Paying back college loan debt

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Tutty59
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Joined: Wed Jan 18, 2017 12:12 pm

Paying back college loan debt

Post by Tutty59 » Wed Jan 18, 2017 12:27 pm

Hello all,

First time making a post here, but I was recently introduced to this site and thought that some advice on my current financial situation would be incredibly helpful!

To get started I'll give a brief background: I'm 23 years old currently working full-time on a salary job. The pay isn't great but it's a foot-in-the-door for experience and has long-term career growth potential. I'm contributing 12% of my wage to my 401(k) retirement plan and have a good sense of direction as far as saving money goes. I've been tracking my expenses for over a year and have many goals set to reduce it even further. The only thing really anchoring me down right now, as I'm sure many of you have yourselves experienced, is student loan debt.

I'm fortunate in the sense that my current loan status isn't as drastic as others I've heard. When I graduated I owed about $20,000 that has since been reduced to $12,000. Last year I had some extra cash after paying myself that I decided to throw at that debt. This year I have a similar mindset, and knowing that I will be spending less than last year, I've created a goal to completely obliterate my debt this year. Simple math shows that if each month I put $1,000 toward my student loans I would be fully paid off by year's end 2017. However, that would leave me with practically no money saved across the year.

My bank account isn't lavish, but I believe for my current situation (young, living at home rent-free, etc.) I am well-off and have enough saved to provide in the event of an emergency. I guess my question is, would it be smart to dedicate all my savings month-over-month to paying down this debt? The obvious answer seems to be yes, but it's also scary knowing that my bank account won't grow more than its current state across the year. Any thoughts or insight you all might have to share would be wonderful, as I would feel much better discussing among other successful investors/savers.

Ace$
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Re: Paying back college loan debt

Post by Ace$ » Wed Jan 18, 2017 5:44 pm

I follow The Total Money Make Over by Dave Ramsey principals when it comes to budgeting and debt. I just wish I was as young as you when I started. :D His steps are as follows:

1. Save $1k in a starter emergency fund to prevent any additional need for taking on debt
2. Payoff all non-mortgage debt as quickly as possible
3. Increase starter emergency fund to a fully funded emergency fund of 3-6 months expenses
4. Begin investing for retirement (15% of gross)
5. Begin saving (if applicable and desired) for college education (this is usually geared toward your children)
6. Payoff the mortgage early
7. Build wealth

You probably have BS1 done, so that puts you into BS2. You should temporarily suspend BS4 contributions, dump every disposable dollar above $1k not neede for regular monthly expenses on the SLs and/or other debt until paid off, then build up that FFEF. Then you're ready to invest. It sounds like you can easily be back to investing within 12-15 months.

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Toons
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Re: Paying back college loan debt

Post by Toons » Wed Jan 18, 2017 5:52 pm

I guess my question is, would it be smart to dedicate all my savings month-over-month to paying down this debt?

Living Rent Free?
Without a doubt.
Apply the "hypothetical " rent money towards your debt,
Until it is paid off. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

livesoft
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Re: Paying back college loan debt

Post by livesoft » Wed Jan 18, 2017 5:53 pm

I think your idea of knocking this out in 2017 is great. If something comes up along the way, then you simply reduce your payments, so I don't see a problem trying to commit $1,000 a month to the debt.

Besides, you are only 23, so lots of folks don't get going until they are over 30. You already have a 7-year head start. Congrats!
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Grt2bOutdoors
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Re: Paying back college loan debt

Post by Grt2bOutdoors » Wed Jan 18, 2017 6:10 pm

Paying debt off has the same effect on your personal balance sheet. Save $1,000 put it in savings account, liability of $12k remains. Pay down debt by $1k, liability is now $11k. Still improving your net worth.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

JGoneRiding
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Re: Paying back college loan debt

Post by JGoneRiding » Wed Jan 18, 2017 10:29 pm

I strongly disagree with DR on the match part. So if you do reduce your other savings I would continue to put in enough to match.

Maybe you should also define "other savings" if you are saying you intend to keep your retirement at 12% AND put 1k toward SL debt but couldn't do any additional savings--You should for sure do that no question get it out why you can and are living rent free!! Sure wish I had.

If you are saying you would have to stop all retirement savings in order to do the 1k per month I would put in enough to get company match. If your company has no match I would stop for 1 year to get this done then ramp up to 15-20% of gross.

Marjimmy
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Re: Paying back college loan debt

Post by Marjimmy » Thu Jan 19, 2017 9:10 am

OP, welcome to Bogleheads.

I agree with all of the above and believe you're way ahead of your peers when it comes to curving debt and handling your financial responsibilities! :sharebeer

So your two choices summarized are as follows:
1. If you can keep contributing to your 401k with company match and knock out debt and live comfortably rent free, do so !
2. If you can't match, have to cut back a little with savings before investing the 1k each month, then do so, but crush the debt first.

Either way, knock out the debt first then you can save / invest for retirement or "other purpose".

-Marjimmy :moneybag
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

emoore
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Re: Paying back college loan debt

Post by emoore » Thu Jan 19, 2017 9:21 am

As long as you're still contributing to your 401K then pay off the debt. I took a different approach when I started my career (25 years old). Instead of paying down my student loans early I decided to fund my Roth IRA. It has turned out to be a great move for me financially and I have more money than I would have if I spent that money on my loans for 5 years. One of the biggest factor in my decision was the interest rate of my loans were low, around 2%. What's the interest rate of your student loans? If it's not too high I would suggest fully funding your Roth IRA and take two years instead of one to pay off the loans.

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knpstr
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Re: Paying back college loan debt

Post by knpstr » Thu Jan 19, 2017 9:23 am

Tutty59 wrote:
I'm contributing 12% of my wage to my 401(k) retirement plan.
Simple math shows that if each month I put $1,000 toward my student loans I would be fully paid off by year's end 2017.
However, that would leave me with practically no money saved across the year.
I am well-off and have enough saved to provide in the event of an emergency.


If you are still saving 12% in your 401k you ARE saving, I'm confused? I guess you mean extra savings for your "move out" account? The whole move out process can move along next year when you are debt free. You will be much more stable without any payments.

You are on track. :beer
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

Tutty59
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Re: Paying back college loan debt

Post by Tutty59 » Thu Jan 19, 2017 10:00 am

I certainly appreciate all of your comments and suggestions! There was some ambiguity with my post so let me clarify a few points:

- The 12% contribution to my 401(k) will continue regardless of my aggressive efforts to pay off the student loans. When I refer to "savings" I simply mean extra reinvestment cash or leisure spending (to my Roth IRA or "otherwise").

- I have 3 separate loans (for Freshman, Sophomore, and Junior year) that hover around 3.31 % interest rates. Junior year was 3.6 % so I intend to pay down that one first, rather than have it accumulate over time.

With all of the positive feedback I've received, I'm really excited to be a part of this community and extremely optimistic for the future. Cheers to you all! :D

Jamieson22
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Re: Paying back college loan debt

Post by Jamieson22 » Thu Jan 19, 2017 10:00 am

You could also consider putting the extra $1k a month into a savings acct rather than to the student loan. Then decide at end of year if you want to use it to wipe out loan or shift priority with the built up funds. Or do 50% to loan monthly and 50% to savings acct.

You don't have to go all or nothing here.

icefr
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Re: Paying back college loan debt

Post by icefr » Thu Jan 19, 2017 10:32 am

Given those interest rates, I would definitely consider contributing to a Roth IRA before paying down your student loans.

COBRA86
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Re: Paying back college loan debt

Post by COBRA86 » Thu Jan 19, 2017 11:49 am

Tutty59 wrote:I certainly appreciate all of your comments and suggestions! There was some ambiguity with my post so let me clarify a few points:

- The 12% contribution to my 401(k) will continue regardless of my aggressive efforts to pay off the student loans. When I refer to "savings" I simply mean extra reinvestment cash or leisure spending (to my Roth IRA or "otherwise").

- I have 3 separate loans (for Freshman, Sophomore, and Junior year) that hover around 3.31 % interest rates. Junior year was 3.6 % so I intend to pay down that one first, rather than have it accumulate over time.

With all of the positive feedback I've received, I'm really excited to be a part of this community and extremely optimistic for the future. Cheers to you all! :D


Are those fixed or variable rates? I'm in the same dilemma with loans ranging from 2.75-3.25% variable.

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Soul.in.Progress
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Re: Paying back college loan debt

Post by Soul.in.Progress » Thu Jan 19, 2017 11:54 am

Marjimmy wrote:OP, welcome to Bogleheads.

I agree with all of the above and believe you're way ahead of your peers when it comes to curving debt and handling your financial responsibilities! :sharebeer

So your two choices summarized are as follows:
1. If you can keep contributing to your 401k with company match and knock out debt and live comfortably rent free, do so !
2. If you can't match, have to cut back a little with savings before investing the 1k each month, then do so, but crush the debt first.

Either way, knock out the debt first then you can save / invest for retirement or "other purpose".

-Marjimmy :moneybag


+10. Well said. You're in the right direction, OP!
Start by doing what is necessary; | then do what is possible; | and suddenly you are doing the impossible. | -- Francis of Assisi

Tutty59
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Joined: Wed Jan 18, 2017 12:12 pm

Re: Paying back college loan debt

Post by Tutty59 » Thu Jan 19, 2017 3:06 pm

icefr wrote:Given those interest rates, I would definitely consider contributing to a Roth IRA before paying down your student loans.


You really think so? I definitely agree on the importance of maxing out your Roth IRA early, but I feel like prioritizing debt would be a better move here. That way there is nothing stopping me from maxing it out next year, as opposed to only being able to contribute X amount of dollars this year and next. I've actually already contributed $2,500 this year, but I'm very curious what other people's thoughts on this are.

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JupiterJones
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Re: Paying back college loan debt

Post by JupiterJones » Thu Jan 19, 2017 3:21 pm

Tutty59 wrote:You really think so? I definitely agree on the importance of maxing out your Roth IRA early, but I feel like prioritizing debt would be a better move here.


The thinking is that the valuable "tax advantaged space" that an IRA gives you is a "use it or loose it" opportunity. You can't skip an IRA this year and then make up for it by putting in $11,000 next year... you just get a max of $5,500 each year and that's that. If you let a year's IRA opportunity slide by, it's gone forever.

Which I get. It makes perfect sense.

That said, I'd pay down the debt instead anyway. Because I hate how it feels to have that loan payment laying its claim to that portion of my paycheck every month, and I know now great it feels to be free of debt. You'll have that thing paid off in no time, and IMHO, it's totally worth a small amount of missed tax shelter opportunity.
Stay on target...

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