Updated on 09.16.14

Which is Best: Pay Off Debts Now Or Avoid Future Ones?

Trent Hamm

Ken wrote in with an interesting question that sometimes shows that paying down debts might not be the most prudent financial move:

My girlfriend and I both went to a private college. Fortunately, my parents paid most of my tuition, but I still have $11,000 worth of loans, which I plan to pay off as quickly as possible (1-2 years). Unfortunately, my girlfriend was not so lucky. She will have about $60,000 and counting (interest) by the time we graduate. In addition, I will hopefully have a good job that pays well, so that isn’t really a concern. However, she is a music major, so she cannot really use her degree (one of those bad decisions that you only now realize, but it is already too late). She will be getting a job pretty much anywhere. I was wondering what type of repayment plan we should do.

Should we try the snowball effect with me paying off my loans first? Then taking what I would normally be paying and pay it towards her loans. In addition, every time she pays off one of her loans, snowball it into the other loans. That seems like the most logical solution.

To this point, I agree with Ken – they should be snowballing these debts. But then Ken drops a little bit more information that changes the picture:

Unfortunately, we would like to get married in a couple of years (2009), so we need to save for that and of course she needs a car when she graduates. I just was hoping that you could give me an idea if I am thinking about this correctly.

Given that they have two big expenses looming that would likely create a big crater of debt in their lives, likely both at interest rates higher than the student loans, I don’t recommend that Ken starts paying ahead on the student loans. Instead, he should make minimum payments on those and start saving very seriously for the car (until the car purchase happens) and then for the wedding. Here’s why.

First of all, most student loan debt is at a significantly lower interest rate than car loans and especially credit cards. This means that the payments will be large ($70,000+ is a lot of debt) but still manageable. Ken should do everything possible to get these loans as cheap as he can: lock in the lowest rates that he can find, then set up an automatic payment plan if it awards him or his girlfriend a reduced rate. It may only save several dollars a month, but that really builds up over time.

Secondly, with that much debt, they’re likely to not get favorable rates on their first auto loan. They should both find out their credit score and not be shocked if it’s not stellar. It’s because of this potential bad rate on the auto loan that they should save now to minimize this loan – or, even better, just pay for the car entirely. Don’t demand an expensive car; now is the time to buy a used one.

Thirdly, saving for that car will allow interest to work in your favor for a while. If Ken saves his money with HSBC Direct, he can earn a 5.05% APY over the next year as he saves for the car. This will increase the money he can put for a down payment by a few percent, thus decreasing the principal he’ll have on the car loan and thus also the interest on the car loan. This is substantially more effective than simply paying ahead on a low-interest student loan and then incurring a large car loan.

A similar philosophy is true for the wedding, which would likely be “funded” by credit card (meaning with a hefty interest rate) if he doesn’t save ahead for it. Since avoiding such debt is much more effective than paying down a low-interest loan, this is the way to go.

What about risk? Obviously, this method carries a bit of risk with it – Ken needs to have the willpower to consistently save for the car and for the wedding and not spend the money, especially when he sees the balance building up in the savings account. Ken didn’t mention any credit card debt, though, which would lead me to believe that he does understand the dangers of debt and frivolous spending.

Good luck!

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  1. Wendy says:

    Not completely relevant to the post, but my comment is: whether they are already working with combined money or will before they get married, they *really* need to have a legal agreement regarding their joint financial situation. If he or she were to pass away, they have no legal rights, and that can cause a big mess. That situation is a lot easier for people in love to discuss than the chance one (or both) of them might leave the relationship in the next 3 years.

    I wish them all the best, and I know of many similar situations that have led to happy marriages. However, it is best to be prepared for the unknown.

  2. MVP says:

    They should be married before Ken starts assuming any of his girlfriend’s debt. Otherwise, he may be setting himself up for disaster if (sorry to be a buzz-kill, but things happen) they end up breaking up after he’s put thousands toward her debts. In the meantime, they should attack their individual debts individually. Once they’re married, then they should put their debts together and work together to figure out a payoff plan

    Also, don’t get swept up thinking a wedding needs to cost $25K to be a real wedding. And, just because the girlfriend will need a car, doesn’t mean she’ll need an expensive one. She can get by fine with a car that costs $5K (forget a loan, pay cash) or less while the debt’s being paid off. Also, while Ken is waiting to get married and after his debt’s paid off, he can take on a second job or two and start saving for the wedding/car possibilities. If the relationship falls through before the wedding (again, things happen) he’ll still have the cash he’s been saving and can use it for something else, rather than feel resentful that he helped pay off someone else’s college debt and didn’t get any return on his investment.

  3. paula says:

    Ken and his girlfriend should start reading everything they can about the “wedding industry” now, to prep them and their families for a low-cost wedding in the future, and to pay as they go. Going into debt for a wedding ceremony is a terrible way to start out married life.

    Further, a wedding based on their funds on hand will likely be more creative, more memorable, and much prettier than the horrid staged versions that cost as much as a down payment on a new home.

  4. Andrew says:

    I agree on being careful with the whole “relationship + money” thing. You should be married before you begin contributing to another person’s financial state. I’m 20. I busted my butt trying to help take care of a girl that I thought I would marry, but instead our relationship soured and I’m still paying off debt that I could have paid off instead of worrying about hers. Save for the weeding, save for a cheap used car, and then focus on debt after marriage.
    good luck!

  5. Is this any particular reason why she “needs” a car? Do they live in a part of the country where she has to drive to work?

    I do believe, as you suggested, that they check their credit score ASAP. It appears, given the facts at hand, her credit utilization rate is quite high and she’s not going to get good interest rates on most loans.

  6. SJean says:

    with 60k in debt, i doubt it is all low interest–there have to be private loans in there, which are often 9% and up.

    Personally, a combined approach is always good.

    If you want to help her with her debt before marriage, without risking yourself, you could say you’ll be responsible for saving for the wedding, and let her focus entirely on her debt. Then with your money, balance saving and debt repayment. If something goes wrong, then you have a savings account full of money that you can use for your debt… or whatever you need.

  7. plonkee says:

    There is nothing to stop them saving the money in individual accounts but mentally earmarking them as joint savings. And a side benefit of the savings suggestion Trent makes is that Kevin isn’t assuming his girlfriends debt.

  8. !wanda says:

    Do Ken and his girlfriend really need to get married? I know several couples who are completely happy and committed to each other, some of whom even have kids with each other, who have chosen not to get married. One of my friends has parents who have been happily together, and not married, for over 24 years. It’s the kind of situation that makes my mother mutter, “Those crazy liberal Californians,” but what makes a relationship work is commitment and not a piece of paper.

    I’m also leery of Ken assuming his girlfriend’s debts; unfortunately, if you get married, I don’t think there’s any way around it. Honestly, if I had a lot of debt, I would do my best to pay it off out of my own money and not let my boyfriend or husband take care of it.

    My advice would be to save for the car and wedding, but think cheap for a car (or for sharing the car, or for rethinking the “of course”) and cheap for the wedding (or for delaying or forgoing the wedding, or for going to city hall and then holding a fancy “family celebration” when you can afford it.)

  9. hl says:

    She doesn’t “need” a car, they can share a car if possible, use public transportation is even better, or get a cheap used car until her debt is gone. Ken should payoff his student debt asap and save for a frugal wedding. His girlfriend should focus on paying off her debt. If she must have a five figure wedding then she can wait until she can contribute to the cost without increasing the marital debt.

  10. Ted Valentine says:

    I would never assume my girlfriend’s debt. NEVER. Not into charity dating.

  11. paula says:

    As a “crazy liberal Californian,” I believe that many people nowadays misunderstand that “piece of paper” that goes with marriage. It’s a legal document. It gives you certain rights. It’s no accident that our gay friends see value in that piece of paper and are fighting for the right to have it.

    You can get a judge to marry you in your backyard for little cost. Put on your nicest clothes, invite a few friends and family, and make it a potluck. Then cherish your mate, and take each other in sickness and in health, and for richer and for poorer. That’s commitment.

  12. Erin says:

    Thanks to the new fixed rate for federal student loans issued after July 1, 2006, the current high rate for consolidation of loans issued before then, and the high variable rate for private student loans, it’s entirely possible that a car loan will have an interest rate around the same rate or lower.

  13. Liz says:

    There is a lot of legal value in that little piece of paper, and it’s saved my husband and I a lot of money (not *quite* why we got married, but it’s been an extraordinary side benefit!). Lots of combinations, and my husband’s car insurance dropped in half. I suddenly went from get no benefits, and also horrible rates on my loans to spontaneously the government is paying for my school. Despite the fact that my financial situation got better.

    I definitely agree with the not-paying-for-her-loans. Put the excess money that you WOULD put to her loans into a “if/when-we-get-married” fund, and strive to have a wedding for less! I planned a really nice, relatively large affair (100 guests, nice dress, the works) for $3k. If they need help with that bit, I recommend Bridal Bargains, a book that can easily be purchased on amazon for maybe $5. There are TONS of things you can do!

  14. Monica says:

    I’m with some of the other commentors : rethink this wedding and car stuff.

    Why not get married for cheap as soon as you can? Our wedding 9 years ago cost us about $1000. We love each other just as much as any couple who paid $20,000. You *can* figure out how to have whatever elements you *really* want (a white dress, or lots of guests, or whatever) for much, much less. I got a lot of ideas from a book called “Budget Brides”. For example, some people get married after Christmas when the church is still decorated with pointsettias and stuff. (Saves on flowers.) Some people have a potluck wedding. Some people have a barbecue in the backyard. Some people just have a small number of guests, those people you are really truly close to.

    And yes, getting married *before* combining your finances makes more sense.

    Consider carefully whether a car is truly necessary. Many people, especially in large cities, do quite well without one. You can use a car-sharing program like Zipcar for the times when you really need it. If it is not possible for her to get by without a car, then buy an inexpensive used car. This makes more sense for a young person starting out with lots of debts.

  15. DJ says:

    $60,000+ debt for a music degree?? Ouch. What kind of job did the girlfriend think she was going to get to pay back that loan?

    I say that because it is not Ken’s responsibility to pay her debt. I’m of the mentality that people should do what they can to come into marriage debt-free and not expect their partner to shoulder their debt. It’s not fair.

    And I definitely agree with those who have said Ken should save the money and *if* they get married then contribute if he desires(and considering their in college they are getting married they are in the prime age range of people who get divorced…just saying).

  16. Rob in Madrid says:

    Private students loans are the latest scam fostered on an inspecting public. Many of them have terms which make it next to impossible to get out of debt. Hopefully she doesn’t have one of those.

    60.000 in school debt. Ouch

    Unfortunately it will take a lot of frugal living to pay that off.

  17. Matt says:

    My advice to Ken would be to not get married to her. His girlfriend sounds very irresponsible and it appears she is trying to get him to pay for her mistakes. “Luck” has nothing to do with having a $60,000 student loan for a music degree.

    “of course she needs a car when she graduates” – This indicates to me that she is very materialistic and selfish. I would not marry a woman like that.

    I recommend he find a girlfriend without much debt who takes more responsibility for her life.

    Sometimes the solution isn’t just about money.

  18. Caroline says:

    Matt: The fact that someone has student loans doesn’t necessarily make them “irresponsible.” Higher education is insanely expensive, and unless you are very wealthy (you or your parents can pay upfront) or very poor (the government will subsidize you), you are stuck if you want to get an education.

  19. Ryan says:

    My first step would be to have a wedding which you don’t need to save money for two years to have. I’m planning to have one next year, and we’ve set a $5,000 limit. It’s one day, although it’s a big day, and it’ll be stressful enough without going into debt over it.

    And just to play devil’s advocate, musicians in symphony orchestras can be paid tons of dough, which would totally justify a $60,000 school loan. But I have no idea how easy those jobs are to come by.

  20. !wanda says:

    I understand that the “piece of paper” has definite legal and possibly financial benefits. If that’s true for them and why they want to get married, they should go to City Hall. If they’re “saving for a wedding,” it sounds like they have an emotional attachment to a nice wedding (or any wedding). That’s what I’m questioning- whether a wedding is more important than digging out of debt. They can love each other with or without a ceremony.

  21. paula says:

    We are getting entirely off topic, but I admire musicians, and Matt’s comments really irked me. You have to be incredibly good to get into an orchestra. And you might have to drive long distances to play in said orchestra, if the only orchestra hiring is 125 miles away (my daughter’s viola teacher had to do this). Other occupations for music majors trend towards education–teaching others to play. The girlfriend’s next move might be to get a teaching certificate.

    Music majors are dedicated and passionate about their work. Anyone with a music degree doesn’t have to prove their ability to work hard.

    Also, as student loans go these days, $60,000 is not horrible–tuition alone for a private college is over $30,000 per year. If your parents don’t have the money to pay for your college loans, $60,000 is normal. Add in the car, which almost anyone needs after college unless they live in a big city with excellent public transportation, and this is the normal situation for most of today’s college graduates.

    Ken does not have dollar signs in his eyes. He is in love with someone who is likely to give him much happiness. He has asked practical questions, and I hope he takes the advice of everyone who has taken the time to post, except for those who counsel dumping a girlfriend with a good education.

    For inquiring minds: My daughter got a degree in English. She immediately found it won’t pay the bills, and so she went back to school. The college she attended is a good name and opened the door to grad school in her field of choice, which is in the hard sciences. A degree in music is no more of a dead end.

    I’ve said enough on this post, but I am really rooting for Ken and his lady love!

  22. bubba says:

    I quite enjoy the irony in how the folks who encourage against helping loved ones with debt are the same people who assume that the relationship is going to fizzle after a few years. Sounds like a self-fulfilling prophecy in the waiting.

    If my life partner was paying off $70K (which at avg 4.9% on a 20yr plan will incur a monthly pmt of $458.11 with a whopping $285.83 going towards interest) and I refused to help, I don’t know if I could look myself in the mirror.

    You either love all of her or you don’t deserve her.

    As for the topic at hand, I agree that the couple should buy a cheap-ass car and get married in Reno. Saving up for two years to buy a car and pay for an extravagant wedding while simultaneously paying roughly $7000 in INTEREST to the debt is just nutso.

    That unbelievable debt should be their highest priority.

  23. Tuck says:

    Ken —

    Ignore the troglodytes like Matt. (And yes, Matt, that’s an insult.)

    Kudos to you for at least thinking in advance, before jumping into a situation that has a potential for disaster. There are some good, rational points made above.

    The one thing I wanted to chime in with was that you guys, regardless of the path you decide is best, need to make sure your finance discussions are constant and open, especially with this much money at stake.

    As someone who also took a financial hit for a girlfriend, (thought not nearly what you are talking about) I found myself getting resentful and bitter about the money, when if I had just been upfront, a lot of drama could have been avoided.

    Good luck!

  24. MVP says:

    Sorry, but college does NOT have to cost $60K. Some commenters act as if there’s no choice but to take outrageous student loans to get a quality education. This simply isn’t true. Many people work through school to pay for it, and many choose less expensive public, in-state schools or community colleges. Many of these people end up with high quality degrees that take them far in life and career – without the heavy debt burden. I do think the choice of school and major says a lot about Ken’s girlfriend, although I don’t necessarily think he should just dump her. I just hope she’ll learn from the experience, pay off the debt ASAP and find a profitable career soon.

  25. Moneymonk says:

    Why is he talking about getting married and paying off debt? Until he is married, then he should talk about his girlfriend.

    She should pay off her debt now and worry about marriage later. It is not Ken’s responsibility.

  26. Matt says:

    My comment wasn’t intended to take a knock at music. I believe it is important but not $60,000 in debt important. The purpose of university is to provide training for specialized jobs which should earn you a higher salary in order to justify the investment.

    In the case posted above, it sounds like she is not going to receive any return on that investment.

    The responsible thing for her to do would be to say to Ken “I am responsible for my debt so I will work to pay it off (or down to a reasonable level) before we get married no matter how long it takes.”

    I don’t see that happening. That is why I say she is irresponsible.

    Ken should think seriously about why his girlfriend hasn’t proposed that option.

  27. SJean says:

    I don’t plan to be debt free before I marry… But I do have a good job (for a college grad) and the debt won’t be a burden on us. I could be debt free before I married, but only at the expense of my 401k, Roth, and savings account.

    Give the girlfriend a break, you make those decisions when you are about 18 years old! And loan money doesn’t seem completely real until you have to pay it back!

  28. Sharon says:

    I just checked out the average cost of a private four year college. $22,000 a year, for TUITION and FEES. Not living expenses. Since she has only 60,000 in Student Loans, she clearly came up with some money for those four (or five years) years. Since her parents were unable/unwilling to assist her with the cost of college I am assuming they either don’t have a college degree (and are earning less) or don’t have the financial skills of those who frequent this blog.
    I also think that “of course she needs a car” could be Ken being protective.
    Yes, if she had better financial skills and more patience, she might have gone to a public school and not gotten any student loans. Then of course she wouldn’t have met Ken so he might not feel so negatively about them. ;)
    I think that she just might have been niave. I know that people told me slop about how money didn’t matter as long as I loved my job. Well, it is true, that no amount of money can make up for you being miserable for eight hours a day, but, at least for me, no amount of lovely job will make up for having debts and dodging creditors. I don’t have expensive tastes, but I do want to be able to support myself. There has to be a compromise.
    Anyway, let’s not curse the poor girl before we really know her.
    I do think that depending on where she is in college, she could consider changing schools/and or majors. And adding a teaching certificate if she doesn’t have one. Also when she does get that “job anywhere” she should look into at least tutoring on the side part-time.

  29. Woody says:

    Trent, you forgot two of the biggest things about student loans vs future loans! First, the interest is deductible if you’re making what a recent grad typically makes (under $70k). And second, if you do find you get into a financial bind, you can deffer payment on student loans without major credit hits! That alone make them more desirable than a car loan, even if they’re at the same rate.

    On the OT discussion, yes, a college degree CAN cost a ton. I graduated from RIT, a tech school in upstate NY, in 96 and walked out with $50K in debt. I got a great career going, and had it all paid off in about 7 years. You CAN get a degree for less than that if you have good local community or state colleges, but not every area has them. And if you’re going into a tech field, going to a college known for that field can boost you right out of the gate when you graduate.

    Can you make a bad decision, like going to tech school for a liberal arts degree, sure. But make no mistakes, getting a degree from a larger name college comes with a larger name price tag. And if you’re in an employment line with two other candidates, and one of the three has a big-name degree, odds are that one’s getting the job.

  30. paula says:

    This subject is so close to home that I must keep responding to what I have read above. I have had two children go through college and my husband return to college, all within the past 7 years. (Plus, I didn’t finish college until my 30’s, when my children were in grade school.) I’ve also counseled students besides those in my own family, as part of a local high-school-to-college program. I have a pretty good sense for how the big picture looks. Here are some details that might help you understand some things about college finances:

    1. Depending on your financial picture, and that of your parents, you could get financial aid, or no financial aid. It all depends on a form called the FAFSA. If you get financial aid, most of the places you apply for college will determine how much you can AFFORD to pay using the same yardstick. As a result, whether you apply to State University or Harvard, chances are you will be paying roughly the same amount out of your pocket up front. If you are accepted to three colleges, and they offer different kinds of financial packages, one of the colleges might offer more loans, and another more grants. This is where the more affordable school will stand out from the others. It is NOT automatically the state college.

    Bear in mind that for many students, part of the aid package includes student work study. The poster who suggested that students work during college is correct if the student isn’t already working as part of a financial aid package. But if the student already works as part of the aid package, working extra may not be allowed. (Summer being an exception.) Some schools (law school being an example) have such rigorous programs that none of the students is allowed to have a part-time job during the first year!

    2. Four-year public colleges often are so full that it is difficult for students to get all their required courswork done in four years. The required courses aren’t available when the student needs them. That costs a lot of extra money, and often the student finds that financial aid runs out after four years. Which school is more expensive now, the public or the private??

    3. Community colleges are GREAT, but they are not for everybody. Until recently, our local community college offered the basics across the curriculum, but the credits didn’t necessarily transfer to the four-year college. Going the private college route instead of local community college is not being irresponsible.

    4. As Woody wrote above, all things being equal, but given that the world doles out the rewards differently depending on where your degree came from, $$ spent at State College for a degree is cheaper only in the very short term than the $$$$ you spend at Harvard, if Harvard will have you. But even Harvard has its drawbacks, and for that reason I recommend visiting the colleges you think look good on paper. It can make a big difference in your life.

    5. Historically, a college education has NOT been a jobs program. Only the wealthy could afford college, and it was an education within the liberal arts. Professional schools and specialized majors were added later. To equate college strictly with job training misses the main point of higher education: To have a broad understanding of the world, culture If you think only in terms of money, a liberal arts degree is probably not a good bet anymore. However, a liberal arts degree does make a person well rounded, and generally trainable for whatever is needed as world economics and technology evolve.

    6. Finally this is a money blog, but it is more than that: Trent calls this “The SIMPLE Dollar.” There is a philosophy behind his attitude towards money: it is a tool for right living in the world. A “universal” degree prepares a person for living this way: understanding how the world works and how one fits into the world without wasting resources, taking more than one’s share, or otherwise imposing on others in a finite environment.

  31. I find it hard to understand why a wedding is viewed as a big investment. A wedding’s memories resonate over the years because of the emotion involved in the commitment, not because you had a really nice ballroom. We married 12 years ago and spent under $2,000. Family cooked up a buffet dinner, we had a free beer/wine bar with a champagne toast, the guys rented tuxes and I had a nice dress. A minister married us in the park, and we had the reception in a donated “party room” with 80 guests. It was a gorgeous evening – but most of all, we put a lot of energy and care into the ceremony, and years later people have told us it was the nicest wedding they’ve been to. Step back from the money and take charge of your own traditions.

  32. Jay S says:

    Even if you get married – you might want to check into not repaying one spouse’s student loans. My wife had 3k in student loans. We paid off her student loan with extra student loan I got. If i die, the SL’s go away, as we didn’t consolidate jointly, and my wife is not responsible for them. Instant 30k in life insurance.

    Also my SL rate is insanely low – like 2.5%. No way I am paying this off any sooner than I have to. It helps that it doesn’t hurt my cashflow (only $150 a month). I have extra – but it is going to savings at 5%.

    As to the wedding – figure out what is really important, and allow spending on this – but scrimp on everything else. My wife wanted a nice dress. She spent $2k on it. Her neighbor made candies for the reception, the other neighbor some apps. She had a culinary student make the cake for the cost of materials. My uncle took photos for the cost of film and developing, and we bought a new lens for his camera. We had the reception at my wife’s home (nice home with gorgeous bacyard adjoining a green space). Flowers were not from a florist.

  33. yvie says:

    I don’t think that he should be responsible for all that debt either. He’s not a sugar daddy! She should at least pay half off or more before he considers marrying her. He could then see her commitment to lowering that debt herself, and if she is willing to make any sacrifices to do so.

    AS well,weddings can be meaningful (in fact I’d say more meaningful) when they aren’t big, showy extravagant affairs.

    Wait a couple of years and see what happens. But in the meantime make sure to cherish one another.

  34. MVP says:

    Jay S, I appreciate your point. But don’t you feel some moral obligation to actually pay for the education you received thanks to the generosity of those who loaned you the money to get it? Putting off paying your loans as long as you can, regardless of the low interest rate, and considering that if you happen to die before you get around to paying them back, your family will be off the hook, sounds pretty tacky to me. Why not just pay it off and invest the extra money you have in your pocket when you don’t have those bills coming anymore?

  35. bubba says:

    I quite enjoy the irony in how the folks who encourage against helping loved ones with debt are the same people who assume that the relationship is going to fizzle after a few years. Sounds like a self-fulfilled prophecy in the waiting.

    If my life partner was paying off $70K (which at avg 4.9% on a 20yr plan will incur a monthly pmt of $458.11 with a whopping $285.83 going towards interest) and I refused to help, I don’t know if I could look myself in the mirror.

    You either love all of her or you don’t deserve her.

    As for the topic at hand, I agree that the couple should buy a cheap-ass car and get married in Reno. Saving up for two years to buy a car and pay for an extravagant wedding while simultaneously paying roughly $7000 in INTEREST to the debt is just nutso.

    That unbelievable debt should be their highest priority.

  36. SallyC says:

    I agree with paying down the student loans slowly, if they are federal loans. They probably have a low interest rate. Look for the “extended” or “income contingent” repayment plans. There are a lot of options with federal student loans. We deffered my husband’s medical school loans under a hardship deferment while he was in residency. Good thing we did because now he has the opportunity to apply for a loan repayment program which will pay down $25K per year of his loans. If we had paid them off (or even reduced them significantly) this would not be an option. If they are private student loans, pay them off, they don’t have the advantages of federal loans.

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