Windfall - What Do I Do

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Windfall - What Do I Do

Postby kcoon » Fri Jul 19, 2013 1:01 am

Today, I received 45k non-taxable out of an insurance settlement. I'm 25, recent college grad and underemployed. To me, this is a fortune and I'm absolutely paralyzed by fear. The most money I've ever had at once is about $3000.

Financial Details
58k federal student loans - 3.4-6.8% interest, zero monthly payment
24k private loans - 8-12.5% interest, $500 monthly payment <---this is hands down the dumbest thing I've ever done.
~$400 credit card debt
No savings or investments

I earn 16k a year. The most obvious move for me is to eliminate the private loans; they are draining the life out of me and my mother. After that, I don't really know my next move. Would it be more pertinent to dump the money onto fed loan payments? Or invest? Or a mix of both?
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Re: Windfall - What Do I Do

Postby Fallible » Fri Jul 19, 2013 1:09 pm

"DO NOTHING RASH." Then read more about this in "Managing a Windfall" in the wiki:

http://www.bogleheads.org/wiki/Managing_a_windfall
"Common sense and a sense of humor are the same thing, moving at different speeds. A sense of humor is just common sense, dancing." -William James
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Re: Windfall - What Do I Do

Postby ieee488 » Fri Jul 19, 2013 1:42 pm

kcoon wrote:Today, I received 45k non-taxable out of an insurance settlement. I'm 25, recent college grad and underemployed. To me, this is a fortune and I'm absolutely paralyzed by fear. The most money I've ever had at once is about $3000.

Financial Details
58k federal student loans - 3.4-6.8% interest, zero monthly payment
24k private loans - 8-12.5% interest, $500 monthly payment <---this is hands down the dumbest thing I've ever done.
~$400 credit card debt
No savings or investments

I earn 16k a year. The most obvious move for me is to eliminate the private loans; they are draining the life out of me and my mother. After that, I don't really know my next move. Would it be more pertinent to dump the money onto fed loan payments? Or invest? Or a mix of both?


To me, it is a no-brainer to pay off the 24K in private loans and pay off the portion of the federal student loan that has the 6.8% interest and the $400 in credit card debt. The interest on that must be pretty high.
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Re: Windfall - What Do I Do

Postby BolderBoy » Fri Jul 19, 2013 1:51 pm

ieee488 wrote:To me, it is a no-brainer to pay off the 24K in private loans and pay off the portion of the federal student loan that has the 6.8% interest and the $400 in credit card debt. The interest on that must be pretty high.

+1

If you "get attached" to the money I fear you'll make a worse choice than the advice above.
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Re: Windfall - What Do I Do

Postby sschullo » Fri Jul 19, 2013 2:12 pm

BolderBoy wrote:
ieee488 wrote:To me, it is a no-brainer to pay off the 24K in private loans and pay off the portion of the federal student loan that has the 6.8% interest and the $400 in credit card debt. The interest on that must be pretty high.

+1

If you "get attached" to the money I fear you'll make a worse choice than the advice above.


+2
Use the rest to invest and to learn how to manage your money. You are so lucky to find this place. There are some absolutes in personal finance: When you are 55, thirty years from now, I will guarantee that you will be very, very grateful that you started your retirement plan at a young age. Ask anybody in their 50s if they wished that saved more and spent less when they were in their 20s, 30s and 40s.
good luck
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Re: Windfall - What Do I Do

Postby blueridge » Fri Jul 19, 2013 2:14 pm

Yeah, pay off those debts (highest interest ones first) and then, take the time to read a couple of books on saving and investing like The Bogleheads Guide to Investing. You will always be glad you did this.
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Re: Windfall - What Do I Do

Postby Hub » Fri Jul 19, 2013 2:29 pm

Definitely pay off the debts, but if, after the private loans and CC are gone, you wanted to max out a Roth IRA with $5500 of it just so that you feel like you invested some of the windfall I would be OK with it. Then put the rest on the highest interest federal loans.

With that said if you don't get the income up soon, you'll have a hard time avoiding future debt.
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Re: Windfall - What Do I Do

Postby nimo956 » Fri Jul 19, 2013 2:31 pm

While I would normally suggest throwing the entire windfall towards eliminating your student loan debt, I would instead consider investing the money in yourself so that you can increase your earning potential. This requires you to assess your career prospects as they stand with your current set of skills/ level of education. Research entry level job requirements and starting salaries for the type of work you want to do. Then find programs that will not only give you the necessary skills, but also show good statistics for placing graduates in full-time positions. Also, if you find a program that you like, speak to actual graduates of the program to get their perspective, rather than just trusting the marketing literature of the school.
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Re: Windfall - What Do I Do

Postby ruralavalon » Fri Jul 19, 2013 3:21 pm

Fallible wrote:"DO NOTHING RASH." Then read more about this in "Managing a Windfall" in the wiki:
I agree fully.

Wiki article link: Managing a windfall .

Beware of anyone (family, friend, neighbor, co-worker, literally anyone at all) trying to sell you anything (insurance, annuity, stock, bond, mutual fund, literally anything at all).

Your instinct to pay off at least some of that life draining debt is a good instinct. Make that a part of what you decide, but take some time to decide. Do include a little something fun or enjoyable for yourself.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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Re: Windfall - What Do I Do

Postby psychoslowmatic » Fri Jul 19, 2013 3:43 pm

I would do the following in this order:

1) pay off the private loans and cc debt
2) Get a big emergency fund together, maybe a year and a half of expenses. You're underemployed so might need to relocate or spend some on transportation for a new job when one becomes available in your field
3) Maybe pay off the federal loans. I wouldn't fault you if you waited until your career prospects improved before doing this if you wanted to keep everything after 1) in emergency funds until you're employed in your field

I notice you said the money was from an insurance settlement. Do you have any expenses relating to whatever incident prompted the settlement? Ongoing medical treatment, special needs to be accomodated, ect? If so make sure you're getting the help you need before using this money on debt.
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Re: Windfall - What Do I Do

Postby Meg77 » Fri Jul 19, 2013 3:47 pm

Congrats on the windfall! Here is the main thing: do not do ANYTHING until you aren't scared anymore. Read and learn for as long as it takes while this money sits in a savings account that ONLY YOU have access to (not even your mom). Only when you are confident in your knowledge and decision should you do anything.

That said, here is what I think you should do:
1. Pay off the private student loans and any credit card balances.
2. Open a Roth IRA at Vanguard and put $5,500 into it, which is the max you can contribute in 2013. Just invest in the Total Retirement Date 2055 Fund (VFFVX) for a fully diversified retirement fund with one fund. It will automatically rebalance for you and you never have to worry about it - just keep adding to it every year.
3. Leave $5,000 in savings and don't touch it unless you face a true emergency - medical bills, for instance.
4. This leaves you about $10,000 which I think you should split between paying off additional student loan debt (only the 6.8% stuff) and finding a way to increase your income. Maybe this means you need to move somewhere where there are better jobs, maybe you take a class to boost your skills, whatever. No college grad should be earning $16,000 a year. That makes no sense and is less than working minimum wage full time or waiting tables part time. Make a change.

Good luck!
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Re: Windfall - What Do I Do

Postby jjg247 » Fri Jul 19, 2013 3:55 pm

Snowball it. Pay off the private loans in their entirety and a portion of the other loans. Then apply the same monthly payments you previously made towards the remaining loans. You will be 100% debt-free by the time you are ready to take out a mortgage. I'm half-joking
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Re: Windfall - What Do I Do

Postby Watty » Fri Jul 19, 2013 4:34 pm

I earn 16k a year. The most obvious move for me is to eliminate the private loans; they are draining the life out of me and my mother. After that, I don't really know my next move. Would it be more pertinent to dump the money onto fed loan payments? Or invest? Or a mix of both?


Normally I would agree with taking six months or more to decide what to do but with as high as the interest rates are on the private loans paying them off is a reasonable choice since that would only take about half of your money.

There are lots of pros and cons but since you are severely underemployed one thing to look into is to see if there might be better opportunities in a different city. Using a couple of thousand dollars of that money for some job hunting trips and to relocate might be worth considering. Most employeement agencies that you pay a fee to are scams so you should likely avoid those.

If you qualify then it would be worth considering setting $2,000 of that money aside to make a retirement account (Roth, IRA, 401k, etc) contribution for 2013 by next April 15th. By making this contribution you might be able to get up to a $1,000 retirement savings credit. As long as the money is set aside, you can wait until after the first of the year to figure out if this will work for you. If your situation is unlikely to change in the next few years then you could also set aside some money to do this in 2014 and the next few years.

http://www.irs.gov/Retirement-Plans/Pla ... 99s-Credit)
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Re: Windfall - What Do I Do

Postby kcoon » Fri Jul 19, 2013 8:10 pm

Thank you for the responses. Yes, making what I make is terrible. Unfortunately, it is not too uncommon right now. I have friends in worse situations than me. The only reason I've stuck with this job is that it is in my field. I think of it as a baby-step to something bigger. I also spent 7 years schooling in resource management (i.e. agency work). Sequestration threw a big wrench in my "guaranteed job when I graduate" plan.

The credit cards actually are no problem. I only buy stuff on promo pricing if I intend to hold a balance. Smaller purchases are paid each month. I've actually only paid a combined $3 of interest between my two cards over five years.

It's tempting to not pay anything on the fed loans right now. I have a zero payment due to income. And luckily, I carry very good insurance on my own vehicle. I have an open med pay claim with them, so they are on the hook for future bills.

I'm going to sit down and do some reading. Thank you for the links. I'm also going to talk to a financial adviser at my credit union, since they offer that service for free. They also aren't pushy over there which is nice.
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Re: Windfall - What Do I Do

Postby Noobvestor » Fri Jul 19, 2013 8:33 pm

"58k federal student loans - 3.4-6.8% interest, zero monthly payment"

Can you elaborate on the interest rates within the federal student loan debt?

I would

1) Pay off the private loan debt. Period. Be done with it.

2) Establish an emergency fund of 8-16K

3) Evaluate the other student loan debt vs. alternatives
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Re: Windfall - What Do I Do

Postby pennstater2005 » Fri Jul 19, 2013 8:42 pm

If you do talk to your financial adviser at your credit union come back here and let us know what he/she recommended. You can even post it right in this same thread. I'd be curious as to what he/she recommends. Just because they aren't pushy doesn't mean they won't put you in a fund that will benefit them more than you. Good luck.
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Re: Windfall - What Do I Do

Postby ieee488 » Fri Jul 19, 2013 8:48 pm

kcoon wrote:It's tempting to not pay anything on the fed loans right now. I have a zero payment due to income

Yes, but is it still accruing interest? Thus adding even more money to what you need to pay back. You need to find that out pronto.
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Re: Windfall - What Do I Do

Postby Grt2bOutdoors » Fri Jul 19, 2013 9:39 pm

kcoon wrote:Thank you for the responses.

I'm going to sit down and do some reading. Thank you for the links. I'm also going to talk to a financial adviser at my credit union, since they offer that service for free. They also aren't pushy over there which is nice.


Free talking (talk is cheap! but it doesn't pay the advisor's bills or their vacation - that means they need to earn their keep by "selling"), but if the advisor tries to entice you or sell you a mutual fund investment with a sales charge either upfront or deferred over a period of time plus total expense ratios greater than 25 basis points (read as .25%) - RUN!!!!!

Just as an experiment; when you meet with the advisor tell them this: You had a windfall of 45K, you took $24K of it and immediately paid off your student loans with interest rates of 8-12.5%, then tell them you opened a Vanguard Total Stock Market Index Roth IRA, and finally say you just have a few thousand left over and you're thinking about placing it in the Vanguard Short Term Bond Index fund. As you are talking, gauge the free financial advisor's face and ask them your "questions" - I'll be you they will be severely disappointed they were unable to "sell" you anything. That's how you will know, they weren't in it for your best interests, rather it was their and their employers pocket they were looking to fill with your "windfall".
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Re: Windfall - What Do I Do

Postby nedsaid » Fri Jul 19, 2013 9:41 pm

Stick it in the bank for six months and don't touch it. Let your emotions subside so that you can approach things more rationally. Deep down in your psyche, you might feel "unworthy" of this windfall or in shock of receiving this money. Let the feelings wear off. This is normal.
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Re: Windfall - What Do I Do

Postby M_to_the_G » Sat Jul 20, 2013 5:19 am

I disagree slightly with those who say, "sit down and wait and think about it." The more you think about it, the more you'll be tempted to do something unreasonable, the more people will find out about it, etc.

I say pay off those private education loans and the credit card balance in totality, at the earliest opportunity. Why not today? Then take your mom out for a nice dinner to celebrate. Then put the remaining money in a money market savings account at your credit union.

THEN sit down and wait and think about what to do with the rest. My advice: leave it in the savings account. With your low income, an emergency fund is critical, and that is the security you likely need right now.
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Re: Windfall - What Do I Do

Postby ruralavalon » Sat Jul 20, 2013 7:22 am

kcoon wrote:It's tempting to not pay anything on the fed loans right now. I have a zero payment due to income. . . .

I'm going to sit down and do some reading. Thank you for the links. I'm also going to talk to a financial adviser at my credit union, since they offer that service for free. They also aren't pushy over there which is nice.

Here is an idea. (1) Pay the private loans off. (2) And even if payments on the federal loans are deferred for now, use most of the rest of the windfall to pay some of the higher interest fedreral loans down/off too, rather than let interest accrue and make your debt grow again, some of those loans are at very high interest. (3) Something in a savings account, a couple thousand dollars, for emergencies. (4) Spend a little bit, a few hundred dollars, on something you want for fun.

I don't think it would be best to look for any investment right now, your best "investment" for now will be freeing yourself from much of that debt. Paying off a 6.8% loan has the same effect as getting a guaranteed return of 6.8% on an investment, and you just can't get anywhere near that rate of guaranteed return anywhere with any investment.

Good idea to do the reading and use the free service, and think it over first. Let us know what they suggest, be careful of any attempt to sell you something.

I strongly disagree with the idea of using any large part of the windfall to build up an emergency fund. You have an emerency right now, with large loans at very high interst like, 6.8%, 8%, 12.5% (3.4% isn't too bad). And you have the windfall of $45k that is large enough to solve much of that emergency. Take care of the debt, get that life-draining problem solved to the extent practical.
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Re: Windfall - What Do I Do

Postby frugaltype » Sat Jul 20, 2013 7:23 am

kcoon wrote:Today, I received 45k non-taxable out of an insurance settlement.

Financial Details
58k federal student loans - 3.4-6.8% interest, zero monthly payment
24k private loans - 8-12.5% interest, $500 monthly payment <---this is hands down the dumbest thing I've ever done.
~$400 credit card debt
No savings or investments


Pay off the private loans. Set aside a good solid emergency fund for you (and your mother?) Pay off a portion of the federal student loans with the rest.

You are perhaps doing this already, but live as close to the bone as is reasonable and pay down the remainder of the federal student loans plus add to your savings. Once the loans are off your back, you will be in much better shape. It sounds like also your mom has been helping you out financially, so consider repaying her also.
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Re: Windfall - What Do I Do

Postby ieee488 » Sat Jul 20, 2013 7:47 am

M_to_the_G wrote:I disagree slightly with those who say, "sit down and wait and think about it." The more you think about it, the more you'll be tempted to do something unreasonable, the more people will find out about it, etc.

+1
Which has already happened since he is going to have a talk with someone at the credit union.

There is A LOT of debt at HIGH interest ($82K worth of debt and growing on $16K income) which needs to be dispatched ASAP.
What is there to think about with regards to paying this off?
Would it better if it went to $85K or $90K or $100K while the OP did something else with his money?
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Re: Windfall - What Do I Do

Postby tibbitts » Sat Jul 20, 2013 8:33 am

You're getting somewhat conflicting advice here, which is normal. There is a range of reasonable responses to your situation.

I'd recommend against any investing at all (except in a bank account) until you've payed off your debts, and you clearly don't have enough money yet to pay off all of them yet. Some people get a little obsessed over losing even one year of IRA contributions, for example, and there might have been a time to consider that, if your debt was 2% and CDs were paying 4% more than inflation. That's not the case here, so the debt - while maintaining some emergency fund - has to be the highest priority.

Lots of college graduates are in your situation, and you're earning $16k more than many of them (and it might not be that horrible, depending partly on how many hours you're having to work to earn that, and whether you receive any benefits, and the cost of living in your area.) You might receive more specific suggestions if you provide more details on your education, current job, and what you think your job prospects are.

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Re: Windfall - What Do I Do

Postby HurdyGurdy » Sat Jul 20, 2013 4:35 pm

kcoon, you have received very good advise here.

I would only add that on your meeting with the financial advisor at the credit union: we had a negative experience with a financial advisor at our credit union. He sold us a mutual fund, with very high expenses (~1.5%), when our needs would have been better satisfied by an I-bond, as we later found out. Many credit unions use CUNA, not the best mutual fund broker.

Ask the financial advisor if he or she has a fiduciary duty towards you.

(Otherwise we are quite happy with our credit union).
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Re: Windfall - What Do I Do

Postby BolderBoy » Sat Jul 20, 2013 5:03 pm

Grt2bOutdoors wrote:
kcoon wrote:Free talking (talk is cheap! but it doesn't pay the advisor's bills or their vacation - that means they need to earn their keep by "selling")

Actually quite a number of CUs do this - the advisors are salaried and their incomes do not depend upon them selling (anything more than education.) My CU does this as well.
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Re: Windfall - What Do I Do

Postby kcoon » Mon Jul 22, 2013 12:33 am

As for a breakdown of my student loans:

There are tons of individual loans. Each semester of school = one unsub. and one sub. Stafford loan. There are a few Perkins loans scattered in there too. It's roughly a 75/25 mix of 6.8 and 3.4% interest, respectively. A couple random ones at 4.5. I've been thinking about consolidating them with Fed Loan. Any info on that could be helpful too! No payment because of IBR repayment plan. My understanding is that since my IBR payment (i.e. $0) does not cover accruing interest, the feds pick the interest up for three years on the subsidized loans. So, about 60% of my loans are not accruing interest right now. Maybe start attacking some of the higher interest unsub. loans? Hopefully, this gives a decent picture of my debt load.

I know this is an opportunity to pay a large portion of debt off. It is also an opportunity to have something else to fall back on and to not have to call my parents asking for emergency money - like car broke down or I broke up a dog fight and need a tendon reattached (yes, this happened).

I'm most curious about CDs or something similar (if it exists). Maybe stack them on a rolling turnover, so there's always money being released from one in case I need it? That may be a bad idea. I'm not sure. That's why I'm here looking for advice. I wanted to ask the CU about CDs vs. savings account. Other options they might have. Safer options. I know they have a rate bump thing with CDs if you have an active shares account, which I do.
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Re: Windfall - What Do I Do

Postby Murdoch » Mon Jul 22, 2013 6:25 am

I'm going to add my voice to the 'pay down debt immediately' camp.
You're paying interest at a rate I would consider an 'emergency' (for most of the debt).
Also, getting rid of a solid portion of the high interest debt will have a great psychological effect, and maybe give you a 'light at the end of the tunnel' boost.

My guess is that it will help you more in the long run, than a rolling CD structure type investment.

Good luck with whatever you decide.
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Re: Windfall - What Do I Do

Postby ruralavalon » Mon Jul 22, 2013 7:07 am

kcoon wrote: . . . received 45k non-taxable out of an insurance settlement. . . . .

24k private loans - 8-12.5% interest, $500 monthly payment <---this is hands down the dumbest thing I've ever done. . . . The most obvious move for me is eliminate the private loans; they are draining the life out of me and my mother.

58k federal student loans - 3.4-6.8% interest, zero monthly payment

It's [federal student loans] roughly a 75/25 mix of 6.8 and 3.4% interest, respectively. A couple random ones at 4.5. I've been thinking about consolidating them with Fed Loan. Any info on that could be helpful too! No payment because of IBR repayment plan. My understanding is that since my IBR payment (i.e. $0) does not cover accruing interest, the feds pick the interest up for three years on the subsidized loans. So, about 60% of my loans are not accruing interest right now. Maybe start attacking some of the higher interest unsub. loans?

I know this is an opportunity to pay a large portion of debt off. It is also an opportunity to have something else to fall back on and to not have to call my parents asking for emergency money - like car broke down or I broke up a dog fight and need a tendon reattached (yes, this happened).


Sorry I can't offer any insight into the idea of consolidation, I have no experience with that. If your information is correct on what is accruing interst (double check that) here is what I would suggest for you.

1. Take $24k and pay off all of the private student loans (8 - 12.5% interest);

2. Take about $18k and pay off all or as much as you can of the federal loans that are accruing interest, starting with the ones accruing the highest interest. ($58k X .75 = $43.5k; $43.5k X .4 = $17.4k; Will this leave only 3.4% loans accruing interest, and the loans not accruing interest?)

The idea is to get you out from under that horrible load of rapidly accumulating high interest debt, which will otherwise haunt you. Accruing at 6.8%, the amount you owe on a loan doubles in 10 years.

3. Put about $2.5k in a savings account or short term CD at a federally insured bank or credit union, for emergencies. Do talk to your Credit Union about this.

4. Spend a couple hundred dollars on yourself.

----------------------------------------------------------------------------------------------------------------------------------------------------

If the above plan will leave only 3.4% loans accruing interest and the loans not accruing interest, and you want to start investing something other than for emergencies -- then I suggest opening an IRA at Schwab, and diverting $50-100 per paycheck from your work into one or more of their broadly diversified low-cost index funds (like SCHB, SCHF, SCHZ, SCHR) in the IRA. Wiki article link: Charles Schwab . I suggest Schwab because they have very low initial minimum investments required to start.
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Re: Windfall - What Do I Do

Postby campy2010 » Mon Jul 22, 2013 8:41 am

Just wanted to pop in here and say DON'T consolidate your student loans. Really, there is nothing to gain financially by doing so. A consolidation loan is a weighted average of your existing interest rates. What this means is that if you have a $5,000 loan at 3% and a $5,000 loan at 6%, then your consolidation loan would be $10,000 at 4.5%. The BIG downside to doing this is that you can no longer pay off the 6% loan ahead of time and keep the low, 3% interest rate on the remaining debt.

Further, you don't want to consolidate the Perkins loans with your Stafford loans because the Perkins loans have some added benefits that you would lose with consolidation (subsidies during layoff....that sort of thing). You also don't want to consolidate your Subsidized Stafford loans with your Unsubusidized Stafford loans for the same reason.

I think the only upside of loan consolidation is that you simplify to one loan, but in the day and age of electronic payment dealing with many separate loans is not that big of a deal.
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Re: Windfall - What Do I Do

Postby kcoon » Fri Jul 26, 2013 1:12 am

Well, still undecided on everything. Talked to my CU adviser. His only real advice was a Roth IRA for now (max contribution) and private debt payment. VIP savings account ($2500 min. balance) too, since I'll get a better rate. He advocated for me to participate in some of their free courses on investment basics if I want to explore more "advanced" options.

Anyways, went to pay off Sallie Mae. Conveniently, they have now updated their site to hide the 10-day payoff calculator that was readily apparent for years prior. I'm trying to find my zen tonight before I talk to them on the phone. Clearly, they do not want to make this easy for anyone.

One thing I am worried about is closing off all those loan accounts. Will it impact my credit score negatively? I basically didn't have any positive credit until 7-years ago and one of my Sallie Mae loans is the third oldest account I have. I guess I wasn't really anticipating any new lines of credit soon, but I'd like to keep the upward trend going since I'm just a few points away from 700!
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Re: Windfall - What Do I Do

Postby M_to_the_G » Fri Jul 26, 2013 1:48 am

Other members on here are more qualified to answer your credit score question, but I would say that that should be the least of your concerns. I doubt paying off your private student loans will impact your credit score negatively. You've still got a credit card and the government-subsidized loans, after all, so you are still a regular user of credit.

The "VIP Savings Account," whatever that is, sounds good for parking the money after you've paid off those private education loans. It probably offers slightly higher interest than a regular savings account and probably has some kind of penalty for dropping below the minimum, so just be aware of that.

Oh, and pay the credit card balance off tonight, too. And then pay off the balance in full every month starting next month.

Just one last bit of advice before you pull the trigger: relax, it's going to be fine. You'll feel better about it tomorrow and even better about it a month from now (and a LOT better about it ten years from now). Also, don't forget to celebrate modestly. Take someone out to dinner tonight, whether mom or a friend or anyone. Celebrate the death of those horrible private education loans. You are a surgeon tonight, and you are going to be performing emergency excision of a dangerous tumor with a 100% potential success rate. Once it's gone from your body, celebrate in some way.
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Re: Windfall - What Do I Do

Postby sesq » Fri Jul 26, 2013 8:26 am

I generally am in the camp that says pay off the debt.

However, your income is alarming. If the cash could help you resolve that I would consider making that investment. I don't know your field, but if jobs are scarce where you are but plentiful and with better advancement possibilities in big city X (or wherever), but you have no ties there I might consider spending 5-10K to take a shot at securing better employment. Then again, perhaps you are living with family, of helping family and staying put at 16K is better than striking out for 40K. Just think you should consider if there is anything in your lifeplan where having some cash would be better than eliminating the debt.

That said, if its get rich quick that comes to your mind or some "friend" of yours - just hit the debt.
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Re: Windfall - What Do I Do

Postby ruralavalon » Fri Jul 26, 2013 9:15 am

kcoon wrote:One thing I am worried about is closing off all those loan accounts. Will it impact my credit score negatively?

No. The impact should be moderate and positive. High debt reduces the score, low debt increases the score. The total of the amounts owed will weigh in for about 30% of the overall score. MyFICO.com .

And your credit score is not the big concern. The bigger concern is getting out from under that life-draining debt which at those interest rates will balloon to even larger debt while deferred. Accruing at 6.8%, the amount you owe on a loan doubles in 10 years.

After paying off all the very high interest (8 - 12.5%) private loans, take about $18k and pay off all or as much as you can of the federal loans that are accruing interest, starting with the ones accruing the highest interest. Will this leave only 3.4% loans accruing interest, and the loans not accruing interest? 3.4% isn't bad, and I wouldn't lose any sleep over that.

This is by far best use of the windfall for you in my opinion.

kcoon wrote:Talked to my CU adviser. His only real advice was a Roth IRA for now (max contribution) and private debt payment. VIP savings account ($2500 min. balance) too, since I'll get a better rate.

Its his job to sell you on buying whatever they have for sale. Take it with a big grain of salt, and look out for what's best for you.

That doesn't mean that all of his advice is bad. A little, one or two thousand, in a Roth IRA account to use as a part of an emergency fund is a good idea. Wiki article link: Roth IRA as an emergency fund . But not the max of $5,500, you need the money to pay off those expensive loans.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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Re: Windfall - What Do I Do

Postby island » Fri Jul 26, 2013 1:11 pm

I'm new to this site and not a financial expert at all, but I've had my share of student loans for undergrad and grad school and coming from that perspective I say at least get rid of the high interest private ones pronto, no question, and then work on the others accumulating interest.

Fortunately I never had private ones and mine are long paid off now, but my income was also low then and it was a long haul and left a lasting impression of suckiness that I wouldn't wish on anyone. Great that you got that insurance settlement, but I wouldn't even want to think of it as a "windfall" since it implies jackpot.

I'm always in favor of saving for retirement at a young age, but with your low income you might be better served to put anything left over in an emergency fund rather than tying it up for decades.

Good luck and please keep us posted.
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Re: Windfall - What Do I Do

Postby z3r0c00l » Fri Jul 26, 2013 5:15 pm

Make sure you have some emergency fund, 3 - 6 months of living. Use the rest to pay down debt, and pay down debt with every penny you earn past that E fund, except when/if you get the chance to contribute to a 401K at a company that will match your money, in which case you should 401K enough to get the full match. The loans have got to go and unlike the others here, I would say pay them all off as soon as possible. Then stay debt free for the rest of your life, with the possible exception of a home or car. Seriously, no more spending money you don't have. That goes 2x for credit cards. If you earn X, spend less than X. Even if X is barely enough to live on.
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Re: Windfall - What Do I Do

Postby M_to_the_G » Sat Jul 27, 2013 5:54 am

So... trigger pulled? 8-)
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Re: Windfall - What Do I Do

Postby abuss368 » Sat Jul 27, 2013 6:13 am

At a minimum, I would consider paying off the private loan. That leaves approximately $20,000. I would consider paying the federal loans or investing the funds for retirement or establishing an emergency fund.

Just don't spend it!!!

By paying off debt and/or investing the funds, at least you are building your personal balance sheet from both directions (assets and liabilities).

Best.
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Re: Windfall - What Do I Do

Postby donall » Sat Jul 27, 2013 8:41 am

It seems like paying off the private loans is a no brainer.

After that I would fund a Roth IRA with $2000, primarily as an emergency fund, but also to receive the Savers Credit. At your income level, this would be .5 X $2000, or $1,000 maximum, which would be more than what you would probably pay in Federal taxes. So perhaps fund the Roth IRA with $1200 to better match your tax liability. But you would pay no federal taxes, start a Roth IRA, and fund your emergency fund (can take contribution out of Roth), which works out to a 100% rate of return.

I'm reading between the lines that you are in government work, so perhaps it would make sense to investigate programs for loan forgiveness for the Federal loans. After determining that there are none, shift payments originally designated for the private loans to the federal loans.

I think I would put the remaining money into a high yield savings account that one can find on the Internet or perhaps a high yield checking account. Being part time will allow you to meet the requirements (certain number of debit purchases, etc.) of a high yield checking account. I would follow the advice of others who think spending money on your future earning potential is of great value. Working part time gives you time to search for other opportunities and network. After you have found a full-time job, and spent whatever you need for this new job (such as a reliable car, relocation costs, etc.), spend some money on yourself and your mom, and then Bogelize the rest of the funds.

I wish you the best of luck. It seems the job situation is getting better for recent grads.
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Re: Windfall - What Do I Do

Postby kcoon » Sat Jul 27, 2013 6:02 pm

Well, Sallie Mae is paid! I can't wait to see my account reflect a zero balance. And thanks, for the tons of advice here. I'll probably just take a little time to figure out the rest of it, since there is a few different approaches I could take.

And donall, work in my field qualifies for 10-year fed loan forgiveness if I can get full-time employment with a fed agency. Right now I'm part-time with one. It's part of the master plan for those loans, but a lot of doors got shut to entry-level work with funding cuts. I consider myself luck to at least have my foot half-ways in the door :) Also, some state jobs here offer a payment-match program for certain public service work.

In the mean time, knowing nearly all my discretionary income is no longer going to Sallie Mae is a big relief. I literally can't wipe the smile off my face over it. I'm going to do a few nice things for myself and family (within reason) now.
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Re: Windfall - What Do I Do

Postby island » Sun Jul 28, 2013 6:05 pm

kcoon wrote:Well, Sallie Mae is paid! I can't wait to see my account reflect a zero balance.


Woo Hoo yea!! I bet that's a relief. Congrats! :sharebeer
Please keep us posted.
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Re: Windfall - What Do I Do

Postby mildred66 » Sun Jul 28, 2013 6:49 pm

Congrats on knocking off the private loan!! Feels good right?
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Re: Windfall - What Do I Do

Postby jkgreathouse » Mon Jul 29, 2013 10:07 am

Congratulations! It truly is a good feeling...I remember it well even 20 years later. That's the first thing I did, paid off the highest percentage rate debt first and then worked down the line from there. It's amazing how much of a difference even having as little as an extra $50 a month because you don't have to pay it anymore. Best of luck on the job. Hopefully they'll figure out a budget in Washington they all can agree on.
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Re: Windfall - What Do I Do

Postby pkcrafter » Mon Jul 29, 2013 10:51 am

Congratulations on freeing yourself from that burden. Now follow the advice of regrouping and doing nothing until you develop a good plan. Consider the Roth because you can always withdraw your contributions without penalty, but develop you plan with the intent to not touch the Roth for 35 years.

The only other recommendation I will make is don't use a credit union for investing. You can, and should, use this forum and the Wiki for investing education. Here's a link to some basic information on financial planning that you should read now whether you invest now or not.

http://www.bogleheads.org/wiki/Financial_planning

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Re: Windfall - What Do I Do

Postby BL » Mon Jul 29, 2013 12:14 pm

I suggest you now look for another part-time job while you are waiting for a full-time job. Even a minimum wage job will help bring in funds that you can put to good use. Don't get used to just sitting around for half the working day.
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