Thursday, April 15, 2010

Prioritizing student loan debt

Via Frugal Dad, I found this post on the question of whether one should save money for a house while one is still paying off student debt. I think the post is directed at people who are younger than me, but in any case he said sure, why not, on the idea that the increase in the house's value over time would more than offset the additional interest on a student loan. Dad's comment was "Personally, I would pay off the loans first."

This, or rather a variation of this, is an important question for us. Not the house part, really, because I have neither the savings nor the credit to buy a house at this point. Nor the inclination, really. The assumption that a house is going to increase in value at some predetermined or predictable rate is a false one, as I and hundreds of thousands of others have learned.

But the question of how quickly to pay off student loans is an interesting one to me. Dave Ramsey treats student debt the same as any other debt, to be avoided and, when incurred, to be paid off "with gazelle-like intensity" as soon as possible.

As you know, our gazelle-ness is right now focused on our CC debt. The Good Lord willing and the creek don't rise, that will be done in early '12. If I were to take the entire snowball at that point and put it toward my student debt, it would be paid off in '15, according to my spreadsheet.

But I'm unlikely to do that. We have virtually no savings at this point, and our gazelle-itude in dealing with consumer debt is precluding saving for the inevitable car replacement, or for retirement or college or anything else, really. We're still not in a position where we can get our kids braces, for goodness sakes.

I'm on the income based repayment plan, which means they take 15% of my gross income for my student loan repayment. According the recently passed student loan reforms, that percentage should go down to 10% in 2014. When and if we get to the point that that's our only remaining debt, maybe I'll ignore the change and keep it at 15%. But there ain't no way I'm putting 30% of my income into student loan repayment - the rest is going into savings. It's not even a matter of balancing the interest payments. I just need to start putting something in the bank.

But like I said, there's a long way to go between here and there.

1 comment:

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