Help a Reader: Student Loans or Savings?

A popular conundrum I get asked a lot (like, every single week) is where to start when you’ve got two major problems going on at the same time. Usually, major debt & major lack of savings. I never know what the right answer to these actually are – in fact, I don’t think there IS one? – but I do know it’s always more helpful to hear from a bunch of people over one blogger with a crazy mohawk. So today, I need your help :) What would you write back if you got this email?

Here’s the situation:

I’m 24 and about to graduate with my Masters, which I went right in to after my undergrad.  I went to a fancy private college for my undergrad, then moved back to home to go to a state school for grad school (wish I’d been smarter about the tuition the first time around!).  I’ve got a job lined up after graduation which will let me stay living with my parents–the pay is good, the benefits are fine, and I’m hoping to use the money I save instead of living on my own to pay down some  student debt.

But here’s the thing: two degrees later, my loans add up to almost $100K.  It didn’t seem like a big deal when I was 18 and signing the paperwork, but everything added up and now I can’t even process the amount that I owe.  One has a rate as high as 10% (gah!) while a few others are variable, so I’d love to start paying down while interest rates are low.

Part of me wants to make a strict live-off-Ramen budget and pay off as much as humanly possible right now.  The other part of me realizes I also need to put money into a retirement account before other expenses (wedding, house, kids) come down the line in the future.  The another part of me realizes that even if I put my whole salary into my loans, I’d still have 5 figures of debt!

So my plea for help has two parts:

1. What do I do first? Should I look into consolidating?  How much of my income should I pile into my loans versus how much should I start saving for a rainy day?
2. How do I get myself into the right mental zone for this? I know I’m not expected to pay off my loans my first five years out, but I also know I don’t want to take advantage of the 30 year repayment plan they give me.  How do I call myself down enough to find a pace somewhere between the tortoise and the hare?

My response back:

Woah! Yes, a game plan is def. needed to make ya feel better :) Although I’m quite impressed with both your degrees – congrats! That is nothing short of awesome. I’d take those over $100k or even $200k of debt any day, as you will forever have an edge over most others out there in the field. Which you’ll also be rewarded handsomely for!

As far as WHAT to do now, however, that’s a bit trickier. It’s always hard to help someone without knowing ’em, esp since I usually go with the emotional side to things over the financially smart method. For example, I’d personally rather have a lot of money in my savings account first before even thinking of paying off debt. Mainly because it makes me feel safer, but also because you then always have the option of USING that money to pay off your debt any day you please. If you go the other route and start knocking it out asap (which is financially smarter), it’s not like you can then “get it back” at any time, ya know? But again, that’s just me.

The best answer here, and probably the most boring, is to work on all things at the same time. Start paying off a little debt while also saving up and living your life as stress-free as possible. That latter part being the most important here (although easier said than done). Yes it sucks being in thousands of dollars of debt, but we also can’t let it ruin our day to day lives. So I think it’s first worth figuring out how much money you think you’d need in savings to feel comfy right now, and then at the same time how much you can put toward paying off your loans every month while still living normally. Unfortunately there’s no magical %’s here that fits everyone. (Which sucks, I know)

What would you all do, friends? How do you find a way to be OK with this?

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  1. Money Beagle May 5, 2011 at 7:22 AM

    The initial decision isn’t as important as the follow through. At 24, I think the hope and expectation should be that there would be decent salary increases expected for the next few years. If that happens, resist the temptation to ‘add something in’ with the extra money. If you decide now to apply 1/3 of your discretionary income to student loans, 1/3 toward retirement, and 1/3 toward cash savings, don’t be tempted to cut that down and get something else (like a house or a fancy car or whatever) once you get your next raise. Plant the seeds of discipline early and stick with what works, and you’ll be happy with the results down the road.

  2. Jennifer May 5, 2011 at 7:27 AM

    Set some aside for a small emergency fund (around $1k), then focus on the debt.

    It’s good to have some savings to fall back on, but it sounds like you have really supportive parents you can lean on if you get in a HUGE emergency.

    As far as the mental zone, remember that you got those degrees (at least part of the reason) to have a higher salary and subsequently enjoy a higher quality of life. It’s only some debt. Keep enough money for yourself every month to enjoy yourself–even just $100 or so.

    Congrats on the masters!

  3. Matt May 5, 2011 at 7:54 AM

    Hustle your butt off! Now that you’ve gotten your degrees get out there and earn some money. Don’t get caught up with everyone else with a masters that feels a sense of entitlement to things like a big house, a fancy car, or spending hundreds of dollars on dinners. You will feel much more accomplished down the road when you will be the only one at the table that is debt free. Trust me.

    Also, just because you’ve earned the right to enter the “real world” do not think that you are above a little side hustle. Every cent counts. Start a budget and beat it every month. Track every dollar and any left over toss it at the debt. I agree with the poster above that you should build a small cushion ($1k-$3k) then attack the debt, the guaranteed accumulation of interest on that debt scares me more than the potential lost gains in the market or in interest bearing accounts.

    I think you are on the right track by simply acknowledging that there is a problem here, already ahead the guy in the next cubicle over. Be smart, be frugal, and understand that this will not fix itself and it is entirely up to you.

    Good Luck!

  4. South County Girl May 5, 2011 at 9:07 AM

    I’d say since your living with your parents (are you paying them rent?) your expenses are relatively low. Give yourself a little pocket money to spend each month so you don’t tunnel yourself in their place and forget what sunshine and friends are. If you can’t consolidate your larger interest student loan debt, start with the highest interest one and toss all the extra on to that big boy.

    I’d keep around $1,000.00 as an emergency fund since your living expenses are low and this should cover a car repair or something like that. After your bills are paid, you have grocery money & and you have some small pocket money maybe $100 a month? I’d take 15% of your income and open a ROTH IRA. The rest I’d throw at the debt with the highest interest rate.

    If your student loan debt was smaller, I would have said to hold out a year or so on retirement contributions (unless there is an employer match… if there is, contribute enough to get the match— don’t leave free money on the table) but since its 100k, its going to take you a while to knock that out so I would do both simultaneously.

    If you get tired of living with your parents, stop paying extra on the Student loans, save 3 months of Income as your EF, and then move out.

  5. Uncle El May 5, 2011 at 9:12 AM

    I really do not know your situation to give you the correct advice but since you are living at your parents house you could do a breakdown of 50% of your salary towards debt repayment. 10 % towards savings and your still way ahead of the average american in terms of savings rate, and the remaining 40% to live on and pay other misc bills. The reason you wrote this email is because the debt is weighing over you so the faster you pay it down, the better you will be.

  6. Brent May 5, 2011 at 9:36 AM

    I’m in the same situation pretty much. ive got a $5k emergency fund set up and then everything else i make goes to the student loan. If i have an emergency, and it has to be a real one, i dip into the 5k and then i take all my extra money and build that account back up to 5k and then resume paying everything extra on my student loan. I wouldnt even think about retirement until this student loan is paid off. Good luck

  7. Kevin @ May 5, 2011 at 9:36 AM

    Whatever you do, make sure you are paying off the higher interest rate debt first. You said you want to pay off the low interest stuff before it rises, but there’s no sense in paying anything more than the minimum on that until you’ve paid off the high interest stuff. You always want to pay down the highest debt first.

  8. Investing Newbie May 5, 2011 at 9:43 AM

    I’m going to be in that situation in 2 years when my loans are due. Currently, I’m trying to pay off the higher interest loans first and letting the other ones sit around until they are actually due.

    Make sure you pay the higher interest loans first. Also try to make 2-3x the monthly minimum payment, just in case an emergency sidetracks you, you can miss a few payments and not go into default.

  9. Steph May 5, 2011 at 9:48 AM

    Now, I see it a little differently than J$. The Dave Ramsey method has worked for me and millions of others so I highly recommend it, try to work on things one at a time so there is some sense of accomplishment.

    1) Make a budget. It’s great to live at your parent’s for a while, but at 24 I’m sure that won’t last too much longer and that is something that should be added into the equation.
    2) Save up a small emergency fund as quickly as possible. $1000 should do it for you, but whatever number you are comfortable with.
    3) Line up your debts smallest to largest and start knocking them out one at the time. Paying the most you can to the smallest balance until it’s payed off and adding that to the next balance.

    As for your retirement account, I do believe the earlier you can contribute the better, but I would contribute whatever percentage would maximize your employer match and not worry too much about anything over that amount.

    If you consolidate, the interest may be lower, but the payments are going to seem to take forever and a day to chip away at this huge balance, which may burn you out after a while.

  10. Walnut May 5, 2011 at 9:50 AM

    I think a critical part of being able to pay off as much debt as possible is your continued ability to live with your parents. That said, I think it will pay dividends to pay your parents some rent money (even if they don’t want it, tell them to cash the checks and throw it into a savings account or something), and make sure to contribute to other overhead expenses. These little things will amount to a few hundred a month which is WAY cheaper than becoming frustrated with your living situation in a few months and springing for an expensive apartment. Definitely focus on building that mutual respect with your parents.

  11. Pressure Cooker Diaries May 5, 2011 at 9:58 AM

    When we originally started paying off debt we used J’s advice to do it all at once. Sorry, J but I think it was a big mistake. You won’t make much traction on anything, and you’ll get frustrated when nothing is eliminated.

    I’d vote 100% for the Dave Ramsey plan:
    Save $1000 as a mini emergency fund, and get on a written budget plan.
    Snowball debt, smallest to largest (regardless of interest rate) and KILL IT!!

    With a decent salary and by living with your parents, you could knock out the debt in a few years and potentially be TOTALLY DEBT FREE by age 30!

    But you need a plan, and you need to attack it with all you’ve got. You’ll get much more traction eliminating small stuff first and then snowballing the payments into the next one. It works.

  12. Stephanie May 5, 2011 at 10:02 AM

    Definitely look into consolidating, though make sure it’s worth it. I know with my loans, they would have lowered the interest rate on one but raised another because they weighted the consolidation rate. Didn’t make sense for me. Also, with some loans, if you set up an automatic payment, the interest rate can drop by .25%.

    I’d get an emergency fund going until you hit at least $1K, set up a retirement fund as soon as possible (especially if your company matches, might as well take advantage…the earlier you start, the better off you’ll be at retirement, even if you only put $50/mo in at the beginning), and start hacking away at the loans with as much as you can. Depending on how you operate, you might want to throw everything extra at the higher interest rate, or you may want some “instant gratification” by paying the smallest loan off first.

  13. MJ May 5, 2011 at 10:34 AM

    I’m in the same spot (without quite as much student loan debt). I was used to living on my own during school and during my first job out of school, so when I moved back to my home state and in with my parents, I looked for the fastest way out and wasn’t able to build up savings or pay off the debt as fast as if I had just sucked it up and stayed with them, which was an option, so I think she should do that for as long as she can! Now I’m overpaying on my student loans (about 50% over what’s due each month) and socking money away to my efund, but the student loans come first because I have a decent amount of savings (5 months and trying to get to 8) and I hate having the debt. I always schedule that payment early in the month and put whatever’s left at the end in my efund.

  14. Kandace {Making It Bright} May 5, 2011 at 10:38 AM

    That’s tough. I would start a $1,000 emergency fund, get it funded, and then move on to the student loans, paying more aggressively on the ones with higher interest rates. At the same time, contribute as much as you need to get the employer match in your 401K. You also need a good budget.

    You’re lucky that you are able to live with your parents while you focus on paying off the student loans.

    Celebrate the small victories in paying back your loans. Reward yourself within reason but stay focused on your financial goals.

  15. Megan May 5, 2011 at 10:40 AM

    As “the reader” in question here (am I allowed to reveal my secret identity??), I want to thank everyone for their awesome feedback! I have just this month hit my goal for my emergency fund, so I’ll start moving that money to my loans instead ASAP. I am also glad to see that some other people have the need to SEE the progress, which makes the moving in multiple directions issue more tedious for me.

    Yes, I am paying as much rent as my parents will let me, and I try to remind myself when things get rough at home that they are wonderful people and that this is good for me–so far, it is working. I have a small IRA and will get a company-matched retirement plan in a few months; how much I can put into that versus loans is up in the air, but we’ll see.

    Since sending this email in, I’ve realized that this is what my dilemma really comes down to: my whole life, I have been focused on saving and having an emergency fund, because loans weren’t an issue yet. Now that they are, I think my focus needs to be on doing what’s best for my overall net worth, and not just the assets column–which definitely means the loans since they are big $$ long term. But how do I get my brain to switch over to this goal!?

    Thanks again, all!

  16. LG May 5, 2011 at 10:47 AM

    There’s a LOT of good advice, the only thing I would do different then what a lot of people are saying is pay down the variable interest rate loans first. Our economy is still way up in the air, and interest rates ARE going to rise, make sure your debt doesn’t sky rocket with them. I do agree with saving $1000 for emergencies, and trying to put 50% of your income towards these debts, starting a retirement fund right now, and look into consolidation. Good luck!

  17. Austin May 5, 2011 at 10:50 AM

    Living at home should equal a rather large amount of “disposable” income, right? I’m not thinking of anything too novel here, so to work on everything at once is the best plan IMO. A huge amount of debt can be just as depressing to future plans as a lack of savings could be, so while you’re living free and easy at home, sock a huge chunk of your income each month towards debt AND to savings. Like Thousandaire said, work on the highest interest loans first so you can stop wasting money on interest payments!

  18. Clare - Never Niche May 5, 2011 at 10:53 AM

    I would sock away an emergency fund of $1000, also save enough to move out/live on my own when that time comes (and it WILL come), and pay down as much debt as possible while living with your parents. Allow yourself a reasonable allowance of cash to have some fun every week but keep your eyes on the prize. Don’t go into any new debt – i.e. car payments, credit card, etc. And to echo Thousandaire, pay off the highest interest loans first. My loan payments are bundled through, which allows you to specify how much you want to pay on each loan. $0.00 is required from my every month on my highest interest loan because they think I’m their cash cow. I always change it to a few hundred dollars instead of $0.00.

    In other news, don’t live on ramen! I get upset when people always turn to this option. Quinoa, lentils, rice, and beans are all the same price if not cheaper and you won’t have a sodium-induced heart attack from them. You can make enough for the week and add whatever you wants – meats, cheeses, veggies. Healthy!

    Best of luck!

  19. Jen May 5, 2011 at 11:16 AM

    Ok I’m really frustrated with this stupid form because I wrote up a nice big detailed response and then it claimed I was “a bit spammy”. I totally am not spammy. Now I have to remember everything I said :( boo.. (Bad comment form, J$) On another note, I tried to submit several more times and it still says I’m spammy! Quadruple boo!

    I’m just emerging from almost this same situation. A few differences, I was getting my master’s while working full time so the cash flow was a little better, and I live with my husband not my parents, so we split rent, but most of his income goes toward his student loans, vehicle, cell phone etc, not to my loans or our savings.

    Since graduating undergrad in 2008, we’ve brought our cash savings from 0 to 25,000, our retirement savings from 0 to 35,000, and I’ve paid off my smallest student loan and have been slowly chipping away at my big loans. So yes, it is doable to save cash and pay off loans.

  20. Jen May 5, 2011 at 11:17 AM

    Part 2
    1. What do I do first? Should I look into consolidating? How much of my income should I pile into my loans versus how much should I start saving for a rainy day?
    – Yes, look into consolidating, but if you have a lot of private loans it won’t do you much good. Set up a budget (more about that in a second), figure out how much more than the minimum you can pay on your loans, and set up automatic payments from an account that won’t ever bounce. Most loans give you a discount if you use automatic payments, and another discount/rebate if you pay your first 12 months of payments on time. Don’t miss this free money! Put all of your “extra” payments toward the smallest student loan. I know from personal experience that 100k is a ton of debt and you will need small victories (ie paying off your smallest loans) up front to keep you motivated!

  21. Jen May 5, 2011 at 11:17 AM

    Part 3
    2. How do I get myself into the right mental zone for this?
    – You are already on the right path! What I did after graduation was to read EVERYTHING I could get my hands on about personal finance – IRAs, 401ks, loans, credit scores, stocks, mutual funds, tax implications – you name it I read it. I stuffed my head as full of information as I could, and then I made all of my financial decisions based on my gut. So far, they have turned out to be very good decisions.

    This is by far the BEST budget spreadsheet I’ve ever used and I cannot recommend it highly enough. It works especially well for someone just starting out, as it helps you wrap your head around all of your current expenses, periodic expenses, and future expenses. The neflix, cell phone, magazine subscriptions, tire replacements, etc really can add up quickly. You can enter how much you want in your emergency fund by a certain deadline in the future, and it tells you how much to save toward it and includes that in your budget. Once you have all of your base expenses in there, increase your emergency fund contribution, retirement account contribution, and student loan payments until it says you have 0 available for the month. That’s not really 0, because it only allocates 95% of your income to account for random expenses that pop up month to month. One thing you might want to do is make sure your emergency savings are at least equal to the amount you would have to pay for rent if you lived on your own, so you can quickly build up an emergency fund and don’t get used to the extra cash flow in case you have to move out.

    Best budget spreadsheet I’ve ever used:

  22. retirebyforty May 5, 2011 at 12:24 PM

    You should look into consolidating all the loans so you can get a lower interest rate. Interest rate is at a historic low so you should be able to do it. Once you did that, then I would save up at least 5k for emergency fund. I think $1,000 is way too low.

    Assuming you work in a place that has a 401k plan and matches contribution, I would put all new money in 401k first so you’ll get the match. That’s 100% guarantee returns so don’t miss out. After you get all the matches, then you should put some toward paying down student loans, some in Roth IRA, and more in 401k.

  23. Grant May 5, 2011 at 12:25 PM

    My understanding of student loan debt is that it can’t be paid off in large chunks. If your student loan payment is $100/month and you pay $1000 in one month, that doesn’t knock $900 off the principal. It merely means that you’ve paid off ten months with one payment. While you’re seemingly paying off quicker, you’ll still pay the same amount, just in less time. When I left college I had a very small student loan payment, about $60/month and the first payment I made was for ~$300. My debt owed was reduced $300, but all Sallie Mae did was apply it to my next five payments, meaning my next due date was five months in the future.

  24. Grant May 5, 2011 at 12:29 PM

    Unless you save up enough to pay the current payoff amount, they amount you’re going to pay back is fixed. You’re not saving any money by making larger payments on a monthly student loan payment. Basically that money is not working for you in the way you intended. You are not saving interest payments.

    If you do want to pay it off in a large chunk, you’re better off investing the extra payments each month while you accumulate enough to pay off the debt in one fell swoop. Laddering CDs in 24, 12 and 6 month increments may be the best option to target a date sometime in the future in which you have a wad of cash available to make the payoff amount.

  25. Grant May 5, 2011 at 12:30 PM

    I would look at consolidating in a Direct Loan and investigating your eligbility for Income Based Repayment or Income Contingent Repayment. Both of those can further reduce your student loan debt, especially when it’s sizeable like yours. My wife was able to reduce her monthly payment by 75% without increasing the amount of interest she will pay over the lifetime of a loan.

    If you’re in a job in public service or a non-profit, the remaining debt on an IBR or ICR is forgiven after ten years or 120 payments and the amount forgiven is NOT counted as income.

  26. J. Money May 5, 2011 at 12:39 PM

    THANKS EVERYONE!!! This is great. Glad you got to see it too, Megan, forgot to ping you it was going up ;)

    Sorry for the crazy “spam” comment stuff — it alarms when there are too many links in the comment, OR, which I just found out, if the comment is TOO LONG. Really sucky, and I’m sorry about that. But looks like y’all have figured it out without me! haha… I guess for now we just break it down into multiple comments until I can find a fix.

    Keep the thoughts coming!! Especially w/ her wanting to get her “mindset” on track — that seems to be the most important part here now. THANKS EVERYONE!!

  27. Jennifer Lissette May 5, 2011 at 12:47 PM

    I just tried to leave a long comment and it was “too spammy” so I’ll try to sum it up cause I’ve gotta jet soon.

    A) Five percent of income into retirement accounts invested in low cost index funds.

    B) Track every penny, create a budget, start a small emergency fund.

    C) Debt snowball the student loans. The debt snowball was literally created for getting you in the “right mindset” for exterminating debt.

  28. kh May 5, 2011 at 12:50 PM

    I would definitely start with an emergency fund. I know when you’re young it’s easy to say that you don’t need one, but if you don’t have any cash set aside for emergencies, you put yourself at risk. If something does happen and you ahve to put a $500 or $1000 charge on a credit card (dental emergency, car emergency, you trip and break your ankle emergency), you’ve then put yourself more in debt.

    Start with a basic E-fund of around $1000 or $2000 then start chipping away at the debt.

  29. Brian May 5, 2011 at 1:07 PM

    I’m just going to say the same thing I say to everyone with a disgusting amount of college loans: Go talk to a local recruiter! I don’t know about the other branches but the Army has the Student Loan Repayment program which will pay off up to $66,000 of your student loans. The rest of that could be payed off in a few years with hard work and good budgeting.

  30. Ginger May 5, 2011 at 1:26 PM

    I think I got hit with the too long of a comment too. I’ll separate it into a couple parts then.
    1st I am going to assume you have federal student loans (SL) as well as private SLs. I also assume some of these are subsidized and some are not. Please tell me if my assumption is incorrect. I would add up the minimums of all your SLs as well as 10-15% of your income to retirement and 5-10% to a EF fund. I would also add in the cost of a small rent and a repair fund for your car. I would track your spending to help you make a budget (include annual expenses in there like Xmas and car insurance).
    Now that you know you can afford your payments (I hope) now it is time to tackle it (all of this is once you have your job). Now, list your debt in three categories, private SL, unsubsidized federal SLs and subsidized SLs. Rank those each by interest rate. Then I would start paying the interest on the unsubsidized SL, nothing on the subsidized and put everything that would be going to the federal loans (that is not) straight to the highest rate private SL. Then 5 months from graduation (you have a 6 month grace period) call up your federal SL companies and ask for a graduated repayment plan. Do this for both subsidized and unsubsidized federal SL. This will mean you have a higher minimum payment later but you probably will be able to pay off the higher rate SL and that should help with that. Remember to claim the SL interest deduction on your taxes btw. Once you have the highest rate SL paid off look at the rest of the debt and determine the next highest, if there are two very close pay off the private loan first.
    For retirement planning check next comment.

  31. Ginger May 5, 2011 at 1:39 PM

    For retirement, a lot of that depends how much you are/will earn. Often companies require you to wait a year to start the 401k. Check with your new company about that. Once they let you contribute make sure to contribute to get the match, if there is any. After that, it gets more complicated. You need to pull out your tax return and take your income minus your deductions (SL, standard deduction and personal) and then determine what highest percent you will be taxed. If it is 15% or less put the remaining retirement savings in a Roth, more than that put it in either the 401k or traditional IRA. Since you are only 24, 10% would be ok but if you could reach and get 15% it would be better. By 25 I would recommend getting up to 15%. Since you will be getting this job in May/June likely your income will be low enough that the Roth IRA would be your best bet.
    For your EF, most people will say save up $1000 or 3-6 month then throw the rest at debt, I disagree. Make a line item in your budget for your EF and keep finding the EF, trust me it will get used. To start I would start with 10% of net, until your 6 month grace period is over just to get some extra savings in there. Also, if you do not have one, get an ING account. If you get someone to refer you, and put in $250 you can get $25 after 3 months, which is a nice addition to your EF. Living at home and having a line items for repairs to your car (as well as a medical line item) should keep the emergencies down.
    Make sure you budget for some fun stuff too and for decent food, that amount depends on where you live. Let me know if you have anymore question, you can contact me through my blog.

  32. Ginger May 5, 2011 at 1:42 PM

    Grant, if you SL company does not put the money towards the debt, and just counts it towards the next X payment, call them. They should be putting it towards the principal but some companies try to get away with not doing it. Some require you to make another payment and write “for principal” on it.

  33. Ginger May 5, 2011 at 1:51 PM

    Oh, and Megan the notmsnmoney proboards have a great community that helps with support and keeps you motivated and does a monthly budget update. I love seeing my debt go down and my net worth go up.

  34. Justin May 5, 2011 at 1:55 PM

    Trade those degrees for $100k or $200k debt? No way! That’s bad advice. The writer said himself that at 18k, he didn’t know what he was getting into – until he found himself looking up at the mountain of debt.

    In terms of the mindset: Once your settle on a working budget, you’ll be ANXIOUS to send payments to debtors… Every check you send means you owe someone a little less money, and it’s a little less debt that they get to apply interest to.

    Also, you might consider a software such as Quicken which will report your ongoing net worth. Watch it climb (even if it starts negative) and you can see progress being made.

  35. Justin May 5, 2011 at 1:56 PM

    **Not “18k,” but at 18…

  36. WR May 5, 2011 at 2:30 PM

    Get moving on building an (at least) 6 month contingency fund. This is not a matter of current need, local situation or any other fleeting reason. It is a matter of philosophy. Building and maintaining a contingency fund forces you to make tough value choices and build enormously powerful lifelong habits. You’ll realize that having this critical safety net allows you to make better choices about almost everything else in your financial life.

    This money goes in an FDIC insured bank or savings. don’t count on much interest.

    While you are doing this try a few things:
    1. Try to get the terms re-negotiated on these loans. Is there a way to fold them into a lower interest loan.
    2. Pay more on the higher interest loan first. Pay minimums on the lower interest one.
    3. if you have the opportunity to get a 401k match, do it. your tax reduction will make it a no brainer.

    Big Thing: Try to refinance your student loans to lower FIXED rate + longer term. One thing different about student loan debt than most other forms is that *hopefully* your earning power will climb over time. Your future debt payments on this will be a smaller & smaller percentage of your income


  37. MacroCheese May 5, 2011 at 2:47 PM

    Just a personal preference, but I would kill the debt first and foremost. This is assuming you have an emergency fund of some sort in place.

    I also say with the expectation that we’re entering a period of lower stock market returns and still sitting in the middle of a period of negative real returns on savings accounts.

    If you can consolidate at a low rate, start paying down until the interest rate curve corrects and you can actually earn money on your savings.

  38. Ginger May 5, 2011 at 2:59 PM

    Macro, if you do this you loose out on the chance for compound interest. The younger you start the less you have to invest to get the same amount of money at retirement,

  39. Diolated May 5, 2011 at 3:01 PM

    You’re not going to pay this off tomorrow–get that in your head now. It took a while to get that deep in debt, and it’ll take a while to get out. Trust me, I’m down to $75K from $130K in student loans. I had lots of starts and fits, but if I were to do it again with what I know now, I would:
    1) Add your total debt–you need to know this amount;
    2) Add up the total interest you’re paying every month–you need to get mad at this amount;
    3) Track your expenses for a few months;
    4) Design a realistic budget, paying yourself first–read, save and invest some money every single month–it make you feel more secure;
    5) Stick to your budget no matter what;
    6) Put all excess $ (including bonuses, windfalls, etc.) on either the lowest balance loan, or the highest interest, whichever will keep you more motivated;
    7) Don’t get caught up in lifestyle inflation or you’ll have these student loans staring back at you like some big dumb animal 10 years from now.

    Good luck

  40. DMB May 5, 2011 at 3:36 PM

    1. Budget, not just for one month but for every paycheck a few months ahead of time. Include a reasonable amount of “fun money” to help you keep your sanity. after necessities, everything else goes to debt.
    2. Save in your company’s 401k up to the matching amount. Increase your contribution later.
    3. Pay the min amt on all your loans and pay anything extra on the lowest balance loan. Make a separate payment with your extra funds. You can specify that you want it to go to principle and not advance your due dates. The satisfaction of seeing something go away outweighs what you’ll save in interest. And once the smaller loans are paid off, you’ll use that money towards the higher interest debt sooner so it will all balance out.

    4. Because you are worried about savings but have an emergeny fund already, you could always save something small to keep up the habit of saving-$50-$100/mo…in an online account direct deposited from your paycheck before you even see it. Now you have everything covered-retirement, saving, and student loan repayment.
    It’s a long road but doable. Oh, in in my opinion consolidating sucks. They stretch out your repayment terms and you end up paying almost double your initial balance due to the extra interest.
    Sacrifice now-work really hard, get a second or third job and use everything toward loan payments, and in the future things will be much easier. It’s worth it.

  41. Dani @ OK, Dani May 5, 2011 at 3:38 PM

    Why is 1000 always the go to emergency fund number?

    I say to this person – first off, congrats on the masters and the job lined up! whoop whoop!! And yay for being able to stay w/ mom n dad for a bit. (winning!)
    I kinda agree with J in that you should work on savings and debt at the same time. Figure out a budget that works for you, and my big advice would be to put as much to your retirement accounts as you can while you’re still young…. and living at home w/ less expenses. Save money while paying your debt down and kicking ass at your new job.


  42. BruceBucks May 5, 2011 at 4:16 PM

    If your staying at home with mom and dad then you should be able to save up about $10,000 in 6 months for your savings. I don’t know how much you are going to make starting off, but im guessing anywhere from 2-4k a month. With no housing expenses that is easily 1 to 2k a month that can go into savings. Then I would start hammering away at the student loans. Through 1,000 at it one month, 2,000 two months, because the longer you let that loan linger the longer it will be with you the rest of your life. My mentality is live on less now so that you can have more later. Pretty soon you wont be living at home and it will be harder and harder to pay down that debt. Use this opportunity to cut that loan debt in half.

  43. WR May 5, 2011 at 4:38 PM

    A contingency fund needs to be sized ‘as-if’ you were supporting yourself. That is kind of the point.

    Fairly straightforward. Add up your expenses for one month and multiply by 6. If you have people who depend on you for their food, shelter and emotional support, you should perhaps extend it to 9-12 months.

    This is a variable amount and is highly personal. The more frugal you are, the less it will be. Do you have a reliable used car? Do you shop at yard sales/Craigslist or find yourself at the mall every week?

    The flipside is this. Until you reach a higher earning level in your chosen profession you should try to earn more money.
    How good are you at the side hustle: Can you make a spot of cash in a pinch? Are you willing to babysit, Mow lawns, Sell your stuff or even work the dreaded retail job for extra dough?

    I built fences. Went to the local fence builder and asked him to send me the jobs that were too small for him to make a profit on. Gave him a finders fee and we both won. There are 1,000 ways to make money.

    Best of luck


  44. brandi May 5, 2011 at 4:49 PM

    I have the same problem. And it seems regardless of which way I lean, i feel guilty about not throwing money at the opposite one. So…

    My best advice, now that I’m almost 2 years into this crazy debt payoff game, is to spend the first few months JUST throwing it into savings. This will help you build a security blanket and give you a few months to figure out what you can and can not live with. For example…Ramen noodles for 3 months :)

    Once you get the lifestyle you can live with down, stop with the savings or cut it back to just a small portion, and throw the rest at your debt.

    This way you have an emergency fund stock piled up for those “just in case” moments (i’m a living breathing example as I blow up a car about every 1.5 yrs…) AND you will feel good about paying off debt.


  45. No Debt MBA May 5, 2011 at 4:59 PM

    A big congrats on getting a handle on where you are and looking to address it in a proactive manner. If I were in your shoes I’d probably do what a lot of the other commenters have suggested. Live as cheap as you can, start a small emergency fund, pay extra on your highest interest student loan, pay at least the minimum on the rest, contribute enough to get your employer’s 401k match. Good luck!

  46. LB May 5, 2011 at 9:40 PM

    I totally agree with J. I decided how much to put in savings and debt and what made me happy. It’s been working wonderfully and I am almost out of debt (including house). :)

  47. J. Money May 6, 2011 at 11:28 AM

    LOVE. LOVE. LOVE this community. Thank you so much for helping out and sharing your advice!!! Really means a lot to me, and I’m sure Megan :)

  48. MacroCheese May 6, 2011 at 2:35 PM


    I would agree, if there were returns to be had.

    The debtor knows exactly what extending the debt will cost them (3-4%?), but what guaranteed return (risk-free) exists at this point that would meet or exceed that?

    Hence, my preference is to attack the debt until the yield curve corrects.

  49. WR May 6, 2011 at 3:02 PM

    I know my views go against some of the “PF Conventional Wisdom” but I think it is important to look at everything as a whole:

    1. As a young person with a newly minted Master’s degree going into the workforce, a good portion of your time, energy and focus should be on the “earning more” side of the equation. If you are like I was, you will need to invest personal dollars into career related activities. Additional trainings, certifications, Professional Organization dues, etc are not always reimbursed by an employer and it is your best interest to choose these things yourself (not just let your boss send you to the hot topic du jour). Cash is King. Do not sacrifice too much cash flow in an effort to save some interest on these loans.

    2. You are going to pay interest on these loans. No 2 ways about it. Do everything you can to refinance or renegotiate. try to drive down the costs of these loans in any way possible.

    Investments in personal development and career boosting activities are the greatest investments of all. Stocks, bonds, real estate and precious metals pale in comparison to the earning power of a highly motivated professional.

    In short, try to drive down your interest rate, keep your payments up to date and once your Contingency Fund is fat & happy, start to tackle these loans with bigger and bigger payments.


  50. J. Money May 8, 2011 at 9:30 AM

    I, personally, LOVE that plan WR. Nicely put :)

  51. Ray Martin May 8, 2011 at 12:15 PM

    I agree that doing a little bit of bot paying off debt and saving for retirement is best, but you still have to decide how much to put toward each. Some things to consider are: 1) after consolidating your student loans, what’s the interest rate? 2) Does your employer do any 401k matching? If so, you wouldn’t want to leave any potential money on the table. 3) at 24, aggressively investing, what kind of return could be expected on your retirement account?

    If your interest rate on the loan is higher than the percent you might expect on your retirement funds, then get that crap paid off asap! But if it’s low, your employer matches well and you expect to see a solid return on your retirement investing because you are buying in at such an early age, the. Take your time on the student loan and start puting that money to work for your retirement. One plan isn’t going to fit everyone or every situation.

  52. Christine May 8, 2011 at 8:17 PM

    hmm that is a tricky question.
    More than likely she has a budget in place for basic needs and knows how much it costs her to live.
    I would start out with pulling together an emergency fund 3-6 months living expenses in saving which shouldnt take too long considering she lives at home. Then I would do a percentages game with the extra money she has left over after her living expenses.. You know there is no wrong or right percentage, she just needs to figure out which is more imortant, paying off student loans or saving for retirement… she could do a 60%-40% type of scenario or do an 80%-20% depending on what her “values” are For me I had put together my 3-6 months living expenses emergency fund and had my basic living needs budget put together then anything extra I put (am putting) towards my debt because I want to be completely debt free (except for my mortgage asap) and then I will be able to contribute A LOT into my retirement. With all that said I will be debt free in ~2 years and Im only 25 so I will have more than enough time to stuff money away into retirement. Even my father in law (who is an accountant and brilliant when it comes to financial security) recommended I focus on knocking out my debt as fast as possible then go onto the retirement accounts.
    Hope that makes sense and helps ?!?

  53. Jenna May 13, 2011 at 2:54 PM

    @Megan, I am three years out of grad school and totally sympathize with your dilemma! For me, not having at least a decent emergency fund was stressing me out. I paid my standard monthly payment on my loans and saved up $5k for emergencies. (I was only contributing to my 401(k) what my employer would match – I’d recommend you take advantage of whatever match they give you. Their match is probably a better return on your investment than any organic return you’ll find.) Then I started diverting the extra to loans instead of savings. If you’re getting bi-weekly paychecks (as opposed to two per month), budget for 2 paychecks each month, and use the “3rd paycheck” in those months that have 3 paydays to help accelerate your savings/payments – it’s an easy way to trick yourself into the extra money. To your point about the “brain switch,” it might be hard at first, but the more you start seeing your loan balance decrease, the more motivated you’ll be to paying it off. Track the balance monthly so you can look back and see the progress you’re making as you go along to keep you motivated…even if that number is overwhelming at first. I’m two months away from paying off the highest-rate of my two loans, and I can barely wait! Best of luck to you!

  54. J. Money May 13, 2011 at 3:42 PM

    Awesome, congrats!!! And so true about tracking = motivation too. That’s how I get when doing my Net Worth each month, even if it goes down. Seeing how it grows eventually over time is killer, just like watching debt go away month by month. Thanks for sharing :)

  55. TheGooch June 4, 2011 at 12:40 PM

    I’d focus on Emergency Fund first, between $1000-$2500 . It’s there to prevent unforseeable expenses from knocking your budget off track, or force you to take on more debt to handle a car repair, etc. Next get 1months expenses saved up to that no matter what happens, you can keep your payments up for another month while you handle the issue.

    Finally, go for broke on your debts. Personally I prefer Dave Ramsey’s debt snowball method, though it may cost you more in interest, it gives you more peace of mind. Whichever is worth more to you, go with that.

    Good luck!

  56. Steve O December 5, 2011 at 3:12 PM

    I don’t like your initial reaction… Those had better be really good degrees (M.S. in Finance, Mathematics, Physics, etc.) to be worth $100,000 ending debt! For example, a MSW (social work) doesn’t do anything besides qualify you for $30k/year starting jobs. We have a perception in our society (which we convey to those 18 year olds) that education is priceless. If you know beyond a shadow of a doubt that you want to be a philosopher or teacher or social worker, then go for the degree, but I think it’s irresponsible to say that degrees which you could get for $30,000 total are worth $100,000.

  57. Kris June 23, 2012 at 4:12 PM

    Lots of good advice! Just reading it motivates me to keep plugging away at my own debt!

    I graduated w/ about $50,000 in student loans. I decided to use Dave Ramsey’s snowball method – but I decided to focus on paying down my unsubsidized loans before the subsidized. It is my understanding that if loans are in deferment, interest does not accrue. This does not apply to me right now as I am making payments, but it is a back-up safety net to use if I ever need to defer payments.
    Direct Subsidized Loans—Direct Subsidized Loans are for students with financial need. Your school will review the results of your Free Application for Federal Student Aid (FAFSASM) and determine the amount you can borrow. You are not charged interest while you’re in school at least half-time and during grace periods and deferment periods.

  58. J. Money June 24, 2012 at 10:45 AM

    Great info – thanks for sharing! And good luck kick its ass! :)

  59. Wade October 7, 2012 at 7:35 PM


    My wife(23) and I(25) are currently dual income, grossing $109,000. We have been out of college for about 18 months now, and are currently hacking away at our combined student loans/one car of $68,500(Originally $94,000). We are paying $3,000 per month to all loans, $1,400 of which is the minimum payment.

    We really want to start a family, but I am not willing to do so until we pay down all of our loans and can survive off my military income(in case we decide she is going to stay at home).

    We are currently maximizing her 401k matching program($172 monthly/$2,112 yearly), which makes her retirement saving double that at $4224/year.

    I am currently contributing 10% to my TSP(a military 401k) which makes my retirement savings $424 monthly/$5,088 yearly.

    What I am thinking of doing is keeping her matching the same(it would be stupid to throw away free money) and lowering my contributions to 5%, instead of 10%, giving us $200 more per month for loans. Also, we would try to trim some savings else-ware($250). But the big problem is, how much will this hurt our retirement plan for the future?

    As I said, we really want to get these loans out of the way, so we can focus on a family…Our current plan gets us debt free in 20 months, but we want sooner….Any suggestions?

  60. J. Money October 8, 2012 at 10:51 PM

    Honestly I think you guys are doing great! I know what it’s like to want to do BETTER and just kill it even more, but unless one of you hustles on the side and brings in even *more* money, I think you may have the best system already in place there. Some times it’s just about prioritizing for the time being until things change, ya know? And plus – you can’t always count on *when* you’ll have a new baby either ;) We tried for two years and then finally was blessed with one, while a friend of ours tried 1 time and a month later was pregnant. I think as long as you’re relatively stable and have a solid income, it’ll totally be fine. There’s never a *right* time in my opinion to have kids, so I say just go w/ what you feel is best and it’ll work out just fine. You’re gonna love it! With or without debt :)