Student Loans, pay off now or later? Thoughts?

bmo88 · May 2015

I am just curious what most peoples thoughts are on student loan repayment. I have posted about our debts and repayment plan on here before and received great advice. Though we have a plan that works for us now, I have been reading a lot online about

We have a set up right now where we are working on paying off all non-mortgage debt within 2 1/2 years. As a result, we are putting 25% of our income toward debt repayments, as opposed to our minimums (10%). While doing this, we have still built up a 3 month emergency savings fund and save 15% toward retirement. Because of our aggressive debt repayment though, we will be delaying having children for another 2-3 years, which feels like a bummer, but a worthwhile sacrifice. It also requires that we pair down our discretionary spending quite a bit. Which means cooking 95% of our meals, not making "fun purchases" and not taking very many vacations. Therefore, it's not that bad, but sometimes it feels trying to stave off debt fatigue (we are 4 years in with 2 1/2 more to go).

Currently, our student loans total $22,200 @ 6.8% (we started at $40,000 about 4 years ago). They make up about 45% of our current debt we are paying off. Most of the articles that say you should delay paying off loans early say it's because the interest rate is usually lower than most debts. I agree it's lower than most consumer debts (i.e., credit cards, car loans), but in reality, it's actually a higher interest than our car loan (0.9% and our mortgage 4.2%). So I am just curious, is it worth throwing $875 a month at them or riding them out longer?

What are you doing if you have student loans?

AprilZ81 · May 2015

You are doing a GREAT job!!!! Keep your chin up!

I'm not debt adverse when it makes sense but you do what you feel is best for your situation.

Since your student loans are the highest interest rate AND the biggest part of your debt I would keep up your plan. If you are truly struggling with the lack of fun money I would maybe rework the budget to add a little bit of fun in there, but I wouldn't make drastic changes.

Are you overpaying on the car loan? Since that is so low maybe you could only pay the minimum on that to free up a little fun money without setting your end goal too far back.

bmo88 · May 2015

Given the interest rate is so low on the car loan, we are not currently over paying on it. In the grand scheme of life, 2 1/2 years is nothing. It just feels like forever given we have been throwing money at our debt for 4 years now.

We budget about $100 a month for "fun money" and might consider adjusting that a bit, especially now that our savings is up to 3 months emergency expenses. Ideally, we want to get to 6 months, but we won't do that until our debt is gone.

DH is not too concerned and wouldn't mind drawing this out even further. But I honestly cannot feel comfortable TTCing or spending lots of money on traveling until we get this debt gone. We will probably just keep trucking away...

kmurphy2131 · May 2015

I would throw more money at the higher interest loans than the lower interest loans. I would love to just knock my car loan out but it doesn't make sense because its 0% interest so I put more into my student loans instead even though they are "low interest" at 6-7%

Its really a personal thing though, in terms of what makes you feel good about it. I don't follow david ramseys method at all, but I know that he teaches the "snowball method" and there are people on here who can probably explain it better than me but here goes. Basically you pay off your lowest balance debt first, throwing all extra money at that while paying minimums on other debts. Then you move to next lowest etc. I prefer to look at interest rates, but if you are trying to aggressively pay it off in 2.5 years the interest doesnt matter as much, and it might help keep your motivation if you are getting rid of debts faster by targeting the small ones.

bmo88 · May 2015

I am aware of the snowball and avalanche methods of repayment. We are technically doing avalanche right now. We are really close to have two smaller debts paid off and then it's just the larger two which have the same interest rate. We will likely pay half and half, though it may be more motivating to pay a larger sum toward one so we can see it visibly decrease more each money. Definitely something to consider.

Mustard76 · May 2015

I agree with PP that whatever makes you comfortable is the best option. We have no other debt, but we're saving aggressively for our next house, while paying way, way too much in rent (but now we're stuck). Anyway, were throwing any extra cash at my student loan trying to get rid of it asap. We don't have other debt priorities, though, so we're in an odd situation.

als1982 · May 2015

You are doing great!!

Our plan is somewhat similar, but have prioritized travel over new cars, so we both drive paid for 'beaters' but allocate anywhere between $500-$1,000 a month for travel. We're in London right now, finishing up our last big hurrah before TTC so now those dollars will go toward a baby fund.

Otherwise, about 17% of our income goes to retirement and 45% goes to killing our debt.

Next week, we'll finish off my student loan which started at $22,000 with 6.8% interest rate. Then, we'll start working on H's, which is at $58,000. Our hope is to have it gone in less than 18 months. His interest rate is slightly less, but because we no longer qualify for the interest deduction and we're already contributing a decent chunk to retirement, we feel like this is the best option for us.

Sure, we could buy a bigger house, new cars or nicer stuff, but we hope this plan will serve us better and allow for more flexibility with how we choose to live in the future.

vlagrl29 · May 2015

If your student loan is the highest interest then it makes sense to me to pay it off sooner. My SL is ridiculously small interest therefore I'm not concerned about it.

bmo88 · May 2015

Our student loans are definitely our highest interest debt at 6.8%. I know it will be worth it in the end, it's just staying motivated to keep the course and commit to getting it paid off.

abrewer5 · May 2015

If you're having trouble with feeling motivated then I would work on your smallest balance first to help keep the momentum going and get it paid off, but I would also pay off the student loans before the car because that rate is so much lower. So if you only have your car, school and mortgage left I would work the SL first. Good luck! You're doing great!!

Xstatic3333 · May 2015

From a strictly financial, MM perspective I think your plan is great! I have those 6.8% loans too, and it is tough to decide what to do with them since they hover between high and low interest. I'm also a big believer in doing whatever financial strategy keeps you the most motivated. If going for high interest payoff first keeps you the most motivated, do it, even if it's a deviation from any specific plan.

For us, we are taking a different approach and paying off our loans a bit slower. There are a few reasons for this, most of which are not MM but I do find defensible for other reasons. For one, we are in our 30s (second half of his 30s for H!) and would not want to delay having kids for the 4+ years it would take to get our loans paid off if we were gazelle intense. Also, since we are on the older side and H is quite behind on his retirement savings, getting that going has been a higher priority to us since we started paying attention to our finances. We've set his withdrawals at the maximum level we're comfortable with, which doesn't leave a ton left for extra debt payments. Finally, we have considered the last couple of years before we have kids as time that is valuable in its own right, and have invested in vacations, dinners out, etc. We wouldn't put our future at risk for any of that, and have halted overseas vacations for now until our e-fund is rebuilt, but are comfortable with traveling while we still have SL and car debt to enjoy our last couple of years without kids.

That said, I have received news that I may have a promotion on the horizon if a few things go as planned. If I do see a big income increase, one of the things I'm planning to do is accelerate payment on the 6.8% loans a bit, at least enough to have them paid off in 5-6 years. We shall see...

brij2006 · May 2015

I'm anti-debt, so I personally would take all but $1k of the E-fund and stop retirement contributions and pay them off faster than the 2.5 years. Focus on just 1 goal, rather than trying to spread your excess money among multiple things.

Not sure how long you have been around here, but Dave Ramsey's Total Money Makeover book is a great one to read to understand why to do this. It's what we are doing personally, and the idea of having our student loans paid in full within a 15 month timeframe (while TTC and cash flowing the birth of our daughter) is so freeing.

bmo88 · May 2015

brij2006: We have considered using our e-fund, but I don't think we will do it. We currently have $11,000 in it (3.5 months expenses), and just built it up to that last month. But since we own a home and we both work at the same start-up (that's stable, but you never know) we wouldn't be comfortable doing that.

hoffse · May 2015

Eh I drag out loans. We're on the 7-year plan, and that is at our current levels without changing anything. H and I are ok with that, and I don't think we will be changing anything to pay them off sooner.

Right now our extra money tends to go toward travel, the house, and nonreimbursable professional development. We are about to embark on the last really big project for the house, which is going to take a lot of money (kitchen), but after that our cash flow will be freed up.

I might pay off loans earlier than our plan, but I also might not. Right now the plan is to just start a snowball once our car payment is up next September, and that should allow us to be done in 7 years. I'm not sure that I will pay it off any faster than that, because I can typically do a lot better than 6.8% in the market.

But this is a priorities question and also a cash flow question. If your loans are high enough to really affect your cashflow, paying them off sooner rather than later will help that a lot.

bmo88 · May 2015

It's a tough question. If we were to pay our minimums only, it would give us an extra $1,000 a month in cash. It would be nice, but not really necessary. Even paying at our current rate, we can still save about $650 a month in regular savings (not emergency/not retirement) and still pay all our bills just fine.

I am up from what should be a big raise next month and DH is up for one as well. Therefore, it will free up more money. But then we will need to decide, pay off our loans even faster by throwing the extra income at it or 1) invest it or 2) go to Europe. Lol, yes, very random choices, but we have been waiting/saving to go to Europe for years and want to do it before we have a child. So we will see.

Also, all of our debt payments are automated. So it's not so much motivation to sit down and make the payment. It's just more the idea that we could be doing something else with that money right now...though short of a vacation to Europe, I don't know what else we would spend the money on right now. We are pretty frugal in our daily lives and are big homebodies.

brij2006 · May 2015

Have you ran the numbers to see how much it would affect your timeline if you were to using $10k of the E-fund, stop retirement, and put every extra penny toward the loans?

It sounds crazy, but a lot of times it can cut that timeline at least in half if you do that. Let's say it gets you down to having them finished in 18 months, then you can save up your full e-fund with the extra cash flow, then save and head off to Europe. It will still probably put you within a shorter timeline.

Then start TTC on the Europe trip. ;-) Just saying.

bmo88 · May 2015

brij2006: Hmm...that's an interesting approach. I will have to run the numbers tonight and see how it would play out.

dragonstarjk · May 2015

Meh. I don't have student loans but H does. Honestly, we are not super debt-averse, so that does affect our decision on this. H has paying his student loans forever it seems like, but it is a very low payment with low interest and it's automated every month; honestly, we just don't even worry about it. It will pay off when it pays off.

I guess if it was 6.8% interest, I would be inclined to make additional payments because that is higher than our mortgage, vehicle loans, and personal loans, but at this point we're just settled in for the long haul. I think he has $8K left.

maple2 · May 2015

I am also not debt averse. If you are comfortable with your current lifestyle and timing of future life plans, then by all means keep up with the aggressive debt repayment. It will obviously make things easier for you in the future. If, on the other hand, you are feeling like you are sacrificing too much to get the debt paid off quickly, then I think it would be fine to scale back your repayment plans. Personally, in the relatively good financial situation you are in, I would not let student loans by themselves be the deciding factor in making major life decisions like when to TTC. In your OP, you sounded a little regretful about having to put off TTC and not having more discretionary money to enjoy life right now. If those are serious frustrations for you, then I think you would be fine to be less aggressive with debt and live more in the now. If they are just minor annoyances, then go ahead and stick to your plan.

hoffse · May 2015

bmo88 said:
It's a tough question. If we were to pay our minimums only, it would give us an extra $1,000 a month in cash. It would be nice, but not really necessary. Even paying at our current rate, we can still save about $650 a month in regular savings (not emergency/not retirement) and still pay all our bills just fine.

I am up from what should be a big raise next month and DH is up for one as well. Therefore, it will free up more money. But then we will need to decide, pay off our loans even faster by throwing the extra income at it or 1) invest it or 2) go to Europe. Lol, yes, very random choices, but we have been waiting/saving to go to Europe for years and want to do it before we have a child. So we will see.

Also, all of our debt payments are automated. So it's not so much motivation to sit down and make the payment. It's just more the idea that we could be doing something else with that money right now...though short of a vacation to Europe, I don't know what else we would spend the money on right now. We are pretty frugal in our daily lives and are big homebodies.

Depending on where.... not going to lie, I vote Europe

hoffse · May 2015

Side note: If you're willing to work CCs for points, Europe can be done on the cheap. H and I are going to Belgium and Germany over Christmas break to visit his grandma, and we are out of pocket about $850 total for two roundtrip flights, 7 nights in a hotel, and the $210 for trip insurance that I couldn't find a deal on.

cbee817 · May 2015

I'm not debt adverse either- $22K isn't much at all and you're doing a great job so far. I think an e-fund is very important and I don't think it's a good idea to stop retirement contributions. If you were drowning in CC debt, that's one thing, but SL debt is different. We had basically the same amount of SL debt when DD#1 was born. When DD#2 was born 20 months later, we were only down to $14K. However, when DD#2 was born, it was finally our only debt aside from our mortgage (DH's car and our kitchen remodel were paid off), so we just threw everything extra to it. That $14K was paid off 9 months later.. mostly because we were tired of looking at it and we weren't traveling anywhere with 2 under 2. We didn't stop retirement contributions or savings.. now the debt is gone, our retirement is more than on track, 529 plans set up for the girls, and we have a substantial e-fund.

bmo88 · May 2015

hoffse: Do you mind if I ask which credit card you used? I currently have the Chase Freedom card that I use to get 1-5% back, but I have never had a travel card.

We found round trip tickets from Denver-London, then Paris to Denver for $815 a piece through Icelandair, and that's the best deal we have seen so far. If we could cut that in half, that would have us locked in to go to Europe for sure.

simplyelise · May 2015

brij2006, so ditto everything she said.

You asked what others with student loans are doing:

We make 64k take home (only retirement is DH's required 4%) and started paying off 55k/6.8% in SLs back in October. We'll be done next July. 21 months for the whole thing. We keep 3000 in emergency savings and put $100/month toward car replacement.

We plan to TTC starting on our second anniversary October '17. Because we want to be debt free before then and have time to up our retirement contributions, get 6-9 months expenses in our efund, and start saving for a 20% downpayment, we are really limiting our fun and vacations. $60 each in blow money and $50/month for a date. Clothes purchases are for need only (unless you use blow money). Our only travel right now is in-state to stay with family.

These sacrifices are completely worth it to us to be debt free. Not having newer cars, living in an apartment, cobbling together our furniture from what DH and I already had or what we can get for free, it's not really much of a sacrifice in the long view.

If much of our money was in the market and we still had 55k in debt and the market tanked at the same time we lost our jobs (i.e., tons of people in 2009), we'd be in trouble. Delaying our retirement and investments 21 months means if that kind of financial emergency happens, our monthly expenses will only be about $1700/month to maintain our current lifestyle. We could weather that for a LONG time while getting back on our feet in jobs or careers. That's why we are so averse to debt.

MaryAguila · May 2015

Interest rate sounds high to me. Any way you can consolidate it and lock in a lower rate?

hoffse · May 2015

bmo88 said:
hoffse: Do you mind if I ask which credit card you used? I currently have the Chase Freedom card that I use to get 1-5% back, but I have never had a travel card.

We found round trip tickets from Denver-London, then Paris to Denver for $815 a piece through Icelandair, and that's the best deal we have seen so far. If we could cut that in half, that would have us locked in to go to Europe for sure.

I have the Chase Sapphire card primarily. We put part of a home remodel on it for the sign-up bonus. If you have a Freedom card you can transfer points from Freedom to Sapphire and consolidate them all in one place. Then from Sapphire you can transfer points to travel partners directly (United, Southwest, Hyatt, etc.), which usually means you are redeeming your points for a higher value. We redeemed our Chase points through United and Hyatt, and that's how we got such a deal on Belgium and Germany.

Also look at the Barclay cards - I believe there is one that is basically 2% back on everything, and you can redeem points to "erase" travel purchases.

I suggest planning the trip on paper first, even down to which hotels you will use. Then give yourself enough time to search for the right cards to bring the cost down. Don't forget to account for the spending minimums to get sign-up bonuses. If you can't hit that (legitimately), then you might want to move onto a different card.

There are also some countries that are a lot less expensive than others. If you are looking at England, France, Italy, Switzerland, or the Netherlands, be prepared to pay. If you would be willing to consider Spain, Portugal, or even a Prague/Vienna/Budapest combination you will likely spend less. One of the partners I work for has been to every country over there (multiple times), and he says that Croatia is the most beautiful. It's also really cheap, by comparison. He says it looks like the Amalfi coast, but without the yachts or the pretentiousness.

The cities are also going to cost a lot more than the countryside. H and I are doing southern France in July (mostly because I got a crazy deal on plane tickets), and we are renting an apartment in Provence for a week. Then we're going to Paris for 2 days before we fly out. The two days in Paris are going to cost almost as much as the entire week in Provence, and I suspect I will like Provence more.

The most expensive place is London. Not only is everything there $$, but they are on the pound, which will not do you any favors. H and I spent a small fortune there. We loved it, but we're not going back until the exchange rate becomes more favorable.

brij2006 · May 2015

I forgot to say what we're doing since we have student loans.

We started out with about $44,000 in student loan debt in January 2014 when we started aggressively paying them down. They ranged from 2-6.8% in interest. We cut out retirement contributions, put all but $1k of our E-fund toward them, sold H's car to get rid of a payment, live on nothing, work overtime and side jobs, sold a bunch of stuff we weren't using or could live without, cut cable, cut subscriptions (XM radio, magazines, online radio, etc), and even put our Christmas and birthday money toward the loans. We will have them all paid off by the end of June.

The way we view it, with having those monthly payments no longer obligated, it gives us that much more cash flow in our monthly budget. We are now able to cash flow emergencies because of it. In December H's car needed $1,200 worth of repairs. We were able to cash flow that in our budget because we were buckled down to living so tightly and had gotten rid of a lot of our student loan payments already. I honestly feel like we are better prepared for emergencies with our $1k E-fund than we were when we had one of 3 months expenses. Now an emergency doesn't break our entire month and we're taking 3-4 months to re-build what we had to dip into our e-fund to pay for. Now if an emergency happens, we figure it into that month (and sometimes next months') budget, and we don't have to touch the $1k. That was never a possibility when we had large student loan payments and an extra car payment.

bmo88 · May 2015

MaryAguila: We haven't formally looked into debt consolidation. Partly because we are worried about losing the flexibility that federal loan programs have if something were to change in our situation. I also haven't come across very many companies I trust, though honestly I haven't done a ton of research. If anyone has done it or knows of a trustworthy company, please recommend!

I have heard of this company, but not sure about them: It's called Darion Rowayton Bank https://student.drbank.com/rates

Has anyone else heard of them?

cbee817 · May 2015

@simplyelise - I'm kind of confused by what your last paragraph says. In 2008 (DH was 26, I was 27), when the market tanked, my 401K lost about 40% and was down to only $12,500 and we had about 7 months of expenses in savings at the end of the year. DH had $28,500 in SL- original balance was $31,000. We paid them off in January 2013- took about 5 years/$6,200 in interest.

Today (DH is 32, I'm 33), my 401K is over $100,000 and our e-fund has 10 months of expenses (includes 2 kids in day care full time- approx $20,000/year for just that bill). We also have Roth IRA accounts, a vacation fund, 529 plans for the girls, DH has a 403b, and is vested in our state teacher retirement system. He's also been laid off 3 times since 2010- his longest layoff being 5 months long and we've had some massive home repairs (2010- new kitchen $21,000, 2013- new roof $15,000, 2014/15 - brand new sewer line from house all the way to the main line in the middle of the street- $14,700 total). We didn't stop saving and I only increased my 401K contribution percentage by 2% (went from 9% to 10% in 2014, 10% to 11% in 2015). With retirement savings, all you have is time. With an e-fund, all you have is security if you lose your job. Why would you sacrifice any of that?

If you throw everything on SL debt and something happens in the meantime, you can't borrow the extra money you put towards that debt to pay your rent/mortgage, monthly bills, or get food.

I haven't read TMM, so maybe that's why SL debt is totally different than CC debt to me. I just don't understand the constant sacrifice, pulling retirement contributions, and having only $1,000 for an emergency in order to pay off student loans in x number of months instead of paying them off in a few years and growing your savings/retirement at the same time.

simplyelise · May 2015

cbee817 I'm not saying at all that an efund is a replacement for investments. I'm saying that delaying my retirement investments for 21 months in order to get rid of $55k in SL debt is worth it to me because if the market crashes and I've got just a basic efund with a ton of debt and the rest of my money tied up in the market, then getting by is going to be very very difficult.

On the flip side, if I wait until the 55k is paid off (and don't borrow on any cars) to put my money toward investments, even if the market were to crash, my monthly bills are significantly lower without the debt payment. I know a ton of people who had to put their loans on hardship deferment in 2009-11 and the loans just sat there and accrued interest. As soon as we get those SLs gone, we protect ourselves from getting behind on them if all the bad stuff happens at the same time.

vlagrl29 · May 2015

back in 2008 right before the economy tanked I put all my investments in a save bond and barely lost any money. There's no way I would delay retirement contributions just to pay something off. It will be here before you know it.

Student Loans, pay off now or later? Thoughts?

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