment plan.

Student loan facts: I have an ~$79000 balance on my loans as of right now (that hurts to type after more than 3 years of paying.) I currently pay $598/month and they are scheduled to be paid off in 2037. I am awaiting the final numbers which will take a few days but it should be right around a $1100-1200/month payment to get them paid off in Feb. 2022 (so 7 years vs 22 years with around a 600/month increase in payment.)

We do have the availability in the budget to do this, but it will slow our other savings goals. So it's not really a matter of needing to see how we can afford them, its a matter of what do I do with our money right now. Once H starts getting the full rate at his new job (in one month) we will have ~2200/month leftover after regular expenses (with my current 25 year repayment plan)

We currently have almost enough in our e-fund to cover 3 full months of expenses living exactly how we live now I'm not sure if we should be going for more like 4-6 months fully funded. I would say my job is very secure. H is pretty secure, but there is a possibility he could be laid off for a couple of months over the winter (though the odds are low and he would 100% get his job back within 2-3 months) in which case we would change our lifestyle a bit as well. When I say 3 months expenses I mean if we both lost our job.

In terms of retirement, I do not have access to a 401k through my work but I will be fully funding an IRA. Right now we are putting $400/month into it, but would need an extra $700 at the end of the year to max it out. H will be getting a pension through his retirement (100% of the average of his 3 highest earning years, plus I will get 30%) I would like to fund an IRA for him too this year.

We also need to consider saving for a new car as mine is very high mileage right now.

We currently rent but want to buy a house in probably 3 years (there are a lot of non financial reasons we would not be purchasing before then)

So I guess my question is what do we do with the ~2200 we have left over each month?

option A) use ~600 of that towards my student loans, 600 towards our IRAs, then split the other 1000 between e-fund and car savings

option

keep paying my current student loans, put 600 towards our IRAs, then split the other 1600 among savings accounts

option C) keep paying my current student loans, put 600 towards our IRAs, then split the remaining between savings accounts and some investments (because my retirement contributions are limited & low)

option D) I'm sure there are other combinations of things I could do here

Sorry for all the information, I tried to give a broader picture of where we are at. I know we would save a lot by paying off my loans faster but I'm not sure if we should be more concerned with an e-fund, investing and saving for a down payment on a house right now. Thanks in advance.

AprilZ81 · May 2015

I would be hesitant to fully commit (with legal documents) to repayment within 10 years. You never know what will happen and I would be nervous to have a confirmed higher payment and then to lose a job or have some other emergency. I would stay on the 25 year plan BUT start making the larger payments. Basically, I would pretend you are on the 10 year plan, or even a 15 year plan.

Any remaining money I would do retirement, then split between house fund and car fund.

After your student loans are done I would then switch to investing in non-retirment accounts (mutual funds or whatever you like).

How old are you and when do you plan to retire?

hoffse · May 2015

My first piece of advice is to stay on the 25 year repayment plan. You can absolutely pay those loans off faster than that, but don't legally obligate yourself to a faster repayment period by changing your note. Keeping high-dollar loans low is key to making sure you have enough of a buffer in case of an emergency. Most months you will have no emergencies (hopefully), so you can pay more. But it's a relief to know that you aren't staring down a $1200/month minimum payment when something unexpected happens.

After that, I think retirement comes next. Make sure you are up to at least 15% of your gross income combined across various retirement accounts. I also suggest putting as much of that 15% into Roth accounts as you can afford to do while still maintaining the 15% threshold.

And then for whatever is left.... well that's up to you based on your priorities, your career, and your personal debt aversion. I'm less debt adverse than many on this board when it comes to student loan and mortgage debt, so I would be inclined to sock away money into savings accounts and worry about paying extra on the loans when those other goals are squared away. But I'm probably in the minority on that, and H and I are in a profession where your income typically goes up a LOT after 7-10 years of work. Like... it might double. I'm about 4 1/2 years away from that, so I'm not going to go crazy trying to get debt knocked out before then. But your circumstances and preferences may be very different.

If you know it's going to be at least three years before you want to buy a house, I suggest looking at some websites now to see what houses go for in the areas you would consider buying in. That way you at least have a ballpark of what you might need to save for a down payment and closing costs, and you can work backwards from that figure. You have given yourself plenty of time to save, but you might want to start now so that it's not stressful later.

kmurphy2131 · May 2015

Thats a good idea about paying it but not actually changing the plan.

We are both 28 and H will be eligible to retire at 60 and I would like to around then as well. I also will likely work part-time when we have a child (in ~5 years?)

kmurphy2131 · May 2015

hoffse said:
My first piece of advice is to stay on the 25 year repayment plan. You can absolutely pay those loans off faster than that, but don't legally obligate yourself to a faster repayment period by changing your note. Keeping high-dollar loans low is key to making sure you have enough of a buffer in case of an emergency. Most months you will have no emergencies (hopefully), so you can pay more. But it's a relief to know that you aren't staring down a $1200/month minimum payment when something unexpected happens.

After that, I think retirement comes next. Make sure you are up to at least 15% of your gross income combined across various retirement accounts. I also suggest putting as much of that 15% into Roth accounts as you can afford to do while still maintaining the 15% threshold.

And then for whatever is left.... well that's up to you based on your priorities, your career, and your personal debt aversion. I'm less debt adverse than many on this board when it comes to student loan and mortgage debt, so I would be inclined to sock away money into savings accounts and worry about paying extra on the loans when those other goals are squared away. But I'm probably in the minority on that, and H and I are in a profession where your income typically goes up a LOT after 7-10 years of work. Like... it might double. I'm about 4 1/2 years away from that, so I'm not going to go crazy trying to get debt knocked out before then. But your circumstances and preferences may be very different.

If you know it's going to be at least three years before you want to buy a house, I suggest looking at some websites now to see what houses go for in the areas you would consider buying in. That way you at least have a ballpark of what you might need to save for a down payment and closing costs, and you can work backwards from that figure. You have given yourself plenty of time to save, but you might want to start now so that it's not stressful later.

I'm not incredibly debt averse, but at the same time don't want to pay tens of thousands more than I need to. Retirement is my big issue right now. I'm not sure if we should consider investing into the stock market to hit the 15% mark. When I combine our incomes & our contributions we are about $1000 short of 15%. But when I look at only myself I am contributing less than 8% of my income because I am limited by the IRA cap and don't have other retirement options.

hoffse · May 2015

Personally, I would move to taxable accounts to hit that threshold if you are maxing out your tax-advantaged options.

AprilZ81 · May 2015

Does the 15% include your husband's pension? Is the pension "safe" and funded? If you are at 14% and still have the pension I think you are doing great.

kmurphy2131 · May 2015

@ AprilZ81 The 15% (really 14%) includes the amount that he is contributing towards his pension. It is considered a safe and well funded system.

AprilZ81 · May 2015

How does his pension work? It he employer matching his contributions? If so, include those dollars in your calculation as long as he is fully vested.

kmurphy2131 · May 2015

I'm really not sure how to best calculate his retirement. Basically he pays into it now (12% each paycheck) and then after 30 years and age 60 (will be age 60 for him) he is eligible to retire. He will then get 100% of the average of his three highest earning years and I will get 30% of the average. If I die he only gets 100%, if he dies I get 130% (morbid but a fact.) So it's not really an employer match but its also not a "what you put in you get back" kind of system either. I find it hard to calculate.

edit: just to clarify the 130% combined total is basically a regular paycheck for life

AprilZ81 · May 2015

I don't know how to calculate that either. Maybe try to back into what you will need for retirement to live the lifestyle you want (usually 80% of your pre-retirement income is a good place to start). Estimate how much the pension will provide based on what you think your husband will make in his 3 highest salary years (be conservative) and the try to calculate how much of a shortfall you will need to make up with private retirement options.

KatieCutie05 · May 2015

None of the above - take every single penny you have left and put it toward your student loans. None extra to IRA's above what you are already doing (what you have is fine for a few years until you pay off those loans. As is your emergency fund. Both are perfectly fine. But to be entirely honest i'd lower both of them to get the student loans gone quicker because once they are gone you don't have to worry about any of that ever again. And its not like we're talking waiting 10 years. i'm talking 2 years.

There is zero reason with all that extra money coming it it should take you 10 years to pay off those loans. Not counting interest - adding 2200 to your 600 payment is 2800 a month- that would get those student loans completely paid off in 2 and a half years! Thats a whole lot better then 25 years and a ton less overall!

http://cgi.money.cnn.com/tools/studentloan/studentloan.html

Thats a very rough calculator but with 80k principal paying 2800 a month with a 5% interest rate is 2 years and 7 months. You can lower it a few hundred to stretch it out to 3 years if you want to... or you could sacrifice more to get rid of it quicker.

Dream a little. How awesome would it be to not have to worry about those stupid loans at all... and once you have those paid off with an extra 2800 a month you can easily max out both your roths - save for a new car in a few months - and easily save for a down payment on a house.

vlagrl29 · May 2015

what is your interest rate on the loans? mine is so low that I am not going full force with getting it totally paid off. I would rather put money into retirement, savings, and home improvement savings. That's more of I priority to me.

bmo88 · May 2015

I agree with taking the approach of paying them off faster, but sticking with the actual 25 year plan. We are doing something similar, our minimum payments on $23,000 of students loans (originally $39,000) is $400 a month. However, we want them gone as soon as possible, so we are paying $800 a month toward them. We would pay more, but we have a few other loans and our mortgage that we are paying off.

As long as you are disciplined and diligent, it is definitely safer and smarter to have a required lower monthly payment and then pay more than the minimum. We have been doing this for the past three years and have managed to pay off $25,000 of our total debt much sooner than necessary.

Sometimes it's hard to throw money at debt because it doesn't feel productive or exciting and you think you can save/invest/spend it on something better, but what motivates us to do it is visualizing the day where we don't feel tied down by our debt.

simplyelise · May 2015

Just my two cent perspective: When H and I got married last October, we had 55,421 in student loan debt. Despite two months of H's unemployment, we currently sit at 38,985 on the loans. We're able to pay an average of 2600/month towards the loans (about 50% of our takehome) and we will be done with them in June of next year.

You guys could be out of debt in 31 months (assuming 6.8% interest here bc that's what we have) if you put your current payment along with your current leftover. You wouldn't even have to change your current retirement to make that happen. That means you could have the loans GONE in just over 2.5 years and you'd be able to save so quickly for a down payment then.

Even if you want to go a little more conservatively and save a couple hundred a month toward car/efund, you are still able to be debt free in less than 3 years. I know it sounds crazy, but from someone who's currently doing it, it's totally worth it not to be dragging the ball and chain of student loans around for a decade.

abrewer5 · May 2015

I'm not a huge fan of debt (ETA what I meant was I'm debt adverse... who is actually a fan of debt?! That was a dumb thing to say), currently working to pay off my student loans as well, so I would be inclined to throw all the extra money towards the loans to get them paid off. It will help a lot to have them paid off before you buy a house because you can save more for a down payment and you'll have less debt when applying for a mortgage and/or if an emergency were to happen and you had to live off one income while having a mortgage. I would work in this order stop savings (other than retirement) to pay off loans, once the loans are paid off I would fully fund retirement (10-15%) for both of you and then start saving for a car/house.

I agree with PP that you should just repay them faster without changing your repayment terms. It's a good back up just in case.

formerlyGDaisy09 · May 2015

Agreed with everyone. Stick with the 25 year plan and just pay them off faster. budgets and circumstances change, while you might have space in your budget for higher payments, do not lock yourself into them.

you may decide in a year or two that you'd like to buy a house sooner, SLs have relatively low interest rates, you could slow-down your payments to save for a DP at that point, while locking into higher payments will put you in a situation where you're really stuck.

kmurphy2131 · May 2015

Thank you everyone for your thoughts. I appreciate an outsider/nonbiased opinion. I love the idea of throwing everything we can at them and knocking them out in 3 years, but I just don't think it would be a good option for us. After my dad suddenly lost his job through circumstances no one would have ever expected, I am really cautious about keeping as much money as we can around. I think that staying on the current repayment plan but paying the extra money will be the best way to go to be able to stay comfortable with saving and start knocking out my loans (which are 7% interest, so unfortunately not low interest)

vlagrl29 · May 2015

I do think its great to stay on the same plan and put extra on it - that's what I do every month.

hoffse · May 2015

kmurphy2131 said:
Thank you everyone for your thoughts. I appreciate an outsider/nonbiased opinion. I love the idea of throwing everything we can at them and knocking them out in 3 years, but I just don't think it would be a good option for us. After my dad suddenly lost his job through circumstances no one would have ever expected, I am really cautious about keeping as much money as we can around. I think that staying on the current repayment plan but paying the extra money will be the best way to go to be able to stay comfortable with saving and start knocking out my loans (which are 7% interest, so unfortunately not low interest)

Yes you need to do what works for your priorities. If H and I threw everything at our debt, we could have it gone in maybe 4-5 years. But a 7 year plan is more comfortable for us, and it lets us keep a bigger e-fund around and do some major house projects before having kids. Those are important to us as well, and 2 extra years of debt buys us that added flexibility. Our debt is all on auto-pay, so I really don't think about it that much except to make sure there's enough in our bank account to cover those payments. I guess if I thought about it more, maybe it would bother me more?

Mentally I need a bigger safety net of cash that is either liquid or could be liquidated than others on this board. Once extra money is sent to debt it's gone, and you can't divert it to anything else. So I think it's about finding that balance between focusing some extra money toward debt so that you're making real progress, but perhaps not so much that you have tied up most of your spare cash in it. The tipping point on this will be different for every person.

7% isn't a crazy low rate, but it's also not that high either. People forget that 7% is pretty good, even for a mortgage (historically). We've been spoiled by historically low rates for a few years now, and I think that makes it hard to have perspective. When my parents bought their first house mortgage rates were in the 15-17% range (early 80's). They assumed a mortgage at 8% and felt like they got a killer deal. For that time, they did. It's all relative.

simplyelise · May 2015

Agree with @hoffse about figuring out what you're comfortable with. If I had a house and/or kids and/or we couldn't live on one of our salaries and/or we had job instability, I'd be very uncomfortable with only the $3400 we have in savings.

Since we live in an apartment with very modest cars and have crazy good health insurance with very low oop costs, we are comfortable staying low on savings for the time being. We also didn't change H's repayment terms, so I'm pretty sure he's on 10 year repayment now. If an emergency happened, we could probably cashflow while temporarily dropping our debt payments down.

cbee817 · May 2015

I definitely agree with @hoffse - our e-fund is much higher than most people on the board because we have 2 kids and DH has been laid off/rehired by his school district 3 times since 2010 (he's a teacher in the city and they go through budget cuts, school closings all the time- he's constantly shuffled around since he's low on the tenure list and sometimes doesn't know he has a job until 2 days before the school year starts).

I'm sure there are some that think I'm crazy for having 10 months of expenses that are relatively liquid (savings account and a CD), but I'm not going to throw that money to our mortgage payment (currently our only debt- cars and SL are paid off) just to cut the mortgage in half. The payment will still be there and our interest rate is only 4%. We may increase the principal on the payment in September when DD#1 is out of day care, but worse case, our mortgage will be paid off in 10 years (we refinanced in 2010 to a 15 year) and we have a good e-fund in case anything happens along the way.

I would make extra payments on your SL, continue to grow your e-fund, and add to your IRA. You have the extra money to do all 3 which is great!

brij2006 · May 2015

I would buckle down with your budget, live on nothing, and put as much money toward these loans as possible. Get rid of the looming $79k in debt. I would put this before saving for a house, and would stop retirement contributions while doing so. Get those suckers gone, and then enjoy the extra $3k in your budget each month to max out your retirement and save up for a 20% down payment on a home.

WWMMD: Student loan repayment options

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