Graduating soon...lots of student loan

[FifthQuarter]

Hey guys,

First time posting here...

I am set to graduate this May and my student loan amounts to:

Federal Direct Subsidized Loan: $13,500 @ 6.80%
Federal Direct Unsubsidized Loan: $4,000 @ 6.80%
Federal Perkins Loan: $5,700 @ 5.00%
Private Loan 1: $22,864.98 @ 8.25%
Private Loan 2: $19,454.57 @ 7.75%

In other words, I will have $65,519.55 student loan to deal with once I graduate. That is a lot. Luckily, I have a job that pays me well. If I try hard, I can pay down completely in 4 years (principal + interest). However, I will have little less than $10,000 saved.

So my question is: considering my loan amount and the interest rates (which are quite high), should I try my best to pay off as soon as possible? or should I spread over, for instance, a 10-year time frame?

As I said, I can pay down fully within 4 years, but I will have saved little less than $10,000, which I think is worryingly little.

My logic is that: if I can get returns in excess of 8.25% per year, I should save my money in the market instead of trying to pay off my student loan ASAP. But considering these high interest rates, I feel like I would be really hard to find a place to put my money where I can get over 8.25% consistently. Even if I do find, it probably comes with a significant risk. I personally want to get rid of my student loan as soon as possible...but is it a smart move?

I would like to see what you think.

Thank you in advance!

 

[jIMOh]

Hey guys,

First time posting here...

I am set to graduate this May and my student loan amounts to:

Federal Direct Subsidized Loan: $13,500 @ 6.80%
Federal Direct Unsubsidized Loan: $4,000 @ 6.80%
Federal Perkins Loan: $5,700 @ 5.00%
Private Loan 1: $22,864.98 @ 8.25%
Private Loan 2: $19,454.57 @ 7.75%

In other words, I will have $65,519.55 student loan to deal with once I graduate. That is a lot. Luckily, I have a job that pays me well. If I try hard, I can pay down completely in 4 years (principal + interest). However, I will have little less than $10,000 saved.

So my question is: considering my loan amount and the interest rates (which are quite high), should I try my best to pay off as soon as possible? or should I spread over, for instance, a 10-year time frame?

As I said, I can pay down fully within 4 years, but I will have saved little less than $10,000, which I think is worryingly little.

My logic is that: if I can get returns in excess of 8.25% per year, I should save my money in the market instead of trying to pay off my student loan ASAP. But considering these high interest rates, I feel like I would be really hard to find a place to put my money where I can get over 8.25% consistently. Even if I do find, it probably comes with a significant risk. I personally want to get rid of my student loan as soon as possible...but is it a smart move?

I would like to see what you think.

Thank you in advance!

I think you should focus on saving for retirement first- get 10-15% of your gross pay going into 401k and Roth IRA, then focus on the debt.

My experience follows...

LOL
you think those rates are high
ROFL

In 1997 I graduated with about 80k of debt which ranged from stafford loans at 5% to private loans at 11%. My total monthly payment on all loans in 1997 was $850 or $950. My rent payment was $650.



Here is what I would do...

Create a budget based on gross pay
15% to retirement accounts
5% to savings for emergencies (when this is 3-6 months expenses, maybe redirect this towards a house or new car).

On the budget, round each student loan payment up to nearest $100. If payment is $201 send $300, if payment is $65 send $100. Keep the numbers nice and round...

What will happen is your 10 year repayment term will probably shrink down to 8 years. In those same 8 years your retirement accounts will have close to 2-3X your annual income in them. Within 8 years you should probably have enough saved to get a small house or condo, and be in a decent position financially.

 

[FifthQuarter]

I think you should focus on saving for retirement first- get 10-15% of your gross pay going into 401k and Roth IRA, then focus on the debt.

My experience follows...

LOL
you think those rates are high
ROFL

In 1997 I graduated with about 80k of debt which ranged from stafford loans at 5% to private loans at 11%. My total monthly payment on all loans in 1997 was $850 or $950. My rent payment was $650.



Here is what I would do...

Create a budget based on gross pay
15% to retirement accounts
5% to savings for emergencies (when this is 3-6 months expenses, maybe redirect this towards a house or new car).

On the budget, round each student loan payment up to nearest $100. If payment is $201 send $300, if payment is $65 send $100. Keep the numbers nice and round...

What will happen is your 10 year repayment term will probably shrink down to 8 years. In those same 8 years your retirement accounts will have close to 2-3X your annual income in them. Within 8 years you should probably have enough saved to get a small house or condo, and be in a decent position financially.

Thank you for your reply!

I can see what you mean. But my job will be in London, U.K. and the cost of living in London is horrendous. Even if I save and have about 2x my annual income, I would still be far from making any significant down payment on an average property in central London.

I am still wondering though:

If I put some money into securities (either stock or bond), I would have hard time consistently churning above 8.25% return on my investment. It makes sense to put my money into the market if I am certain that I can get above 8.25% returns on my money...if not, isn't it better to payoff my student loan?

 

[Brat]

I would not make any plan based on the assumption that you will earn 8% on your investments.

It is my recollection that a student loan can be re-worked once. Ask your university student aid office if they have any information along that line. Obviously the loan with the highest interest rate should receive any excess $$ you have available.

Try to build a saving account equal to a year of your payments. Although you have a job at the moment life can change in the blink of an eye.

 

[chris2008]

jIMOh's advice is good. At the start of your career you will need an emergency fund + an early start of retirement funds + some debt reduction.
It is not a matter of "one or the other".
The debt reduction will give you guaranteed returns of 5 - 8,25 % and they are tax free.
But the other items are important, too.

Another point: at the start of your career you should avoid "lifestyle inflation".
Yes, you will need to invest in your career (think of clothing, network lunch etc.). But track expenses. make the most of every Lstg. and be creative to reduce cost.

 

[jIMOh]

Thank you for your reply!

I can see what you mean. But my job will be in London, U.K. and the cost of living in London is horrendous. Even if I save and have about 2x my annual income, I would still be far from making any significant down payment on an average property in central London.

I am still wondering though:

If I put some money into securities (either stock or bond), I would have hard time consistently churning above 8.25% return on my investment. It makes sense to put my money into the market if I am certain that I can get above 8.25% returns on my money...if not, isn't it better to payoff my student loan?

Focus on the macro part of my post-

15% to retirement
5% to emergency fund/debt reduction

spend 80% of what you earn
"save" 20% of what you earn

and you will have success.


If you need to deal with a specific problem, I suggest people do this... put life on a timeline (your financial life only). Put key milestones- debt free, retirement, buy a house... and put a cost on each of those items in the order you think they will happen.

Because some people have different values (for example being debt free next year is more important than retiring 10 years earlier) or other priorities, its possible the timeline gives you your solution.

Fund longest term goals first- to some minimum (I suggest 15% to retirement is the minimum). All the other goals on the timeline are "optional"- if you do not buy a house, that does not mean you fail or are a bad person... but retirement is not an option- sooner or later the body (and mind) will not want to work anymore. You will either die w*rking or need to retire, so that goal needs to be funded first.

If you finance short term goals more than retirement (or put a higher priority on shorter term goals like debt repayment), you will eventually leave open the option you will rationalize not saving for retirement now because some other short term goal always "appears" more important- first student loans, then a house, then a wedding etc... and you lose the ability of time to help compounding work on retirement savings.

Hope that helped.

 

[MichaelB]

Fund longest term goals first
./.
If you finance short term goals more than retirement (or put a higher priority on shorter term goals like debt repayment), you will eventually leave open the option you will rationalize not saving for retirement now because some other short term goal always "appears" more important

Excellent advice.

Interest on student loans is an above the line deduction so it is likely to cost less than 8%. US taxation on foreign earned income has very high marginal rates.

In addition, paying the loans while living overseas builds a credit history – important for all but critical for people living abroad, unless you plan to stay. If you do plan to return and have a mortgage, the higher credit score might save enough in lower mortgage costs to offset the additional interest incurred over the longer repayment period.

 

[Lusitan]

I would max out any tax-favored retirement plans (e.g. 401k, Roth/IRA) and, after saving up a 6 month living expenses emergency fund, throw the rest at the student loans. I'd start with the private loans (highest interest rate first) and once they were taken care of, I'd pause to pat myself on the back, then I'd increase long-term savings (or savings for a specific goal, like a down payment on a house) while at the same time diverting some extra to the unsubsidized federal loan (the distinction between sub/unsub may still be important if you return to school and defer your loans for a while); last of all I'd pay down the sub fed loan.

 

[aaronc879]

Not sure if U.K. has the same retirement accts as U.S. like 401K and ROTH IRA but if you do then i'd put in enough to get the full company match in the 401K and max the ROTH after you've built up a minimum 6 month emergency fund. Then pay off debt paying off highest interest rate first. IMO don't even think about buying a home or taking on any other kind of debt until you pay off the debt you already have.

Remember to LBYM and if you can't pay cash you can't afford it. That goes for every purchase you will ever make except for a primary residence.

 

[JPatrick]

In other words, I will have $65,519.55 student loan to deal with once I graduate. That is a lot. Luckily, I have a job that pays me well. If I try hard, I can pay down completely in 4 years (principal + interest). However, I will have little less than $10,000 saved.



!

On the positive side, if you can accomplish what you project above;
*4 years and paid off
*10K banked
*Holding down a good job
I'd say you are doing pretty darn good, assuming the rest of your balance sheet is clean.

Just two other thoughts..Any chance your employer might chip in on the bill?? Secondly, if you are married, or even if you are not, buy a boatload of cheap term insurance.