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Pay off student loan with emergency fund?
Old 02-05-2012, 01:09 AM   #1
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Pay off student loan with emergency fund?

Hi folks, wanted to get your friendly advice. I owe around 9k in student loans at about 6%. I have 20k in savings for emergencies. Should i pay off the loans with my savings or should i attack these loans more aggressively? I pay about $100 more than the minimum every month. Thank you for any advice!
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Old 02-05-2012, 04:44 AM   #2
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I would. After that, ALL the money I could save would go back towards the emergency fund.
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Old 02-05-2012, 05:33 AM   #3
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I vote yes as well. To me nothing feels better than not owing anyone, any money - no matter what interest rate I am being charged.
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Old 02-05-2012, 05:52 AM   #4
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Hi folks, wanted to get your friendly advice. I owe around 9k in student loans at about 6%. I have 20k in savings for emergencies. Should i pay off the loans with my savings or should i attack these loans more aggressively? I pay about $100 more than the minimum every month. Thank you for any advice!
That is a good question. Emergency funds are just that, and when you need them and they are not there, bad things happen. How stable is your job and how much do you think you need to cover emergency situations?
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Old 02-05-2012, 11:13 AM   #5
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I vote pay it off. You're still left with 11k in your emergency fund, it reduces your mandatory monthly cash outflow, you get a guaranteed 6% return (your interest deduction for tax probably doesn't help you too much now anyway) vs. the tiny interest rate on your savings account. You can then divert the minimum monthly payment of your loans plus your additional $100 extra payment to your savings until you rebuild it.
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Old 02-05-2012, 11:21 AM   #6
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I would recommend using only the portion of your emergency fund that exceeds six months living expenses for student loan payments.
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Old 02-05-2012, 11:30 AM   #7
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Originally Posted by Westie View Post
Hi folks, wanted to get your friendly advice. I owe around 9k in student loans at about 6%. I have 20k in savings for emergencies. Should i pay off the loans with my savings or should i attack these loans more aggressively? I pay about $100 more than the minimum every month. Thank you for any advice!
I faced a similar question back in the late 1980s when I was down to $2k in student loans with about $6k in savings. Back then, the interest rate on my loans was about 8% while my savings were earning a lot less. Also, the 1986 Tax Reform Act was quickly phasing out the deductibility of personal interest. I paid off the rest of the loan and had replenished it pretty soon thereafter (less than 6 months).

If you are squeamish about reducing your EF so much in one shot, you can always hedge your bet by paying off 1/3 or 1/2 of it now then see how things go in 6 months then pay off another chunk of it. [I see REWahoo is leaning in that direction, too.]
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Old 02-05-2012, 11:55 AM   #8
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I would recommend using only the portion of your emergency fund that exceeds six months living expenses for student loan payments.
+1
In addition to the 6 months of expenses for the unknown, I would also look at anything that is more likely, that could come up in the next year or two... major home or auto maintenance or auto replacement and the like. It might not make sense to pay off one debt just to end up with more later. Also, do you have anything else that could be used as a "plan B" such as a HELOC or less liquid assets like stocks or mutual funds? This wouldn't be ideal, but if you have a stable job and the probability of needing the funds is pretty slim, you may be able to lean other resources.
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Old 02-05-2012, 01:10 PM   #9
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I would recommend using only the portion of your emergency fund that exceeds six months living expenses for student loan payments.
+2
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Old 02-05-2012, 01:48 PM   #10
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How long will it take to repay the hit to your EF? It would be nice to eliminate that 6%, but not if it risks your EF for a substantial period. I'd be fine with 6 months, but at 1 year I'd try something more like paying an extra $600 now and then using the usual $100 extra to replenish the EF again. All depends on how secure you feel about your income and your EF for that future period where it might not be optimal.
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Old 02-05-2012, 02:08 PM   #11
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Wow thanks for all the replies. I feel pretty secure with my job status. The EF right now would handle about 8 months of bare necessities otherwise.

I just don't like still having these loans. With them paid off i could get closer to maxing out the 401k or just dump that back into the EF like you guys have suggested. Or maybe a little of both. I think i'll pay off 1/2 of it to start and see how i feel. What a great forum. Looking forward to picking up some tips from everyone. Thanks
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Old 02-05-2012, 03:13 PM   #12
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Wow thanks for all the replies. I feel pretty secure with my job status. The EF right now would handle about 8 months of bare necessities otherwise.

I just don't like still having these loans. With them paid off i could get closer to maxing out the 401k or just dump that back into the EF like you guys have suggested. Or maybe a little of both. I think i'll pay off 1/2 of it to start and see how i feel. What a great forum. Looking forward to picking up some tips from everyone. Thanks
401(k)? That could change things. If there is an employer matching contribution I would max that now even if it meant taking longer to pay the loan - or a least do the math before making a decision. Paying half the loan leaves you with 6 months of EF expenses covered, so it sounds about right.

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Old 02-05-2012, 04:30 PM   #13
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401(k)? That could change things. If there is an employer matching contribution I would max that now even if it meant taking longer to pay the loan - or a least do the math before making a decision. Paying half the loan leaves you with 6 months of EF expenses covered, so it sounds about right.

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Well they match up to 6%. I'm currently putting in 9%. So i'm a couple of thousand away from the 16,500 limit. Doing away with the student loan would give me the ability to contribute a little more.
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Old 02-05-2012, 04:48 PM   #14
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Well they match up to 6%. I'm currently putting in 9%. So i'm a couple of thousand away from the 16,500 limit. Doing away with the student loan would give me the ability to contribute a little more.
Got it. Paying half the loan now and seeing how things go seems reasonable. Keep up the good work.
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Old 02-05-2012, 04:58 PM   #15
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Wow thanks for all the replies. I feel pretty secure with my job status. The EF right now would handle about 8 months of bare necessities otherwise.

I just don't like still having these loans. With them paid off i could get closer to maxing out the 401k or just dump that back into the EF like you guys have suggested. Or maybe a little of both. I think i'll pay off 1/2 of it to start and see how i feel. What a great forum. Looking forward to picking up some tips from everyone. Thanks
You already had my blessing and approval!
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Old 02-05-2012, 09:25 PM   #16
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Originally Posted by Westie

Well they match up to 6%. I'm currently putting in 9%. So i'm a couple of thousand away from the 16,500 limit. Doing away with the student loan would give me the ability to contribute a little more.
The limit is $17,000 for 2012. Once your loans are paid and EF back up to par that's what to shoot for.
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Old 02-05-2012, 11:06 PM   #17
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Thanks guys
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Old 02-23-2012, 04:51 PM   #18
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Wanted to update you guys. I paid off the loan completely. The feeling of freedom is unbelievable. My tax return will go back into the emergency fund and i'll let that build up again every month. I've already applied what i usually pay towards student loans into my 401k. A little bit closer to maxing it out! Nice to get rid of that loan at 30 years old. Thanks again for all of your advice and time.
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Old 02-23-2012, 05:33 PM   #19
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Wanted to update you guys. I paid off the loan completely. The feeling of freedom is unbelievable. My tax return will go back into the emergency fund and i'll let that build up again every month. I've already applied what i usually pay towards student loans into my 401k. A little bit closer to maxing it out! Nice to get rid of that loan at 30 years old. Thanks again for all of your advice and time.
Good for you. Thanks for updating us.
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Old 02-23-2012, 05:36 PM   #20
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Good for you. Thanks for updating us.
+1

We always appreciate a follow up post to tell us how things worked out.
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