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Joseph and his partner have made all the right moves. They carry no credit consumer debt, but they’re still burdened with student loans and a mortgage. They’re barely able to make ends meet, and are worried about what this means for the future.
I am 30 years old and in my last year of a Master’s program. I will graduate with $125,000 worth of student loans, whose monthly payments will be approximately $925/month for 25 years (my undergraduate loans are, luckily, paid off). The interest rate on $80,000 is 4.25%, $45,000 is 8.00%.
I own a home with a mortgage of $165,000 with an interest rate of 6.625%, with mortgage payments (including homeowner’s insurance and real estate tax) of $1,400/month, to be paid off in 27 more years. There is approximately $65,000 in equity. I have no credit card debt at the moment.
My partner has $35,000 in graduate student loans at an interest rate of 4.25% and no credit card debt. Currently, she makes $35,000 at her job and is contributing to a company-matched 401k. When I graduate, I will likely make between $30-35,000/year.
We hope to have two children within the next four years. We are very frugal with spending, but at the moment just about make ends meet. We have one used car that we inherited from our family. When I graduate, the money I earn will just about off-set my student loan payments. We hope to throw any extra towards the principal of the mortgage.
Even under that scenario, though, we would only be able to pay off the mortgage in 15 years, and the student loans still in 25 years. Is there something we are missing?
Before the readers answer, I’d like to note that while paying off a mortgage early is a good idea for some (I hope to do so, for example), it’s not a necessity. Mortgages aren’t “good debt”, but they’re relatively innocuous. According to most experts — including my accountant — the choice between carrying a mortgage or paying it early is a “wash”. In other words, it makes little difference financially. (It can make a huge difference psychologically, though.) I suspect this is another case, like the recent broke New Yorker, where it’s best to simply be patient, continue making smart choices, and let time work its magic.
This article is about Ask the Readers, Planning Saturday, 30th December 2006 (by J.D. Roth)
December 30th, 2006 at 8:44 am
it seems to me your graduate school investment is not paying off. I don’t know what your field is, but 30-35K a year seems low for someone who holds an advanced degree. I know its not as simple as this is going to sound, but maybe your priority once you graduate should be to find a job that pays a salary suitable for an advanced degree.
Education is an investment, but sometimes you have to do some legwork to make that investment pay off.
Good job staying away from the cards. If I were in your shoes, I would focus on:
1.) graduating
2.) finding a master’s level job
3.) getting an emergency fund established
4.) then thinking about kids
5.) then paying down the student loans
I wouldn’t worry about doing anything extra with the mortgage for now. The reason being you already have substantial equity built up, so you can sell and move at any time if you need to (I’m simplifying a little here of course). You can also deduct more mortgage interest than student loan interest. I think the limit for SL interest is like $2500 a year per return, or something like that.
December 30th, 2006 at 9:51 am
I currently have 70000 dollars in credit card debt. I placed these in CCC recently but I struggle monthly trying to find the money for prescriptions, food and gas to take me to work to pay the debt. Anyone have any ideas since bankruptcy will take all I own. I am 60 years old and divorced and looking at a terrible situation.
Thank you for any help
December 30th, 2006 at 10:02 am
What kind of masters degree did you get? $30-$35k is definitely on the low side. Would you consider moving to another state where the pay is higher for your field but the standard of living is approx the same?
It seems that you have your financial house in order where you dont’ carry any bad debt like credit cards. I think your best option right now it to look for ways to increase your income.
FT
http://www.MillionDollarJourney.com
December 30th, 2006 at 11:08 am
icup and MDJ, I wonder what kinds of Master’s degrees you’re thinking about. I can’t think of any Master’s degrees that would command a starting salary of greater than 30-35k besides engineering, business, and nursing.
December 30th, 2006 at 11:44 am
Wow! I hate to repeat the other posts, but boy did you waste some time in school! You can make 30K/year delivering pizzas, which is what I’d suggest you start doing in the evenings.
As for your plan to have kids in the next four years…why not pay off the school debt first? You’ll have more time/less stress/etc when you do have children if you take care of the debt first.
Honestly, I hate to say it, but I feel like $30k/year is something a high school kid can make. With an advanced degree (from an expensive school), it’s time to put that thing to use!
December 30th, 2006 at 12:50 pm
Get a home equity loan or a HELOC (4%-7%), and invest that 65% (or more if you can get it) in Berkshire Hathaway. It’s Warren Buffet’s company, which is super stable and averages 23.5% a year. That’s an extra $12k/year in income. Pay the minimums on all your debts (except monthly CC bills) and invest the rest in Berkshire.
Meanwhile, I would find another job / hobby to make some money on the side. $60k/year for two people isn’t good. Invest all the extra money you make in Berkshire.
It sounds risky, but getting ahead in life is simply the process of accepting enough well calculated risks to let them average out and push you ahead. I employ this same strategy because it’s not particularly risky, and very profitable.
Tynan
December 30th, 2006 at 1:26 pm
As the first person in my family to pursue higher education, I hear a lot of, “You went to school for *how long* and you only make *how much?!* Wow, they really took you for a ride!” That gets old fast.
So, I’m not going to question the value of your higher education or your choice of career. Assuming that you do good work at a job you like and are well suited for, you’re building a good foundation for future advancement.
It sounds like you’ve been making smart decisions, and that you have a realistic perspective on your situation. Honestly, I don’t think you need to do much that you aren’t currently doing.
I might suggest taking a part-time job on evenings and weekends, using that money to reinforce your safety net. Even if you continue to just squeak by financially for a couple of years, knowing that you are prepared to deal with unexpected car problems, computer trouble or medical issues goes a long way towards making you *feel* secure. The real benefit to this is not so much financial as psychological. The big picture seems much less daunting when you have the little things under control.
Once you graduate, give yourself some time to settle into your new responsibilities and lifestyle before making real, detailed plans for kids. It’s not something you’re ever truly ready for, no matter how much you prepare!
Best of luck!
Kitty
December 30th, 2006 at 1:40 pm
$125,000 in student loan debt is a ton of money for graduate school that only gets you a masters degree. And to then only make $30-35,000, the whole situation makes no sense to me. However you are in this situation now. Here are my suggestions.
1) concentrate on the smaller student loan first. Throw all your extra money at that one. Deliver pizzas in the evenings, or newspapers in the early morning. you have to generate more income to throw at the debt.
2) i would not have children right now. you need to get some debt paid off first. Children do not have to cost a lot of money, but in order for you and your partner to both work, you will have to pay daycare. That could run you $1000 a month for a newborn. This is money that you could knock your debt out with very quickly.
3) do not worry about your mortgage right now. You have a loan of $45,000 that could be paid off much faster than the $165,000 mortgage could. And once you have 1 of the loans paid off, that will free up a chunk of cash to either debt snowball or pay daycare if at that time you have any.
I hope you can get through this, it will be hard, but with lots of hard work and discipline, I am sure you can. Good luck!
Jennifer
December 30th, 2006 at 2:18 pm
I agree with what everyone else said about your degree… If you paid $125000 to get the degree, I’m hard pressed to understand how you could not be expecting more then a 30-35k for your effort. It seems to me that you are probably underestimating your earnings potential.
But even if your starting salery would only be 30-35k, I wouldn’t be suprised if your salery could rise rapidly during your first few years in the work force. (I personally started at 35k after graduating and went to 45k the second year, 52k the third… going from 0 experience to 1-2 years experience makes a difference.)
I think you should probably do some more research, and shop around more in the job market.
What exactly is your masters in (and what was your bachelors in?)
December 30th, 2006 at 2:37 pm
I’m guessing you’re getting a master’s degree in Journalism . . .
I am 49 years old with a bachelor’s degree, and twice opted out of grad school (after being accepted) because of low starting salaries in my field and the high debt that would accrue. Boy, am I sorry I made that choice. Around the time I hit 40, I began to realize that not having a master’s degree in something — anything — was a serious disadvantage. And I ended up in debt anyway, but it was “bad” debt instead of student loans. So don’t beat yourself up. If you’re studying for a degree in a field that you want to work in, I believe it will pay off eventually. I don’t have any suggestions for your current situation, other than finding ways to make extra money, or just keeping it stable for now. Just want to support you in your studies.
December 30th, 2006 at 3:11 pm
I don’t find it surprising that a lot of people are discussing the merits of your degree, as there is an obvious discrepancy in the figures but one thing really is important for everyone to remember: money is not everything. Yes, it’s strange me saying this as a regular reader to this blog but here’s why:
I was discussing this article with my girlfriend and she said similar things. However, then I had to ask her “Aren’t you in the same situation bit 8 years earlier, though?” And yes, she is.
She studied as an Undergraduate in the UK for three years before moving to Boston to work for a Psychological study at Harvard. Now she’s back in the UK studying a Masters at Cambridge with aspirations to be a developmental psychologist in government social policy when she graduates next year.
Why do I name these places? She funded this herself through loans. She has huge student loan debts (£30k / $57k) but no other debts and can expect a job earning £19,000 ($37,000) when she graduates. She earned the equivalent of more than this when working in a bakery full-time last summer.
She didn’t take her advanced degree for money… it’s what she wanted to do!
The financial advice… I’ll leave that for the others.
December 31st, 2006 at 6:10 am
I have a mathematical objection to raise when you say “When I graduate, the money I earn will just about off-set my student loan payments.” Assuming you make on the low side at 30k and are in a fairly low tax bracket, this exceeds the monthly $950 school loan obligation easily.
30000*.75 (25% tax bracket) yields $22,500 after taxes or $1875 per month. It isn’t a lot of breathing room, but the situation may not be as dire as it seems.
Strategically speaking, you may wish to get a HELOC and move some of the student loan at 8% into it. The HELOC will be tax advantaged.
December 31st, 2006 at 6:46 am
I’d second the HELOC suggestions. At an earlier point in my life, I had a chunk of credit card debt that I rolled into student loan debt (my employer paid part of my master’s, so I took the cash, paid the ccs, and took out a loan for the degree). Then, when I owned a house, I took out a HELOC to pay the remainder of the student loan debt. In each case, I was moving the debt to a more tax-advantaged vehicle while I was steadily paying it down. You may consider doing the same; the tax benefits may free up some more money to put towards savings or paying down more of the debt.
I, also, won’t get into the rate-of-return question on your masters. I have a masters in public health that cost about $40k, and typically puts you in jobs that don’t pay a whole heck of a lot. One thing to consider, depending on your field, is whether there are positions you can take that offer loan repayment/forgiveness. A friend of mine who graduated from dental school with an astounding about of debt had the option to work in the public health sector & have the loans forgiven after a couple years.
Even if standard debt forgiveness isn’t an option in your field, you should also consider negotiating signing bonuses or straight debt repayment from employers who are interested in you. If you’re in a field with high demand for talent but relatively low incomes, employers often use tuition or loan payment as incentives to attract prospects.
Finally, the 2nd job thing sounds good on paper, but can run you ragged & leave you no room for the rest of your life (read: the wife & eventual kids). We use ebay & craigslist like a second job to earn some more income but with substantially less effort. Look around your house - you’d be surprised what people will buy from you.
Good luck!
December 31st, 2006 at 8:51 am
Even without mentioning the issues surrounding paying 125k for a 30-35k degree… my advice would be to not worry about paying the mortgage early. Frankly, that’s dumb. You have enough equity built up that there’s no hurry to pay the thing off. Sounds like your money could be much better spent. If you want, throw a little extra on it by rounding up to the next hundred dollar each month- or make an extra payment a year. But for god’s sake, if you’re having a difficult time making ends meet and you’re paying your mortgage off in 15 instead of 30 it should be pretty obvious what the solution is.
December 31st, 2006 at 5:55 pm
Find a rich person and ask them what they would do in the situation. I guarantee that you won’t find one that GOT RICH borrowing money to invest. (Berkshire Hathaway or not) Please don’t borrow money against your home.
If you are a great worker and get your Master’s you will advance and quickly be making more than 35k. (unless you are working in government or non-profit)
December 31st, 2006 at 6:24 pm
Agree with #15. Stupid, stupid, stupid decision to mortgage your house to invest. If you’re lucky it can work out, but the downside is huge. Investing is what you do AFTER you’re household finances are taken care of.
(Do people simply not do any financial calculations on their vanity degrees? That’s what a masters or doctorate is if it doesn’t actually earn you any money. Can you tell it’s a pet peeve of mine?)
Don’t prepay the mortgage, and definitely don’t have kids before you’re on a sounder financial footing.
January 1st, 2007 at 11:33 am
I seriously wish Joseph would put a comment on here to respond to some of the questions… specifically the cost of the degree versus the payoff. Chris T makes a good point.. if your degree is in a field you love, it may be worth it over the long run.
I would say you are in no financial shape to have children. Kids can be expensive… breaking a leg on the soccer field, getting a bad illness… someone mentioned day care costs. All are significant when you are stretched thin.
I would do whatever you could to pay down the large mortgage. Either use a HELOC (watch variables rates though). I would also advise you to build up a 3 month emergency fund as soon as you can. I’d do that before any extra debt repayments.
January 2nd, 2007 at 5:17 am
“Joseph and his partner have made all the right moves”
Uh, no they haven’t. Going that far into student loan debt was a horrible mistake. It’s too late to help them, but for everyone else this should be a lesson. I would never wish this scenario on my own children.
I have a 4 year old and an infant and there is no way in hell I will ever let them take a single student loan. We’re going to save like crazy ahead of time. They will work before they get to college and while they are in college, and if they don’t have the $, they’ll take time off and save money until they can pay-as-they-go.
I believe that an education is of utmost importance, but that doesn’t mean that you should bury yourself in a mountain of debt for 30 years.
People seriously lose all common sense when it comes to finances and education.
January 2nd, 2007 at 8:59 am
jag nogg - I agree fully. I wish I would have worked more through college instead of relying on student loans to get me through. My generation I think completely bought into the notion that we would be able to afford it once we graduated, so why not go for it.
For the people saying 30-35K is decent for a master’s degree, it could be that I run in completely different circles, but for me and most of my friends, when we graduated from regular college 8 years ago, we started in our jobs at around 34K. Now a lot of my friends make double that. Granted, this is in the computer industry, so maybe we’re spoiled, but I just assumed people with higher degrees just naturally make more.
Maybe I’m being overly optimistic here, but just make sure you shop around a lot for a job when you do graduate. You might find that you are indeed undervaluing yourself. Even if you have your heart set on one job in particular, just mentioning that you have had other offers might give you a bit of a bump at the negotiating table.
January 2nd, 2007 at 9:44 am
Um, how about moving into a less expensive house? While it’s less than pleasant, you can live in a two bedroom house with payments of ~$475/mo. that frees up a lot of cash.
Frankly, it sounds like you’ve only begun to find ways of cutting back.
January 2nd, 2007 at 3:02 pm
Have you looked into consolidating your two loans? I consolidated mine for less than the average of my cumulative interest rates, and after I make 3 years of on-time payments, Sallie Mae will drop my interest rate by 1% - which would not be insignificant for your $125K.
January 30th, 2007 at 2:23 pm
I agree with what most people say that Joseph may be underestimating how much his earning potential really could be.
On a different note and asking for advice, allow me to explain my situation.. Myself will be graduating (in December of 07) with a bachelors in both managment and finance. Upon graduating I will have approx. 80k in debt, and 3k in ccs, currently while in school I make 35k a year working full time, which i barely make it in order to provide for my household. Am I in a financial struggle or is it something I can recoup from eventually throughout the yrs..? Is the amount i owe common for a double major? Once i have my degrees should i be expecting a raise or start job hunting (i’m currently in the banking industry)? Any comments appreciated.
Lexie
October 2nd, 2007 at 7:58 am
This isn’t something that you can use right now - but something my husband and I recently ran into.
When deciding to have kids - FIGURE OUT HOW MUCH DAYCARE COSTS!!! We have one daughter and in order for us to both hold down a full time job (which we have to do in order to pay the bills) it costs us $620 a month. Thank goodness we didn’t have twins or that would be $1240 a month. Thats very, very close to our house payment! Lots of places in town were as high as $800 a month.
Just be prepared for some BIG expenses with kids. Most Moms stay home not to spend time with the kids, but because it doesn’t make sense to go to work if they don’t make more than they have to pay in.
August 17th, 2008 at 6:15 am
Sell the house. Use the equity to eliminate the 8% student loan debt and apply the balance to the remaining student loan debt. Yes, you will need somewhere to live; however, for this season of your life, how about going back to an renting an apartment or house?
As frugal as you are you’ll wind up in a house, again, down the road if you choose. Less debt affords greater options.
I also agree with #23, take a look at daycare options BEFORE planning for kids. Babies themselves don’t have to cost a lot but getting someone you trust to watch them whilst you are at work can cost quite a bit.
March 7th, 2010 at 9:04 am
I’m not going to get into the Master’s Degree debate. When I finished mine, I got a job paying $25,000 a year. Now I work in sales with the potential to earn four times that amount. If you are “just making ends meet,” I would not be thinking about having children. Your costs go up dramatically, and the added stress can really affect a marriage. I definitely wouldn’t worry about the mortgage right now, but the student loans are problematic. I worry about the suggestion to take out a HELOC. To put so much debt into a secured situation . . . what would happen if one of you lost your job? Why not just get a second job and make a goal to pay down the student loan debt? After putting away six months living expenses, you can begin to think about affording a family.
March 8th, 2010 at 7:16 am
Time and patience will assist and living within and below your means will help. SIMPLE: NO debt is good debt as you may here time to time from financial counselors and etc…the borrows become slaves to the lenders. A degree is never ‘WORTH’ going into debt for no matter how valuable it “can” be…it could have been done..I have two degress and I owe no one anything…yes it took me awhile to complete but I wanted to see the light at the end of the tunnel and not have the light controlled by someone else that I could have owed for yrs. Wake up America! It can be better for all us financially if we would just look into the systematic controlled lending system. Remember banks and loan companies are in business to make money (also include Universities as well) and they will not show up for your graduation but they will know when you graduate to ensure you pay your interest to ‘THEM’..also the remember the money you borrowed wasn’t the bank’s but someone else’s …therefore they are the middle man collecting the interest. We can get better with knowledge…