Student loan/big picture financial advice please (loooooong)

[steppenwolf]

Hi MM, two year lurker/infrequent poster coming out for some budget/financial advice (in case you were looking for a little excitement to spice up your Saturday nights!) 

A little about me, I am 28, graduated from grad school last fall and started a full time position then, living in a MCOL city in the Midwest. Now that I have started my career track/rest of my life, I am trying to get my big picture financial plan in order.

My biggest question right now is how aggressively I should be paying off my student loans versus saving for retirement versus saving for shorter term goals.

I am currently enrolled in Income Based Repayment. I realize my current payment barely scratches the surface of my loans, and will have me paying more than double the original amount of the loans over a long period of time. 

I know I have the ability to be pretty frugal if I need to be. I lived on ~$12,000 a year during grad school, just over the poverty line. However, I did this through living in a pretty restrictive way in some respects, such as only going to the doctor when I absolutely had to, carrying catastrophic health insurance only, cheap food, tiny apartments, and giving up my car.

My first impulse getting out of school was to continue to live very frugally and throw everything I can at the loans, but continuing as aggressively as I have been would mean falling further behind on retirement saving, not saving for shorter term goals like having children in 5-7 years, home ownership (??) and the like.

Fundamentally is the question of whether I should be treating this debt like an urgent emergency Dave Ramsey style or temper it somewhat with saving/spending for other life goals.

Another wrinkle in the situation is that I work in a field where I can qualify for Public Student Loan Forgiveness. I have deep questions about the program, such as if it will pay out as promised, since it hasn't been ten years yet for the first people to gain forgiveness with the program, the broader implication of putting student loan debt on taxpayers, having to file taxes separately when I'm married, etc. (I remember reading this thread a while back pandce.proboards.com/thread/298247/stop-panicking-student-loan-reform a year ago.) Also, the PSLF program requires full time employment, so I wonder if that means I would be unable to work part time if I have children later down the road.

PDQ details

*poof*

 

[steppenwolf]

Apr 25, 2015 21:06:11 GMT -5 carrotsmakemefat said:

Where is all your money going? Your expenses seem low and you have quite a bit left over monthly.

Have you tracked how much you actually spend each month, by line item?

Yes, I've been putting on average $2,300 each month for the last four months towards student loans, my Roth IRA, and my emergency fund since I started this job. I use Mint. 

I'm still in living in the mostly frugal way I was when I was in school (living in an apartment with roommates in a less expensive neighborhood, meal planning/bulk cooking/shopping at inexpensive grocery stores to keep food costs low, trying to go out only once a week, biking when I can, stuff like that.) 

Thanks for the link, I'll check it out. 

[gingery]

I personally would take the $2300 and apply all to student loans, if you get in a bind you can cut back but I'd sick as much towards it as possible.

[steppenwolf]

Apr 25, 2015 21:22:22 GMT -5 @vicmo said:

Do you have a retirement match at work? I would personally want to contribute 10-15% of your income to retirement, either through a 401k or Roth IRA, before paying extra on loans.

I don't. There is no match and the fees for the 401k are pretty high. So that's why I am currently contributing to a Roth IRA, with a plan to invest at my future job which I hope has a better retirement plan, as I'm sure I will max out the $5,500 limit this year if I am not throwing everything at student loans. 

Since getting this job, I have been prioritizing medical care and getting my health issues under control , as well as buying some new clothes, etc., which I didn't allow myself before, but still trying to figure out the debt payoff/saving in general/spending for myself balance overall.  

[steppenwolf]

Apr 25, 2015 21:06:11 GMT -5 carrotsmakemefat said:

This link helped me. I am on standard repayment and realized I'd end up paying my loan back on PS forgiveness and it wasn't worth it. By paying $150 more a month I'll have it paid off WAY quicker. I was pretty shocked when I crunched numbers
www.bankrate.com/finance/student-loans/how-long-to-pay-off-student-loan.aspx

On my current IBR, I pay per month, which works out to be less than the interest on the loan. (After 25 years, any remaining balance is forgiven.) 

When I plug my numbers into that calculator, it gives me the error message "The debt can not be paid off with the given monthly payment and interest rate! The monthly payment is too low to even pay the interest on the loan."

I am clearly doing something...wrong. 

[steppenwolf]

LIKE SAY I go for it, throw all my money at paying my SL in five years, and then in five years I will be 33, likely trying to get pregnant, with no significant personal savings for children or home ownership or anything else, and way behind on retirement.

That seems stupid, right? I should simmer down?

[Deleted]

From the $2300 currently going to your Roth, emergency fund and loans I'd keep the savings the same, give yourself some fun money and keep the rest going to your loans as per a snowball plan.  

I'd also pick a number for your emergency savings that when you reach it you cut that contribution in half and then you can decide if you start a spending savings or add it to the snowball. 

[Roc A Bee]

I would prob up your budget to $2000 a month. That's an extra $450 a month for fun, extras, whatever.

With the extra 2k, I'd save half for retirement (15% of your gross) and throw the other 1k at your highest student loan.

[steppenwolf]

Apr 25, 2015 22:43:36 GMT -5 Roc A Bee said:

I would prob up your budget to $2000 a month. That's an extra $450 a month for fun, extras, whatever.

With the extra 2k, I'd save half for retirement (15% of your gross) and throw the other 1k at your highest student loan.

So focus on retirement and paying SLs? What's your opinion about more medium savings goals like having kids, a house, etc.?

[phunluvin82]

Apr 25, 2015 21:43:27 GMT -5 steppenwolf said:

LIKE SAY I go for it, throw all my money at paying my SL in five years, and then in five years I will be 33, likely trying to get pregnant, with no significant personal savings for children or home ownership or anything else, and way behind on retirement.

That seems stupid, right? I should simmer down?

I don't think you should go all in on the loans for five years, but what if you attacked them for just one year? Given your numbers, it seems like if you can stand to do one more year of the frugal lifestyle, you could make a big dent of like 25%.  This would cut the amount of interest you are paying so when you do scale back to focus on other goals, at least more of your payment will be starting to go to principal.  Also, it will be easiest to make these sacrifices now while you are used to it.  Once you start increasing the cost of your lifestyle, it becomes really hard to reverse that.

I wouldn't completely abandon the IRA in the meantime though.  But you could probably temporarily lay off of the efund soon, as the Roth IRA can double as an efund in a real pinch.  

[curbsideprophet]

I would max out the Roth and focus on the loans with the 6% rate. You can re-evaluate after those are gone. Given your income i don't think the overall amount of loans is that crazy. I don't think you need to live like you were in school just to pay them all off ASAP.

I think you should put some money towards retirement and some money towards saving.

[Deleted]

I think I'd do this:

take care of wardrobe and health issues. You're making $72k - not a Grad student any longer!

Figure out getting to a x month of salary in cash. Looks like you've got appx 1 month - maybe go for 2-3-4, some thing like that. Do that...and then stop. This will give you a cushion to get an apartment, travel, car, future mat leave/wedding, house down payment, whatever. Yeah, your Roth can be efund - mine is (we took our efund and put it on there)....but we also have appx 3 Months of expenses in cash.

figure out a monthly Roth contribution that gets you to the yearly max. Allocate that $ and do it.

Consider any advantages to a 401k to the company match. Maybe with high fees, doesn't make sense?

And once you've done those things, tackle the loans. When you're single or couple with no kids, you'll never have more cash to do this...and you have a large amount of loans. I think you're better off gettong it to a more manageable level vs. tryong to Pay off (Mentally). I think with your ability to Stick to a budget - you can get this under control quickly.

I probably would look at it in Terms of freeing up cash to make larger payments (snowball) Vs interest rate (to some degree). Get rid of the $1-2k loans and put the money towards the next smallest. Pretty soon - you're down to 1-2-3 loans and making a real impact on them.

Finally. ..do you want to work in that sector? If so, go for it. Just wonder of there are other tradeoffS -salary, lifestyle, job satisfaction - where it really doesn't make sense to do this. don't just do it for the loans - 10 years is a long time to be miserable.

[Susie]

I agree with a lot of the pp's. As priorities, I'd tackle:

1. Whatever urgent health and work wardrobe issues you have post-grad school.

2. Build your e-fund up to about 6 months' expenses.

3. Allocate $458.33/mo toward your Roth (which = $5500/year).

4. Depending on the specifics of your employer-provided retirement plan, decide on an amount to contribute. I think you should contribute something above and beyond what's already going into your Roth, but it doesn't have to be a huge amount right now.

5. It's ok to have your SLs on IBR for really slow repayment, but since it doesn't sound like a sure thing that you are going to do PSLF I'd start snowballing based on interest rate. I'd pay this one first: Stafford Subsidized $1,592.22 @ 6.550% because it'll give you satisfaction of PAYING ONE OFF pretty quickly. Then for #2 I'd pay off Grad Plus $11,878.21 @ 6.160%. Then after that I'd reevaluate and pick #3. While snowballing, pay the min on everything else and dump the extra cash all against the one loan you are paying off.

6. Don't let yourself get too focused on how long it will take you to pay off ALL of your SLs, and OMG kids, OMG life, OMG everything. One step at a time.

Calvin and I were 25 and 28 when we each graduated from law school, and we had about $260k in collective SLs. About $140k were mine; $120k were his. We're 33 and 36 now and finally expecting baby #1. We put it off about 3 years longer than planned to get into a stronger financial position first. Our SLs aren't gone now, but we each owe about $70k - we're about halfway there. It's far more manageable now. We have contributed more to retirement than to SL payoff, but that's necessary. If we waited on saving for retirement until the SLs were gone, we'd be up a serious creek if we only started saving for retirement in our 30s. We'd have lost so much time in the market, among other things.

[msmerymac]

I think you should be saving 15-20% in tax advantaged retirement vehicles. So max out your Roth IRA at $5500/year and then do the rest in your 401k. No match and high fees suck, but at the same time, you don't have to pay taxes on a 401k until you take the money out, and it's pre-tax, unlike investing in regular index funds, where you would be investing post-tax and have to pay capital gains taxes each year.

After that, I would make sure you have at least 6 months of expenses in an efund. You might even want to bulk this up a bit, since your expenses are pretty low. In my mind, a large unexpected expense could be more than your normal monthly expenses, though obviously you can live fairly frugally in case of a job loss. But that's not the only emergency that can happen, right?

After that, I would pay down the loans aggressively.

I wouldn't necessarily worry about saving for a house or kids now. Those are things you have a long time to plan for, and as long as your finances are in order and you don't have other debts, you can re-prioritize your loans or savings in the future.

[Deleted]

Max your Roth.
Contribute 7.5% of your gross to your 401k (that + the Roth = 15% gross)
Set aside $10k cash (more than 6 months expenses but your expenses are incredibly low and I think unrealistic for a non-grad student to sustain)
Put the rest towards your SLs.
Also consider things like:
-changing jobs may necessitate getting a car. Having a few thousand set aside for an inexpensive car to buy outright or for a down payment wouldn't be the worst thing in the world.
-does your partner rent or own? How will your expenses increase if his/her place is more expensive than your current one?
-if your partner rents, do you plan to buy? Where will you get the money for the down payment?
-does your partner have a similar loan burden? What is their plan for payoff? Are you on the same page financially as to how to prioritize savings?

[steppenwolf]

Apr 26, 2015 5:02:58 GMT -5 smileyface said:

Yeah, your Roth can be efund - mine is (we took our efund and put it on there)....but we also have appx 3 Months of expenses in cash.

But the Roth has a $5,500 cap per year, yes? So you use it for part of your efund only? 

[steppenwolf]

Apr 26, 2015 5:02:58 GMT -5 smileyface said:

Finally. ..do you want to work in that sector? If so, go for it. Just wonder of there are other tradeoffS -salary, lifestyle, job satisfaction - where it really doesn't make sense to do this. don't just do it for the loans - 10 years is a long time to be miserable.

Yes, I'd ideally like to be in a nonprofit setting. I looked for those jobs out of school but a for-profit setting was much easier to find. I have been actively looking for a nonprofit job, and I believe one would be much easier to get later this year or early next year due to the current job market in my field. 

The trade-offs are less money, I think maybe in the $50k/$60k range? and less schedule flexibility, but a more rewarding position career-wise. 

[steppenwolf]

Apr 26, 2015 10:45:09 GMT -5 carrotsmakemefat said:

Apr 26, 2015 10:34:13 GMT -5 steppenwolf said:

But the Roth has a $5,500 cap per year, yes? So you use it for part of your efund only? 

If you're asking if the Roth counts towards the 10k efund the answer is no. Retirement should never be viewed as a fall back.

I think (a) you're smart to think about your whole financial picture now and (b) on the right track given your income level. Good for you

Oh no, it would take a very, very dire emergency for me to touch any retirement money. Losing out on compound interest is forever. I get that. 

[steppenwolf]

Apr 26, 2015 9:25:26 GMT -5 @mrsspunky said:

Max your Roth.
Contribute 7.5% of your gross to your 401k (that + the Roth = 15% gross)
Set aside $10k cash (more than 6 months expenses but your expenses are incredibly low and I think unrealistic for a non-grad student to sustain)
Put the rest towards your SLs.
Also consider things like:
-changing jobs may necessitate getting a car. Having a few thousand set aside for an inexpensive car to buy outright or for a down payment wouldn't be the worst thing in the world.
-does your partner rent or own? How will your expenses increase if his/her place is more expensive than your current one?
-if your partner rents, do you plan to buy? Where will you get the money for the down payment?
-does your partner have a similar loan burden? What is their plan for payoff? Are you on the same page financially as to how to prioritize savings?

Yes, the financial situation with my partner adds another layer to consider. 

[steppenwolf]

Apr 26, 2015 8:06:46 GMT -5 Susie said:

Don't let yourself get too focused on how long it will take you to pay off ALL of your SLs, and OMG kids, OMG life, OMG everything. One step at a time.

Calvin and I were 25 and 28 when we each graduated from law school, and we had about $260k in collective SLs. About $140k were mine; $120k were his. We're 33 and 36 now and finally expecting baby #1. We put it off about 3 years longer than planned to get into a stronger financial position first. Our SLs aren't gone now, but we each owe about $70k - we're about halfway there. It's far more manageable now. We have contributed more to retirement than to SL payoff, but that's necessary. If we waited on saving for retirement until the SLs were gone, we'd be up a serious creek if we only started saving for retirement in our 30s. We'd have lost so much time in the market, among other things.

Thanks. This is good advice. I think my thinking on it can be very black and white. Right now I have this feeling like, at max I can contribute $24,000 to debt or savings per year, so how will I in the next ten years be able to save enough for a downpayment, save enough for children, and seriously handle my student loan debt, and it makes me feel kind of hopeless. 

But I have followed your story for a while and it has been inspirational for me. 

[Deleted]

Apr 26, 2015 10:45:09 GMT -5 carrotsmakemefat said:

Apr 26, 2015 10:34:13 GMT -5 steppenwolf said:

But the Roth has a $5,500 cap per year, yes? So you use it for part of your efund only? 

If you're asking if the Roth counts towards the 10k efund the answer is no. Retirement should never be viewed as a fall back.

I think (a) you're smart to think about your whole financial picture now and (b) on the right track given your income level. Good for you

To clarify, over a 3 year period, my husband and I, recognizing that we were approaching Roth eligibility limits, maxed Roths (for those years) with money from our efund. We have since replenished a cash-only efund with 3 months of expenses. We have other retirement investments, but elected to do that before we became ineligible. So, yeah, we look at it as a back-up, shit goes to hell pool of funds, but have never withdrawn from it. That's what I mean by - it's our efund. Technically, it was/is, although we have marked it for retirement.

[Deleted]

First, breathe.  $96k in student loans for a starting salary of $72k isn't so bad these days. Dave Ramsey has some terrible advice.  Debt is good to a certain extent.

I ditto everything @mrsspunky said.  Max your Roth, especially since marriage will likely mean you aren't eligible anymore so these years are your last.  Then add enough to your 401k to get to 15% of your salary combined.

Get your emergency fund up. I'd also maybe save for a car unless public transportation in your city is preferable to driving. It's a personal decision and I don't know how much it would save but I wouldn't NOT have a car because of saving money.

Put your health and personal care at the top of your list.  You have a good 40+ years left in the workforce so you need to prioritize those things.

Keep talking to your partner about the big picture financial stuff so you are on the same page before making any big decisions.

Good luck!

[steppenwolf]

Thanks @notquiteblushing!

The car thing is partially financial but also a personal choice - I mostly commute by bike when it's warm, and don't have a bad public transportation commute when it is cold/rainy. I'd rather put that money towards other stuff right now, though things might change in the future. I really feel for the parents I see carrying strollers up the subway steps!