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Wait to see if congress passed student loan forgiveness.
She has private student loans.
I was in this position. Save the 20k for emergency fund. In this economy you never know you’ll be laid off or need it for a rainy day. Everything else moving forward, put all the extra money onto her loans. I paid off over $100k in student debt and it’s hard. I’ve been there.
Great points. She’s risk averse. Doesn’t like the thought of not having a healthy savings account. I think your strategy is great and something I’ll advise her.
Basically, increase the $560 monthly payment to $1000 at a bare minimum for the next few months. When she gets a bonus from work, put that straight to pay down debt. If she manages her finances well, she can keep building her savings and drop $7-$10K in 6-8 months. I just want her to drop that lump sum amount sooner rather than later to reduce total interest payments down the line.
Okay so this is a classical question of present value of money. What is the interest in those loans?
4.2% fixed.
I still have over $100k remaining and until recently was also trying to build an emergency fund.
Here's what I did:
I put an extra $500 each month to loans, then put any remaining money after expenses into a savings account to build an emergency fund.
Now that I have ~$25k in an emergency fund, I put an extra $1k towards my loans each month and only a small bit into savings (basically in this economy I want to try to build beyond a 6 month emergency fund).
I would advise this approach - it's really about balance till you get an emergency fund.
If I became unemployed I would still be able to make the minimum payments on my loans and pay other fixed expenses for 6 months while searching for new employment. If this happened but I didn't have enough of an emergency fund, I would probably have to stop payment on loans first which has a negative credit impact that would cost more in the long run.
I did the same thing. It gave me a nice cushion so I didn’t have to worry
If her loans are from the government, she doesn’t have to pay anything until September. No interest accrues, so it’s literally free money.
I didn’t keep a rainy day fund (only $1K for emergency purposes) and managed to pay off $50K in 11 months. If she has a stable job, she should use part of the $20K and start paying off the student loans.
Is it risky? Well, that’s debatable. I’d rather have 0 debt than have $20K in my savings account with 5x debt. Especially if I have a stable job.
Very similar thought process to mine. That’s exactly what I’m trying to convince her to do.
Personally, if I were her, I’d like to keep at least $5-10K in my bank account but I’d also like the ability to put some of that money thats gaining a negligible 0.5% APR in a savings account and put that towards total principal / interest.
Rising Star
Well Dave Ramsey would suggest she keep only $1k in the bank as a basic emergency fund and put the rest toward those loans (assuming she doesn’t have other debt). I was in a similar position and I decided to keep 3 months of expenses in the bank as an emergency. Obviously you pay a little more interest over the life of the loan that way, but I don’t like having nothing saved in case of an emergency. Obviously she’ll need to live like she’s broke for a while (because with that much debt she basically is) and put as much of each months income toward this debt as possible. But if I were her, depending on her expenses, I’d probably keep most of that money in her bank and attack the debt. Ignore the idiots telling her to sit on it. Even if it were federal debt, get rid of it as fast as reasonably possible. Debt sucks.
1. Keep 6-9 months or expenses in cash.
2. Get match with 401k
3. Direct all monthly cash surplus to debt
I still have $30k student loans. Refinanced with SOFI with some very low rate. I am much further In my career. I could pay off my student loan. But I put my money to work on real estate investment and equity market. Someone starting out it makes sense to some risk and start investing responsibly.
Is it in one loan or multiple? If one pay downa bit and keep 5k cushion encase she wants to do something she can. If it's multiple pay down the highest interest one first and pay minimum on rest
One loan of $100K.
First thing, try to have her refinance the loan. You can get rates under 3% fixed these days. Then I'd suggest chipping away each month with whatever extra she's comfortable with
Rising Star
Nicely done and agree it’s worth it. The investing thing is debatable. Yeah 2.75 is so low but the risk free rate is even lower so I would probably pay the debt still as the delta you get on your investments is all risk premium. Market has been so hot so it’s paid off but I wouldn’t want to invest my loan payment fund right now if you expected to pay off debt in a short term as market could do anything and you could end paying debt longer because of it, but I’m risk averse
My dad says always pay yourself first. If she puts the money to loans, there is nothing to feed herself with in an emergency
Advice I would have for her is “Cash is king” - do income based payment plan. She’ll build her rainy day find / liquidity much faster and give her opportunities to jump into other investments. Although the interest may be higher, if she is in a fed loan program and the worst case happened that she lost her job and couldn’t pay (very unlikely scenario I’m sure) she could still stay on income based and be forgive after 20-25 years.