Question Of The Week: Should I Pay Down My Student Loans ?

Question Of The Week: Should I Pay Down My Student Loans ?

Question of the WeekHappy Friday everyone! I hope you are all having a wonderful week, and ready to enjoy a sweet 3-day weekend in remembrance of the women and men who have served to protect our freedoms. Like My freedom to hope on the internet and ask everyone a question! And my big question of the week is………..drumroll…….

Well, actually, you can just read it in the title of this post. But for dramatic effect….the question is…..

Should I Pay Down My Student Loans?

Yes? No? Maybe? You don’t care?…Oh, you want more information? Ok, sure.

Our Student Loan Balance Is $13,791

Edit: Just FYI, the interest rate is an average of ~ 6%

Now, remember how I set a goal of paying off my student loans in 2013? Yea, me neither, but apparently I wrote it on the internet. Well, life circumstances and barely making enough to pay the bills has kept me from rocking the student loan payoff like I wanted to. It’s already May, and I had hoped to have already paid down about $5,000 on the loans, but no dice.

BUT!

I have an opportunity to make a decent sized payment RIGHT NOW! I could drop over $3,000 on principal with the click of a button (well, several buttons, some typing, and possibly a donut)! But I am having trouble pulling the trigger on this decision. Can you help me make the decision? Here’s why I can’t seem to say “YES!” to the student loan crushing grenade I want to drop on Sallie Mae:

Our Current Emergency Fund Is $6,100

Now, before you start throwing rocks at me because I’m a blasphemous financial writer, let me elaborate, because honestly, I’m comfortable with the number above. Here’s why:

I contributed $11,000 total to my Roth IRA when I was 18 & 19 years of age. I am now 27 (UGH! So old!). This means the $11,000 has been in there for over 5 years. And, according to the IRS Publication 590, I can withdraw any amount from my Roth IRA that is not “earnings” after having the account open for over 5 years. So, I can add the $11,000 to the $6,000 listed above as my emergency fund. Now my emergency fund is $17,100! WOOHOO! But wait, there’s more!

As I’ve probably said a BAJILLION TIMES, being a month ahead on your budget is the BEST POSSIBLE THING you can do for yourself financially. We’ve been here for over 4 years now, and we don’t stress about our cash flow. And one other perk of being a month ahead means that it can also act as an emergency fund buffer! So you can take the $17,100 and tack on another month to our emergency savings, which gives us a healthy amount as a backup in case of a serious emergency! We’ve also got our savings buckets which we could raid at any time, because haircuts and vacations can wait when we’re in emergency mode. We would also switch over to our emergency budget, which would free up additional cash flow.

Suffice to say, we’ve got our emergency situations covered. So why, then, can I not pull the trigger on this extra $3,000 (not included in the savings above) to start laying the smack down on our student loan?!

The Rock

Well, because it’s $3,000 less cushion in case we need it. “But didn’t you just write a few hundred words above on why you DON’T need that extra money?” Why yes, yes I did. But I’d rather not have to dip into my Roth IRA to bail myself out. “But haven’t you been able to handle pretty much any inconvenience that has come your way so far?” Yes, that is also true. “So why are you cowering like a dog with your tail between your legs, hoarding your money for no good reason, letting someone suck interest from your account every month, and keeping your student loans protected like it was your Bieber t-shirt collection? Don’t be a spineless hoarder Jake!”

Wow. That was kinda harsh, guys. Geez.

Readers, What Should I Do?

Ok, now that you’re “In the know”, what do you think I should do? Should I pull the trigger? Or should wait and see how our cash flow situation does over the next few months? What would YOU do in this situation?

Thanks for all the helpful encouragement in advance!

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Comments

  1. You know you sound like we did a couple of weeks back. We paid another $37,000 lump sum down on the mortgage and it was painful to pull the trigger. Not because we thought it was the wrong decision but because it was less cushion for us in the bank. We have a nice ES as well or our TFSA worst case scenario but it’s hard to let go. It’s nice to see the money build but we realized that we would rather just get rid of the mortgage and move on with our lives. One day I’ll write about the debt free lifestyle and what it’s like. We are far from retired but life’s not so bad with no debt. No we haven’t paid the mortgage off yet, red tape, sick dog etc.. all I’m sure I’ll write about BUT the point is that chunk of money we just paid down the mortgage with that we were worried to get rid of, we didn’t need it. We are ok. I read many posts on yes pay the mortgage down, no don’t do it.. just make the decision that’s right for the both of you. Full-stop! Cheers mate…
    Canadian Budget Binder recently posted..I Can Buy It, But Can I Afford ItMy Profile

    • Thanks Mr. CBB. We’re leaning on making the payment, but with our cash-flow shortage, I like having a larger emergency fund. If we were short because of unexpected expenses for 6 months straight, that could put a decent dent in the fund. It’s the unknown that kills me :\

    • MomofTwoPreciousGirls says:

      Mortgage is a little different because at the end of paying it off, the house is still there as an asset. And in an absolute emergency the equity COULD be tapped…however, I hate when a big chunk of money comes and I have to pay it right out to something else. Feels good to see it there.

      Jake those student loans are a noose around your neck! Get rid of them and remember that is that much more in your budget to put towards your savings and other goals.

      • Thank you for the boost of confidence! I guess I do have access to a decent amount of cash if something bad should happen, huh? I should probably just drop the cash so I don’t end up spending it on T-Swift concert tickets…

  2. I would definitely put it towards the student loans. This is coming from someone who has a hard time saving any money because I just want those student loans gone ASAP! You seem to have a decent sized emergency fund already. Do you know how much your loans are gaining in interest each month? Does the interest capitalize at all? I hate interest, especially capitalized interest and just thinking about how much my loans are growing each month would definitely convince me to throw any extra money at them…does it convince you?
    debtperception recently posted..New WheelsMy Profile

    • Yes, the interest is about $70 a month on a $220 payment. It does capitalize. I definitely want these gone, but I also don’t want my EF to get eaten away and then have to dip into the Roth if something big happens. BUT, many things have come up and we’ve been able to cash flow most of them, so I’m not SUPER worried, just cautious.

  3. Wait wait wait are you saying $6,100 is a SMALL emergency fund? While you’re in debt? And have other cash and accessible investments? I must have been listening to too much Dave Ramsey because I have no idea why you are keeping so much cash around while you still have these student loans!

    You didn’t mention your student loan interest rate, but if it’s over 3% I would use the $3k and consider using more to pay it down now.
    Emily @ evolvingPF recently posted..What Would You Do If You Really Needed Money?My Profile

    • We have a much bigger EF, because we’re down to one income, and are on an EXTREMELY tight budget. I would not feel comfortable with Dave Ramsey’s “$1,000 emergency fund” while in debt.

      The rate average is about 6%. I don’t feel comfortable dropping more than the $3,000 at the moment, but will definitely have a chat with my wife about how comfortable she feels possibly putting down more.

  4. I don’t have the problem you have, but if I were you, I would pay down the student loan. Like you said, you have resources to pull money from in case of emergency.
    Michelle’s Finance Journal recently posted..She Thought, He ThoughtMy Profile

  5. I would probably pay them off ASAP since the interest rate is over 6% and even in the current bull run beating that is going to mean taking on a decent amount of risk. But in the end you need to do what makes you feel comfortable and if that is some sort of hybrid where you pay off a good chunk of them then so be it.

    • The interest rate is pretty high, especially compared to my mortgage, and how my investments are currently doing. I’m leaning toward dropping the $3,000, but I’d still have $11,000 left, so it feels like a drop in the bucket. But MATH tells me that I’m wasting money each month, and math usually wins…

  6. I say do it! Here’s why: It’s a high interest rate. Depending on when you purchased your house, it’s probably higher than your mortgage interest rate. Also, if you have or plan to have a car payment, chances are the interest rate on a car loan will be significantly less than on a student loan. I have a few thousand left on my student loan from grad school and it’s our #1 priority to pay off. Student loans are deceptive because if your loan is like mine, it’s over a 10 year period, so the monthly fee is low. Ours is only $101/month. Doesn’t seem like much and we can comfortably handle that payment, so it can be easy to want to forget about that loan and focus on loans with a larger balance (for us, that was previously our house loan balance). However, at 6% for the student loan, you end up paying much more for it over 10 years than what you actually owe before interest. Hypothetically shorten that loan period to a typical car loan period – 36 months – now, hypothetically, you would be paying over $330/month if you normally pay $100/month right now. How quickly do you want to get rid of that monthly payment to free it up for putting that $ aside towards extra savings? Additionally, the quicker you pay it off, the better debt to income ratio you have for future loans if needed. Say you end up relocating for a job in a few years and end up selling your house and buying a new one – if you have a lower debt to income ratio your loan options/interest rates will be better. These are things Jon and I are learning as we go through the home buying process a 2nd time.
    $3k seems like a lot, but when you hypothetically shorten the loan period from 10 years to a more reasonable period of say 3 years, $3k will have a huge impact on how quickly you pay off that higher monthly loan payment. I say do it. Especially with the Roth as an emergency savings option. If you ever have an emergency and need to take out a bank loan, having a less debt to income ratio will certainly help you get an emergency loan more easily than if your debt to income ratio is high.

    Bottom line, imo, don’t let the low monthly payment deceive you; when you shorten the loan period the monthly payment becomes surprisingly high.

    • Thanks Keila. Our mortgage interest rate is 3.25%, so it’s definitely higher. Our payment is $220 per month, I’d love to cross that line off the budget. And good call on possible re-location, new home. We don’t plan on going anywhere for 7+ years, but you never know. I hate debt as much as anyone, but the uncertainty of life is causing me to be a bit more cautious than usual with this cash. Most likely, I’ll make the payment this weekend, so thanks for the feedback 🙂

  7. Why are you hoarding money, you of little faith?

    Look at the birds of the air; they do not sow or reap or store away in barns, and yet your heavenly Father feeds them.

    Are you not much more valuable than they?

    • Thanks Jesus. Very true, Matthew 6:26 is something I have rested on for a while now, and you’re totally right. As the steward for God’s money, what should I do with this? Am I being a good money manager, or should I fire myself? Great verse, and thanks for the encouragement 🙂

  8. Tough call.It’s hard to let a chunk of change go. I would probably save a bit more then throw it at the loans.
    Kim@EyesontheDollar recently posted..Should I Get a Smartphone?My Profile

    • I’m a bit more conservative when it comes to ensuring I always have the backup cash for my family, but holding onto cash-sucking, high-interest debt is also detrimental to my family’s financial position. Hmmmmm :\

  9. I say pay the loan!! You have a good saving cushion, so much more than me! Pay off that loan ASAP! Get rid of it.

  10. Jake,
    You have personally helped my family out on a number of occassions and we are very appreciative of that. Finally, I may be in a position to help you and yours out. Been there (well, not as well as you guys are when we were your age), but have definitely done that. DO IT. JUST PULL THE LEVER AND DO IT! Don’t look back, don’t think about it for another nano-second. JUST DO IT!!!!!!!!!!!!!!!! Really, if we had ever had a chunk of that change to throw at our school loans we would have been dancing in the streets! DO IT!

    • Thank you Jim. I guess the debt has to be paid no matter what, might as well save the interest, right? I bet I won’t miss the money either…Thanks for the advice!

  11. I’d say pay the $3,000 toward the student loans! Calculate to see how much interest you’ll be saving if you do. You’ll still have enough money to cover most minor emergencies or unexpected bills with what you have left in your emergency fund, and it’s nice that if a dire situation were to arise, you do have other options to tap into, if necessary. Sure it’s hard to watch your savings go down that much with just a couple button clicks, but I think your savings buffer makes it worthwhile. Plus, you’ll get to see your student loan balance go down $3,000 at once, and that will be a great feeling!

    • Thanks Kate. It has been slow going with the loans, but knocking it down over 20% would be pretty awesome! I do have the savings, and am selling a car soon to add another $2,000, so it’s not like I’d miss the cash. Plus, the only emergency that could make me hesitate is job loss, and I’m pretty locked in, with multiple streams of income as well, so I don’t think that should deter me. Most likely doing it this week.

  12. This thread is blowing my mind a little because it has me thinking about my own student loans. We’re working on buying a new-to-us car with cash that we’ve saved, and I just now realized that despite my total aversion to car loans, mathematically it makes more sense to use the cash we’ve saved to pay off our student loans (6.5% interest rate) and take out a low-interest car loan instead. Ahhh!

    • Brynna,
      BINGO!!! Now, you are absolutely right. Forget the “new to you” car – kill those student loans. You won’t regret it.

      • 🙂

        I’m curious… do you mean forget as in don’t buy at all? Or get a lower-interest loan?

        • Brynna,
          If there is ANY way you guys can go without a “new to you” car right now, I would strongly encourage you to do that. I understand that sometimes that’s just not possible, and if it just isn’t possible for you to do that right now, then go with a 0% interest rate and buy the cheapest/most reliable car you can find. But before you do that, do yourself a favor and explore ALL other alternatives. KILL THAT STUDENT LOAN DEBT FIRST AND FOREMOST! Best of luck!

        • What Jim said. For most, a car loan is DEATH and should be avoided at all costs. But if you are diligent with your budget, and don’t buy a car that will go down in value very far, then I’d say get the low or 0% interest loan, and knock out the flipping loans! But don’t buy a car newer than 5 years old to avoid MAJOR depreciation. Email me directly if you have specific questions on this, as new car can suck the LIFE out of your financial future.

          Relevant:

          http://www.iheartbudgets.net/2012/06/you-dont-need-new-car/

          http://www.iheartbudgets.net/2013/04/need-a-new-to-you-car/

          • Thanks both — We do definitely need a different car at some point, as our only is a 1996 with lots of miles. We looked closely at our savings goals and budget this weekend and are putting it on hold for a few months so we can make sure we have enough money for the baby coming in September. Our student loan balance is similar to yours. I hate it, but I hate the thought of getting into credit card debt because of an emergency even more.

          • Playing it safe when having babies is always the best policy. You can’t call the student loan servicer and be like “can I tap into my student loan equity? I have an emergency”.

            As for the car, good to plan ahead, but just make sure you buy Honda or Toyota 🙂 Trust me. I have a 1994 Civic with 275,000 miles on it, still gets 30+ MPG and is running great. And My 1994 Accord had 295,000 miles, and is my daily driver and gets about 29 MPG. Only has a minor oil leak (fixing soon) and no other issues, and I plan on driving it until 350,000 – 400,000 without a hitch 🙂

          • Jacob,
            We too had 2 little ones when we were young and quite frankly we’d never even heard of having an ER fund (a rainy day fund, yeah – but that was a pittance compared to what ER funds are considered these days). Please just throw that $3K at your school loans. I promise you, you will NOT regret it and if you don’t – you want to know where that $3K will end up? It will end up in baby crap that the baby will never need – it’ll only feed the parents’ insecurity re: providing “enough” for the baby. Been there, done that. Do yourself, your wife, your kids a favor and take the leap. It is in your family’s best interest.

            Seriously! I love that your generation is so financially savvy and frugal, but I think we (as in my generation) may have scared the crap out of you guys so bad that you don’t have the guts to trust in America anymore. Totally get that. I do – but it’s wrong. America isn’t going anywhere. Please lose that debt – neither you nor your family will regret it. Best of luck and, once again, CONGRATS on the new little one. Love that!

          • Done and done! $3k paid, check out the bottom of the post! I made an update 🙂 Thanks for the continued encouragement Jim

  13. I’m in a similar position, in a couple of ways (though not identical), but the comfort of having those funds there is great. I have a hard time letting my savings go, because the “what if” mentality is always there. Better to be cautious than foolish.
    Tushar @ Everything Finance recently posted..How Much Money Should You Save For A Baby?My Profile

    • But paying down a high interest rate debt is NOT foolish. Totally with you on the cautious thing, though. I guess, just think about it this way. What if the loans were at 12%? What would your recommendation be then?

  14. Hey Jake–if you can find another way to get a risk-free, guaranteed 6% return, sink your $3k into it. Otherwise, “invest” in your student loan! My 2 cents… 🙂
    Kurt @ Money Counselor recently posted..The Vision ThingMy Profile

  15. I might sound rude, but you already lost that money. You are 13K short in all your calculations, whether you admit it or not, and you lost it years ago.

    Either my math is off or I misunderstood something, but you’re saying you have 17K in an emergency fund… Well here’s an emergency: you owe money for something you did (how many, five?) years ago.

    Get your money and pay your student debt in full next week. Then get one of those Philips hair clippers, they’re $50, shave your head and be happy. I’ve had one for several years and it’s amazingly convenient.

    Why the hair clipper? Just so you can think about your new hairstyle. It is a much more interesting topic than the decision whether or not you should stay in debt for the sake of some mythical emergency.
    Dennis recently posted..How to Lose Weight Without Breaking the Bank: Paleo on a BudgetMy Profile

    • Totally get where you’re coming from, as I listened to Dave Ramsey daily, was on the forums for a year, etc. and hate debt with a passion. BUT, I don’t have $17k in liquid cash money. I have $6k cash for an EF, $11k in my Roth IRA (that I COULD cash out penalty-free), and $3k savings to put on the loan. I could possibly put $8k or $9k on the loan, but I don’t want to cash out my Roth. I’d lose future tax-free money, as well as a good return, as I’m up over 13% for the year already. I’ve made more in the Roth than I’ve lost in student loan interest for the year.

      So, I appreciate the shove toward debt-freedom, but due to the tightness of the budget, and living on one income with a family at home and a mortgage, I’m not going to completely drain my emergency fund.

      Also, I;ve had Wahl hair clippers for over 4 years, and they’ve been AWESOME. $30 clippers, saved over a few THOUSAND in haircuts. 🙂

  16. I’ve been struggling with advising my son on a similar situation. He has $12K in student loans at about 6.5%, accruing approximately $66. in interest each month. He has a $2K emergency fund, but he is living at home. He has Savings Bonds worth about $2K which are not mature, but pay a ridiculously low interest rate! I’m thinking maybe he should cash in the bonds and pay the $2K on his student loans to reduce the interest cost.

    My main concern is that he’s driving an older car that needs repairs & will need more. If he uses the savings bonds & the car needs to be replaced it would be a problem… We’ve considered the bonds to be part of his emergency fund or car replacement fund, if necessary.

    If you’ve got the $3K earning LESS than 6% interest, I say pay it on the student loans. Your emergency fund seems pretty good for the time being.

    • Diane, thanks for the advice. For your son, I’d say pay on the loans, as his current $2k is more than adequate to get a good, used car. For reference, my last 3 cars were $2,000, $1,600, and $2,800, and I’ve put over 200k miles on them combined, and they’re still going strong. 🙂 Just go Honda or Toyota, somewhere in the mid-late 90’s if he needs a replacement vehicle 🙂

  17. I agree with others, just do the $3k. If that is too painful, then do $1500 today and then an extra $300/month for the next five months. Just be without a doubt that it is going to principal! Some loan servicers are really bad about that.
    Kacie recently posted..A trip to the mountains coming upMy Profile

    • Thanks Kacie! And yes, I will be VERY specific about it going to principal, because most just see it as paying ahead, and bump out the next payment date. Tricky lender sharks!

  18. From what you’re saying, it sounds like you know that the logical thing to do is put the money on debt, but the idea of parting with that cash is making you skittish. So I say: Don’t do it. If you need that money for peace of mind, keep it.

    I completely understand that mentality, I’m doing the $2k e-fund thing while in debt (well, $1,700 now after the kitty got sick) and I worry constantly that something REALLY bad is going to happen before I get all this debt paid off.
    Jordann @ My Alternate Life recently posted..The Sick Kitty SagaMy Profile

    • Peace of mind is definitely important, so knowing that I have my $11,000 in the Roth technically available if we ever need it does help calm my fears a bit. But I also like to have liquidity, so having a few more months saved up in cash help as well. We’ll be dropping the $3k on the loans this week 🙂

  19. Jacob,
    Good for you!

Trackbacks

  1. […] be writing a post on this for Tuesday, but I have gotten some interesting comments on my “Question of the Week: Should I Pay Down My Student Loans?” post. I still haven’t made the payment as of writing this post, but most likely will. […]

  2. […] is, and sometimes I can hardly contain myself. On Friday, I wrote a fun little piece called “Question Of The Week: Should I Pay Down My Student Loans ?“, and I got some great responses and answers from my awesome readers. As I was responding to […]

  3. […] several new life and money developments in the last week.  First he asks whether he should pay down his student loan debt with a cash bolus, and then justifies why he has such a large emergency fund, chiefly because of this big […]

  4. […] wrap-up of some of the big posts that happened this week. Last week, there was quite a frenzy over what I should do with $3,000, and then we revealed a big announcement, and then I argued for the size of my GINOURMOUS Emergency […]

  5. […] As I’ve mentioned in the past, we barely make enough to get by, as one of the sacrifices we are making to allow Michelle to be at home with our kid (soon to be kids!). We would have it no other way, but it means that things are a bit tight at the iHB household. To keep from going insane, we do budget in a little spending cash, and are lucky enough to have figured out travel hacking, allow us to travel and vacation for free using credit card rewards. But other than that, things are pretty tame around here. Our budget has kept us in a good spot, and online and tax season income has allowed us to even make some strides in paying down our student loans. […]

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