Being is debt (as opposed to debt as an abstract value) is a terrible feeling. However, to work on one’s personal finance, feelings have to be set aside momentarily while options are considered.

Student loans debt has a couple of advantages over regular loans including (1) you can ask that payment be tied to your income paying less when your income is less,(2) automatically deducted from your account (which usually drops the interest rate by 1/4 percent), (3) tax-deductible interest, (4) some companies will reimburse student loans at various rates, (5) student loans can be forgiven by working in certain fields or locations.

A student loan should be the last place you put your money when working on a financial plan.

I have a similar question, and reading through all of the posts have been so helpful for me, that I thought I would ask for your advice for myself.

I’ll try to keep this brief.

The monkey on my back: A $101K federal student loan at 9% interest

My dilemma: What can I do to alleviate the almost $800 month in payments for the rest of my life? Refi, etc?

What also complicated things is my financial scenario:
-Own an apartment in NYC worth about $275K
- Current mortgage balance is $96K (at 4.75% fixed)to which I pay extra $50/monthly principal payments
-Have about $26K in savings (just started my own biz, so need it as liquid emergency account)
- Have about $1000K in slush fund
- Have no credit card debt (after wracking up so much debt from school, am deathly afraid of it)

As another posted said, my feeling is that the student loan debt will be forgiven upon death, and because I’d be paying so much each month for life (it seems), I’m not in too much of a rush to take cash from anywhere else to pay it off. “It’ll be with me forever” is my take on it.

But is there anything I might be able to do about the debt? I have another smaller loan at about 4%, but was told that to consolidate, the “weight” of the 9% loan would cancel out any benefits.

Is there ANYTHING else I can do?

Rudd: if you think it’s that simple, you’re missing out. In the modern world, people can’t rely on a stable income, particularly in some employments. Thus, risk due to unstable income is a factor, and an emergency fund is more important than ever. That’s just one example – there are many more that make the situation incredibly complex and impossible to have a “one size fits all” formula, thus a philosophy is needed.

The 4% debt vs. 5% interest is evidently a good example. If putting the money in the bank will yield roughly a positive +1% each year, it’s financially stupid to pay off the debt, and your friend asking for advice should have known that, instead of following philosophies and ideologies. Next time, let him know that finance is not politics — it’s math.

What happened to good old-fashioned FV / PV calculation and benchmarking? Well, I don’t know, but I surely want them back.

(can you email an answer, or do you only answer via posts?)

I’m debt-averse but I’m also a bit conservative in that I don’t want to cash out my emergency fund just to get rid of the car debt.

So, I’m going the snowball route: I just paid off my credit card and now I’m doubling up my car payments so it’ll be paid off in May 2008. Then I’ll roll the car money into paying off the school loans by 2012 instead of 2024.

All along I’ll be saving for retirement and putting several hundred dollars/month away – first I’ll boost my emergency fund, then start house and travel savings accounts.

So even though it’s not fun or immediately rewarding, I’m doing a combination of aggressive payments tempered with staying the course. It’s nice to know I could pay off my car today, but I don’t think it’s the best use of my money, and more importantly, I don’t think it’s the best choice for me.

Right now, on paper at least, isn’t the best option to pay the usual payments and keep my emergency fund (HSBC acct. at 5.05%?)? My income is beyond the cap for much of the interest on the student loan to be tax-deductible, so I guess the more frugal thing for my debt to just stay the course. (Right? Or am I doing the math wrong?) But it’s hard because part of me really just wants to pay off the car debt (which would cut my emergency fund by slightly more than half) and then take Trent’s advice to save what I would’ve spent in car payments every month. I just want to be rid of that debt, I guess.

Thoughts?

At the very least, your reader should ask herself what I asked myself two years ago: Do I really want to still be paying for my diploma in 2023? Or do I want to be able to flex my full savings prowess in 2007?

I had a student loan for $13,000 with an interest rate of 4.9%, and the minimum payment was $90. Paying the minimum would draw it out for 18 years with over $6500 disappearing into the black hole of interest.

I chose to pay it off aggressively (about $1200 a month) and now that it’s paid off I’m much more healthy, both mentally and financially– I’m continuing to put that $1200 into savings.

Think about it. Say I only had $500/mo to put towards the student loan. I’d have it paid off in 28 months and would only be throwing roughly $800 away.

By your advice of paying the minimum, if you invested that additional $410 every month for 18 years at 5%, even with compounding, would generate $54,500 in interest. Subtract 25% for taxes and the $6,500 you p*ssed away to interest on your student loan, and you end up with roughly $34,400.

As an experiment, follow my path: pay $500 a month for 28 months, and then start investing that $500/mo for the remaining 15-8/12 years. You’d end up with $48,000 and after taxes and student loan interest ($800), you’re set up with 35,200. Hey, you just made $600 bucks!

Now, would pay $600 for the privilege of paying $90 for 216 consecutive months? I know I wouldn’t.

(To answer the question of deducting student loan debt, you can only do so if you make a pittance. I’ve never been able to write-off a single cent of student loan debt because I have a decent job making decent money. Of course, “decent money” does not equal “enough money to buy a freakin’ house in Seattle”, but that’s another story for another time but hey, at least I have more money to invest in the meantime!)

(To answer the fear of not having an emergency fund, I’ll let you in on how I was able to spend $1200 a month to pay down my debt. I did actually just pay the minimum, and I put the $1200 into my company’s ESPP with a guaranteed 15% return (it’s actually about 70% because of a healthy stock price. When it vested, I cashed out and attacked the loan. Contributions to ESPP are fairly liquid– you can pull them out at any time without penalty. So while I was building up a balance in my ESPP I was also maintaining an emergency fund of sorts, all the while generating more income for myself. YMMV)

Second he is clear about the fact that the math might be better to save/invest instead of paying off a 0%-5% loan. However, a lot of people get into problems with 0% cards, or don’t pay down their student loans enough and stretch other areas of the budget.

If you have the discipline to put the money in savings account and pocket savings interest minus loan interest, then I agree. But, Dave Ramsey deals with a lot people who have screwed up, so he advocates paying debt first.

Oh and this blog is really great. I’m working on including some personal finance in my Intro to Economics classes, and it has given me a lot of good ideas. Keep up the good work.

I realize the savings account income is taxed but the student loan interest is tax deductible so the two balance each other out and my money is still worth more in the savings account.

So what if the interest rate on the savings account might change in the future. If it does, I’ll move money from the account to the loan THEN, not now.

Gal

Now don’t get me wrong, I do not advocate paying down that student loan. I would absolutely take any extra principal and save it. 4% is some of the cheapest money she is every going to see in her life and she should utilize it as long as possible. Your advice was not bad, but I would suggest that she use the “extra principal” to build up a small emergency fund and then start investing the money in a taxable account or a Roth IRA. Either way, if the proverbial **** hits the fan in her life, she can access the money (at least the principal amount in the case of the Roth IRA).

Is there a risk that she could lose some principal? Yes, absolutely, but the odds say that over the long term she will probably earn way more than 4% or even 5%. Personally speaking, it would be worth the risk to me.

If, for some reason, she is extremely risk-averse I would probably suggest that she build up a modest emergency fund and then go ahead and start paying down the loan. No sense in spinning her wheels or potentially losing money (if interest rates on savings accounts tank again).

My 0.02

How is student debt being unsecured “one of the worst things”? Since it is unsecured, that means your creditors can’t come and claim any specific property to repay the loan as in the case of a mortgage (secured by your home) or a car loan (secured by your car).

Now one bad thing about student loans is that even though they are unsecured, you cannot get rid of them through bankruptcy. That is why the rates are lower, because the lender is going to get paid one way (by you) or another(by the government), no defaulting allowed.

I also did a post of Dave Ramsey and his “all cash” philosophy. Some things you cannot always pay cash for such as, law or medical school. Grants and schlorships do not always cover those expenses.
I like Dave Ramsey for as his view on other debt. But he over do it sometimes. House and student loans should be an exception

Mathematically, I know the best thing for me to do with the money I’ve trimmed from my budget is to increase the amount I invest.

Emotionally, I can’t bring myself to do it until I have a fully funded emergency fund. But back to the math, I can’t bring myself to put money in the bank at 5% until I pay off my car at 6.9%. So I keep a thousand dollars in my emergency fund, invest the small amount that I’ve put away every month since I graduated from college, and aggressively pay down my car loan.

But by the time I buy my next car, I plan on having enough money to pay for it in cash. But I’m going to look into financing to see if I can get a loan at a lower interest rate than the savings account that the money is in.

Loved your post – and I think you’re right on the money.

With an income under $100K, some student loan interest is tax-deductible for the life of the loan.

Not having an emergency fund means that if the student loan is just paid off, and there’s no money in savings, and the car breaks down or there’s a medical emergency that’s only partially covered by insurance, then most people would have to resort to credit cards. which charge way more than 4% interest.

It’s a completely personal choice, but as I dig my way out of debt and look toward financial stability, I keep building an emergency fund, because without one, and with my luck, I’d end up right back in ‘bad’ debt.

One suggestion for the poster – she locked in a good rate, but did she ask if an automatic/electronic payment plan could get her a reduced interest rate? The holder of my student loan gave me .25% off for allowing them to electronically debit my account each month.