Advice on Paying Off Student Loans ASAP

[jdtwelv]

I am 26 years old, living at home with my parents and want to be debt free as soon as possible.
I make $3,200/month.
I have $20K in savings.
I currently pay $2,800/month to my student loans.
I pay my credit card balance in full a the end of every month (average is $600-$800).

I do not have any retirement, 401K, IRAs, or other investments.
I have savings bonds maturing in 2-3 years with an approximate value of $3K.

I have 4 private student loans (all variable rates) as follows:
$8,407.89 @ 5.46%
$29,554.22 @ 3.16%
$20,361.05 @ 3.16%
$14,380.95 @ 4.16%

I have a whole life insurance policy with a cash value of $5,200 with a taxable gain amount of $1,204.
The policy was purchased for me by my grandmother back in 1991, the annual premium is $400, and I'm wondering if I should cash in my life insurance policy to help pay down some of my debt.
I was considering cashing in the policy + using my tax refund to payoff the $8,407.89 loan, leaving me with 3 loans to pay - just an idea.

I'm open to any and all suggestions. Please let me know if any additional information would be helpful and I will gladly provide. Thank you for your help!

[RobInCT]

$20k is a really big emergency fund if your expenses really are under $1k per month. You could maybe do with less. Though to be fair, you might want to consider what the cost would be if you had to move out (after all, this could be the emergency) when determining how much to set aside.

Beyond at, it is a little difficult to advise how to pay off faster given that it looks like you are already contributing virtually your entire income, save $400/month, to your loans. It seems like the only way to contribute more is to increase your income. Second job? Overtime?

Make sure you pay the highest rate loans first.

I don't know much about whole life insurance except that almost everyone thinks it is a terrible investment, so I will let someone else answer that part of your question.

Overall, it looks like you are doing pretty well. At the rate you are going, the debt will be gone in a little over 2 years. I know it can be stressful. I graduated with $150k or so in debt a few years ago, and I still have another year or so to go before I make it to $0. But sometimes time really is the only solution.

[Watty]

(all variable rates)

Since they are variable rate loans most of the arguments for keeping them for a long time and investing the money don't really apply.

One thing to look at though is what your marginal federal and state tax brackets are and if you are eligible for a deductible IRA. Single people get into the 25% tax bracket pretty quick so it would likely be a good choice make deductible IRA contributions first if you are in the 25% tax bracket or higher. You can still make contributions for 2012.

If you decide to not do this then it would be good to move some of your emergency funds into a Roth account for 2012 and 2013 since you can always take the contributions out (but not the earnings). If you search the boards or Google for something like "Roth emergency fund" you will find lots of information.

The only reason that keeping the life insurance might make sense is if you have a need for life insurance, like if you have kids, or if you have some health issues that would prevent you from getting life insurance in the future if you need it then. If you do have kids then a term policy would likely be a better choice assuming that you qualify.

[crowd79]

Take 1/2 of that $20k in savings and pay off the $8k loan immediately.

[g$$]

I have 4 private student loans (all variable rates) as follows:
$8,407.89 @ 5.46%
$29,554.22 @ 3.16%
$20,361.05 @ 3.16%
$14,380.95 @ 4.16%

When do the rates reset? Can you find the rate formulas? Have you asked if these can be converted to a fixed rate?

I do not have any retirement, 401K, IRAs, or other investments.

Does your employer offer a 401(k) with a match? If so, you should probably participating to at least get the match.

I have savings bonds maturing in 2-3 years with an approximate value of $3K.

I'm assuming these are Series EE savings bonds. My understanding is that these double in value when they mature (i might be wrong about that). That said, it probably makes sense to wait till these mature rather than cash them in now.

$20k is a really big emergency fund if your expenses really are under $1k per month. You could maybe do with less.

+1. Especially since you live with your parents.

Some other thoughts:
(1) Some of your interest should be tax deductible. It looks like you're not over the income where this deduction starts to phaseout, but you may have reached the maximum deduction. Just something to keep in mind.

(2) Some loan administrators offer a discount on the interest if you enroll in automatic payments. Have you looked into this?

(3) Do you own a car? You could take out a loan on the equity in your car and use the proceeds to pay some of your student loans. You would effectively be trading one debt for another, but you can probably get a much lower rate on a car loan. I hear Pen Fed has rates below 2%.

[TSR]

I currently pay $2,800/month to my student loans.
....
I have 4 private student loans (all variable rates) as follows:
$8,407.89 @ 5.46%
$29,554.22 @ 3.16%
$20,361.05 @ 3.16%
$14,380.95 @ 4.16%

Can you clarify this just a bit? First, are you required to pay $2,800 per month or are you just overpaying to try to get it knocked out quicker? Second, do all of your loans have the same payoff period? Third, how much are you actually required to pay on each of the four loans?

This all might give folks a better handle on your cash-flow and allow for better advice.

[jdtwelv]

I currently pay $2,800/month to my student loans.
....
I have 4 private student loans (all variable rates) as follows:
$8,407.89 @ 5.46%
$29,554.22 @ 3.16%
$20,361.05 @ 3.16%
$14,380.95 @ 4.16%

Can you clarify this just a bit? First, are you required to pay $2,800 per month or are you just overpaying to try to get it knocked out quicker? Second, do all of your loans have the same payoff period? Third, how much are you actually required to pay on each of the four loans?

This all might give folks a better handle on your cash-flow and allow for better advice.

Thank you all for the replies, very much appreciated.

The total minimum payment each month for all 4 loans combined is $680. I am paying $2,800 per month just to knock them out quicker.
They all have the same payoff date: 6/11/2029.
There is a 0.25% reduction in rates if I enable auto debit (which I have not because my payments vary each month for each loan as I'm paying the loans down starting from highest interest rate to lowest interest rate currently).
I have asked for the rates to be lowered as I have been overpaying on time each month since I graduated school, but I was denied.

My employer has a match, but it is not very good.
The savings bonds are EE and EEE I believe.

I forgot to mention, I am single, have no children, and my only expenses are my loans and my credit card bill each month. I own a car that is fully paid for (approx $3,500 value) I need to get to and from work. I also have a secondary source of income for about 6 months out of the year where I make about $300-$400/month.

Thanks again, any other information that would be helpful please let me know!

[roymeo]

I was once in a similar situation with the various student loans (7 or so). I didn't really think it through and started sending extra money to all of them or just the higest balance instead of choosing one with a higher interest rate or low remaining balance to obliterate.

When the eventual layoff happened, I still had all of them demanding a minimum monthly payment.

(It looks like your loans are all pretty easy to stack-rank for paying off, the ones with the highest rates are also the ones with the smallest amounts, so you don't even need to consider paying a smaller loan off to reduce the monthly minimum even if it's not the highest rate.)

To me, working in an industry with frequent layoffs, part of preparing for emergency is reducing the obligations I may be under if something happens.

I'd probably cash out the whole life policy, especially if your job provides life insurance. It doesn't sound like you have any dependents who would need money to get by. The only reason to keep it would be that it started when you were so young the rate is so good that it's OK, but I'm not sure that $400/year counts. (I'll admit that I've been unable to cash out my own due to familial pressure--but it's also paid for by said familia.)

Your emergency fund may not be too outsized if you can't easily go into forbearance on the private loans in the case of a layoff and have any concerns about your job security and ability to find new work. You may want to look at where you store that extra money, some have mentioned Roths, there's also IBonds, etc.

Definitely take advantage of the 0.25% rate reduction for them all, and THEN just make EXTRA payments to the ONE LOAN you are targeting for elimination.

roymeo

[Saleen]

I would set up the auto-pay to get the .25% discount. You can still make an additional payment.

I have auto-pay through nelnet on my 6 student loans. In addition, I put an extra $300 a month towards my highest interest loan.

[icefr]

I would definitely set up auto-pay, especially with the 0.25% rate reduction. I have auto-pay set up with my mortgage, but I make extra payments at random points throughout the month.

I liked roymeo's advice beyond that point.

[NoVa Lurker]

Your emergency fund may not be too outsized if you can't easily go into forbearance on the private loans in the case of a layoff....

Definitely take advantage of the 0.25% rate reduction for them all, and THEN just make EXTRA payments to the ONE LOAN you are targeting for elimination.

I was going to make these exact points. Having some cash buffer is important, and auto-pay is worth it for the discount.

Also, I agree with your approach to get rid of the $8k balance loan within the next few months, then you can tackle the $14k balance loan while still making the min. payments on the other two.

Taking out a car loan to pay off a chunk of the student loans, which is one suggestion above, seems more trouble than it's worth, given the value of your car.

It's possible you could finish paying off one of these per year, each of the next four years. That would be really nice work!

[NYBoglehead]

Definitely enroll in the auto-debit. The savings is definitely worth it. If you're paying 2800/mo toward knocking out these loans you should be able to crush them a lot sooner than you realize. I'd cash in on the whole life policy and like you said use that and your tax refund to knock out the $8,400 loan. Then keep making the same monthly payment towards the other 3 loans.

[Karamatsu]

If the life insurance policy is only worth $5K it may just intended to protect the family in case of an untimely death. The costs associated with burial/funeral, etc, can be outrageously high and could be a burden in the worst-case scenario, so sometimes parents will buy insurance like that for their kids.

But now that you've grown it seems you could cash in the policy and instead self-insure by making your parents the POD beneficiaries of your investments and bank account.

I think it's really great what you're doing, paying off the loans as quickly as possible. Do it intelligently, of course, being realistic about your needs, but just doing it shows good character.

[tjhutchi]

Concentrate on paying off your lowest balance loan first while making minimum payments to your remaining 3. Then repeat until you are debt free. See Dave Ramsey's Debt Snowball.

[grabiner]

My employer has a match, but it is not very good.

Regardless of how good the plan is, you want to get that match. If your employer matches 50% of your first $5000 in annual 401(k) contributions, you get an immediate 50% return as your $5000 becomes $7500, and that's a better return than you get by paying down the loans.

I have savings bonds maturing in 2-3 years with an approximate value of $3K

Those bonds have a rate of 5.24%-5.34% (see http://www.treasurydirect.gov/indiv/tools/sbrt1212.pdf), which is much higher than current rates. The bond return is taxable, but your student loan interest is tax deductible, so that cancels out. Therefore, you are better off holding the bonds to maturity and using the bond proceeds to pay off the student loans at that time; you'll get more of a loan payoff than you would by cashing them in now.

If you don't consolidate, you want to pay off the 5.46% loan quickly; not only is it at the highest rate, but once it is gone, you will have a lower debt obligation and will thus need less of an emergency fund. The whole life policy is probably also a bad deal, as you don't need insurance now, and it may not be the right insurance for you when you do need it later.

Therefore, I like your idea of cashing in the policy and using your cash to get rid of the 5.46% loan. You may want to put a good part of your emergency fund toward the 4.16% loan, for the same reason.

[roymeo]

My employer has a match, but it is not very good.

Regardless of how good the plan is, you want to get that match. If your employer matches 50% of your first $5000 in annual 401(k) contributions, you get an immediate 50% return as your $5000 becomes $7500, and that's a better return than you get by paying down the loans.

Good catch. I overlooked that line.

Agree with grabiner. Even if the match is something like 25% match up to 3% of pay, that's still a TWENTY-FIVE PERCENT RETURN. Though sometimes vesting periods (all this matching money is yours but only after 4 years) can make it worthless if you're not 'likely' to be around long enough for it to vest. But that can be hard to tell, "who knew the economy would do that and you'd stay at that place that long"...

[Watty]

My employer has a match, but it is not very good.

Regardless of how good the plan is, you want to get that match. If your employer matches 50% of your first $5000 in annual 401(k) contributions, you get an immediate 50% return as your $5000 becomes $7500, and that's a better return than you get by paying down the loans.

+1 on getting the match, even if it is only a 25% match.


I have yet to see anyone post about a 401k plan that is so bad that it is not worth getting any match that is offered.

[nimo956]

This is what you should do:

1. Contribute the minimum to your 401k to get the employer match. You are turning away free money.
2. Set up auto-pay on all the loans to get the rate reduction. Set it up to pay the minimum each month.
3. If your goal is to be debt free, it makes no sense to hold on to so much cash while paying interest on the student loans. Find out what the interest rate on the $3k in bonds is; if it's lower than the rate on your loans, I would just cash it out. Also cash out the life insurance policy. Pay off the loans in the following order:

a. $8,407.89 @ 5.46%
b. $14,380.95 @ 4.16%
c. $29,554.22 @ 3.16%
d. $20,361.05 @ 3.16%

With your $20k emergency fund, $3k in bonds, and $5k life insurance policy, you have $28k. Tomorrow, pay off loans (a) and (b) immediately. That leaves you with about $5k. Keep $1k or so in savings and put $4k towards loan (c). You now have only $45k in loan payments left. Keep paying the minimum on loan (d) and direct all additional income towards loan (c) to pay it off first. When you are done with that, direct all income towards (d) to finish it off. This approach has the benefit of improving your monthly cash flow each time you finish paying off a loan. If you can contribute $3k/month to loan repayment due to improved cash flow, you should pay off the $45k in 15 months and be debt free. Good luck.

[stilts1007]

My advice would be to stick with living at home as long as you can, especially if you are thinking about buying a place in the next few years and saving up for a down payment. Living with your parents can be a drag (at least sometimes), especially when your friends have their own places. But once you move out, it is way more than rent that becomes more your responsibility. I lived at home for a couple years and power-paid my student loans off, living closer to my college budget than my new salary. Makes the rest of your life a lot easier.

[g$$]

If the life insurance policy is only worth $5K it may just intended to protect the family in case of an untimely death. The costs associated with burial/funeral, etc, can be outrageously high and could be a burden in the worst-case scenario, so sometimes parents will buy insurance like that for their kids.

It sounded to me like the OP was talking about the "cash value". Said another way, the amount he can receive if he stops making payments. The face value, or amount his beneficiary would receive in the event of a death, is probably much more. I'm not an expert on these policies, so i will leave it out of my comments after this.

When the eventual layoff happened, I still had all of them demanding a minimum monthly payment.

Some loans let you "pre-pay". You should find out if this is the case for any of your loans. This gives you a little more protection in case you have an unforeseen reduction in income.

1. participate in the 401(k) enough to get the full match. This should be a no brainer.
2. Enroll in the automatic payments. Not only will you get a reduction in the amount of interest, but it will protect you from accidentally forgetting a payment. You can still make one-time variable contributions each month.
3. The loan on the car probably is not worth the hassle. Someone else already said this.
4. Probably wait till the bonds mature before cashing them in. A previous poster already explained this.
5. consider paying off the $8,407.89 loan immediately. Your emergency fund is very large for someone who has no dependents or other obligations. Also consider applying a good chunk of this to the $14,380.95 loan.

Also, I think it's great that you are so motivated. Keep up the good work! Just don't let yourself burn out. The interest rates on the two biggest loans are very low (<3% after auto-pay). This isn't the kind of back-breaking debt some people come out of school with. Don't be afraid to treat yourself every now and then.

[supersharpie]

Here is what I would do OP:

1. pay the monthly mimimums ($680)
2. max out my Roth IRA ($460)
3. max out my t401k ($1458 gross, ~$1100-$1200 net)

680 + 460 + 1150 = 2290

4. 2800 - 2290 = use the remaining 610/month to pay down your student loans

I think it is very misguided to throw away roughly $55,000 of tax advantaged space over the next 2.5 years for the sake of less than $10,000 in interest savings over the next 5 years.