Loan Strategy

My first priority is paying off our credit card debt. It's the biggest monthly burden, drags down our credit scores, is viewed negatively by insurance companies and lenders, and causes the most angst (especially when the credit card companies change the repayment terms by adjusting interest rates and hiking minimum payments!).

But when the credit cards are gone, we'll have to decide what to tackle next. Aside from car loans, the major debts would be student loans and the mortgages. We have two student loans, each with about $25k owed, our second mortgage at around $27k, and our first mortgage at approximately $138k. I'm not going to even think twice about the primary mortgage, but the other three are all on my list of things to pay off quickly and ahead of schedule.

The student loans are on a 20-year repayment plan, with nearly 16 years left. The interest rates are pretty low, around 3.5% (fixed). They're through the federal government, and Hubby & I each have our own. If we are tight on money, we can easily put either or both into hardship deferral without any negative consequences. Student loan interest is tax-deductible for both state and federal income taxes. And if one of us dies, that person's loan is forgiven - I wouldn't be stuck paying off his, or vice versa. The down side is that if we were ever to declare bankruptcy, the student loans cannot be discharged.

The second mortgage is a 15-year balloon at just under 10% (fixed). We have 11.5 years left of payments, at which point we'd either have to pay a lump-sum (I think of approximately $20k), or we'd have to refinance and roll in the remainder. The mortgage interest we pay is tax deductible for federal income tax, but only if we itemize (which is highly likely for at least the next 5 years, and quite possibly longer). We would be able to eliminate this debt if we declare bankruptcy or gave the house back to the bank, and could get away paying pennies on the dollar if we did a short-sale.

Although this is one of those situations where Dave Ramsey recommends paying the student loans first, because the outstanding balance on each loan is smaller, I really can't convince myself of the wisdom in that. Pretty much every way I see it, paying off the second mortgage before the student loans makes infinitely more sense.

Income vs. Net Worth

Yesterday afternoon, while my sister was visiting, the subject of debt/net worth came up. I mentioned that we had a negative net worth, and she couldn't figure out why- by her reasoning, I make far more than her and her boyfriend combined, plus we have a second full income... so Hubby & I make about 4X what they do.

Not counting the money we've sunk into repairs and improvements (about $30k over the past 3 years), we've lost quite a bit on the house due to fallen property values... around 20-25% from what the purchase price. The house has dropped over $40k in value, and we're currently upside-down on the mortgage by $25k. Our monthly mortgage & utility payments are roughly four times greater than their monthly rent & utilities... so having a higher income hasn't really helped to give us a greater net worth in that area.

We owe over $50k in student loans currently, all locked in at low interest rates. Since we have so much other debt, it's not worth paying this off quickly - but it's a huge hit on our net worth. By comparison, they have less than $10k in loans... though they're still in school, and that balance is rapidly growing (while ours is slowly decreasing). We are paying on three out of four of our student loans, whereas theirs are all deferred right now.

We have two newer vehicles that we're making monthly car payments on, costing us nearly $800/mo. Since we have loans on both vehicles, we also are required to carry full coverage auto insurance, which adds about $100/mo in expense (solely for collision & comprehensive) - we'd still have to pay at least for basic liability if the cars were paid off. They own both of their vehicles outright, saving them on monthly payments and on insurance, but their cars are high-mileage and have numerous mechanical problems. They both function reasonably well, but I certainly wouldn't feel comfortable relying on either vehicle to get me to/from work daily, at least not without several thousand in repairs and maintenance.

And finally, we have far more consumer debt. It's down quite a bit from it's all-time high, but we still owe over $24k. Our minimum monthly payments are currently over $900/mo. By contrast, they owe less than $5k in credit card debt, and are seriously delinquent on it. They're planning to save up some money and offer the credit card companies a settlement for about 50% of the original balance (before all the late-fees, over-limit fees, and interest were tacked on). If they can convince the card companies to take it, they'll pay less than $1500... but in the meantime, they aren't paying a dime.

Student Loan: 1 gone, 3 to go...

I submitted an e-payment for $1339.35 today, which is the outstanding balance on one of my student loans. It'll be a few days before the payment clears, but it feels GREAT to be done with that loan. 

I took it out to help pay for my summer classes during my last year of school. I had maxed out the "regular" federal student loans, most of my scholarships wouldn't cover summer classes, but I wanted to get my degree done as soon as possible. 

The original loan amount was $2500, at 5% interest rate. 

The minimum payments were due quarterly, and were $120 every 3 months. 

And now they're gone!  :) 

Student Loans

Last night I spoke to my sister, who recently enrolled as a full-time undergrad student. She was able to secure a very small grant to help cover expenses, but also had to take out additional student loans. She debated for awhile how much to take out - enough to cover tuition & fees only, all education-related expenses (textbooks, etc.), or enough to cover some of her living expenses as well (she's off-campus, so it would include rent, utilities, food, and vehicle expenses). She ended up taking out the maximum allowable loan, to make sure that she'll be able to cover her bills.

I'm sort of conflicted on this. I don't have a problem with student loans, so long as the amount is reasonable and you anticipate being able to pay it off. I took out about $29,000 in loans for my undergraduate degree. On a 20-year repayment plan, my monthly payments are $200/mo right now, and will drop to $160/mo in three more years (if I paid according to the schedule). I was pretty lucky in that the interest rates on federal loans was significantly lower than they are now (about half!). It doesn't seem like much, but when the total loan amount is more than a new car, and it's over 10 or 20 years, that's huge!

I looked up the maximum amounts in federal student loans that she'll be eligible to take over the next few years, and based on those numbers I'm guessing that she'll end up taking out about $35,000 to $40,000 by the time she graduates. Based on a loan amount of $35k, on a 20-year repayment plan, she'll owe $250/mo in minimum monthly payments... and on a 10-yr plan, it'll be $382/mo.

If she graduates, gets a job in the field, and continues to work for several years, it's totally worth while... she'll make up that amount in higher wages within a few years. But if she can't find a job, or decides to do something else instead, that's a lot of money to owe.

It sucks to have to take out loans that are almost double the tuition bill, just to cover living expenses and basic necessities, but it's almost a requirement. You can't really make it through school as a full-time student when you have to work full-time in addition... and you need a place to live & food to eat. I don't want to encourage her to take out more in loans than she truly needs, because it's so easy to break into the piggy bank and use it for "fun" stuff (been there, done that!) - but I definitely understand what it's like to have to project out 5 mo's worth of expenses & anticipated income and then guess at how much in loans you'll need to cover the deficit.

Pay off a student loan?

Both Husband and I each have multiple student loans, and we each have to pay two separate student loan payments. The biggest loans are federal Direct student loans, through the government. They're on 20-year repayment plans, so the monthly payments are fairly manageable. 

I only owe $1329 on my other loan (I think it was originally $2500). If I kept paying according to the schedule, I'd have almost three years left. My plan was to pay off my credit card first (currently $7400), and then pay off the smaller student loan - both by January 1st. 

I was thinking about taking either this or next month's credit card payment and instead just using it to pay off that loan instead. I'd still pay the minimum credit card payment, of course, but I could use the extra and pretty much get rid of that loan altogether. I don't think it'll make much difference overall (the credit card has a slightly higher interest rate, but in terms of actual interest paid it would be only $3 or so "extra" to pay off the loan vs. pay down the credit card). It might affect my credit score, but I would guess that would be ever so slight if at all. 

Are there any other considerations I'm missing? 

Financial Goals for 2009

I like to project out estimated expenses & income, and figure out where we'll be at various points in the future. I usually just do the rough calculations on a sheet of scratch paper, or on the back of a napkin, and don't often keep 'em or track how that compares to reality. 

The last time that I set written financial goals was in October 2008, and that's when I established the following list of "goals" that I hoped to achieve by the end of 2009: 

1. Contribute $200/month to emergency fund 
2. Achieve balance of $5000 in emergency fund by end of 2009 (current balance = $1900) 
3. Eliminate credit card debt by end of 2009 (current balance = $12590)
4. Pay off Perkins student loan (current balance = $1626)
5. Pay down Stafford student loan to <$25k (current balance = $25502)

Right now it's hard to say whether I'll be able to accomplish all of them. I still think it's possible, but it's going to be a bit tougher than I'd originally anticipated. We had a critical home repair in January that cost $1700, and was paid for using the emergency fund. My decision to go back to school (made after I wrote those goals) will also set us back by about $2500 this year (for tuition, textbooks & fees). 

Because of the economic climate, I've been contributing far more than $200/mo into the emergency fund, so that the current balance is already over $5000. I've also already taken care of #5 (just barely!). 

I'll definitely be able to pay off the credit card debt referenced in #3, but I'll possibly have to make a decision whether to wipe out the emergency fund to do so. Hopefully I'll be able to earn some extra money working overtime, and my company will give a holiday bonus at the end of the year.