In the Military: Saving for retirement vs. student loans?

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In the Military: Saving for retirement vs. student loans?

Postby JellyNellie » Wed Jan 02, 2013 9:15 pm

I'm wondering if anyone could offer some advice on how to allocate my $$:

After rent/taxes, I net around 2k/month. I am two years into military service (28 y/o female), and it is my hope to serve 20. I have $6k saved for emergencies, and another $3k set aside for a car (mine is still going strong but has 170k miles!). I save $350/month for a car, and just started contributing $200/month towards the Roth TSP (a Roth 401k for military members). I mainly chose this option for low fees and ease of allocating payments as my salary changes. No credit card debt/car payment-- single, do not own a home.

My question is regarding my student loans. After undergrad and grad school, I have about $50k in loans at 6% interest. I am on the income-based repayment plan, and my monthly payments are $40/month--which does not even cover the interest, and I've grown nervous watching interest capitalize for the last year or so. I plan to take advantage of the Public Service Loan Forgiveness Program, in which loans are forgiven after 10 years of military service.

So, how am I doing?? My rank (and therefore income) is low now, and it is important to me to keep cash liquid for an upcoming car purchase. Also important to me to start retirement savings.... however, is it wise to continue paying the minimum on student loans?? Or should I be more aggressive "just in case"??

Any advice would be great.

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Re: In the Military: Saving for retirement vs. student loans

Postby ejb245 » Fri Jan 04, 2013 1:28 pm

My advice, after going through similar thoughts after grad school (pay more to feel better or just pay the minimum and watch the balances go up), is to do what makes you feel more comfortable. You don't know what the future will hold and if not even covering the interest is making you nervous, then maybe just up your payments to cover the interest and a small amount of principal. That way, you'll be making some progress towards paying down in case after 4 years you decide to get out of the service and you'll give yourself a little peace of mind.

Good luck!

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Re: In the Military: Saving for retirement vs. student loans

Postby frugalcoconut » Sun Jan 06, 2013 9:57 am

I am not familiar with the Public Service Loan Forgiveness Program ... does it wipe out the entire debt including both principal and accumulated interest? Assuming the answer is yes: Obviously there are no guarantees in life ... you'd be relying on the legislature not to modify/eliminate the program at a future date and there's always the possibility that you might not remain in the military for the next 8 years (whether through factors in your control or not). Despite these risks, if I knew there was a distinct possibility that a 50k debt would be forgiven in 8 years, I don't think I would put any effort in paying down that debt ahead of time ... especially when there are much better uses for your cash at this point in your life. Maybe keep the balance stable if that gives you more peace of mind ... although you can anticipate paying more toward it anyway when your income rises.

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Re: In the Military: Saving for retirement vs. student loans

Postby DoingHomework » Thu Jan 10, 2013 12:56 pm

I would definitely suggest you become an expert on the loan forgiveness program. Based on the 5 minutes of research I just did, it sounds like any extra payment you make will simply be a gift to the government with no benefit to you. Unless there is more to it, I would not pay a penny more than required to. It appears also that you must be very careful not to pay early or make advance payments as well.

I can understand your concern with the interest capitalizing. But you can also view that simply as an accounting thing. You can also view the entire situation as an incentive payment waiting for you after 10 years of service just like some people get bonuses and so forth. In my opinion there is not really any reason you even need to think of it as a debt. You can also view it as a cost of separation should you ever think about that in the next 8 years. Maybe 6 years from now you will have developed skills that make you highly valuable to a private sector employer and they want to hire you. You can always negotiate them paying off your loan as a condition of attracting you away from the military. (I used to be an exec in a defense firm and we recruited military people on several occasions and had no problem negotiating on issues like that, although never did that specific one.)

It is true that you might leave the military early and it may not be your choice. I would not be surprised to see a significant drawdown in the next 5-10 years no matter who is in charge. But even if you get forced out that does not mean all is lost, you can still go work the rest of your time in a near-volunteer role in public service to finish out your 120 month obligation just to get the loan paid off. Worst case is that you could work in the Peace Corps.

So definitely make sure you understand the rules of the program and understand any risks you might be taking. But it sounds like you are in a good position and should not be bothered by the interest adding on every month. Just complete your obligation in the service and enjoy the extra reward you earn after 10 years.

Good luck to you and thank you for your service!

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Re: In the Military: Saving for retirement vs. student loans

Postby JellyNellie » Thu Jan 10, 2013 4:48 pm

Thank you all for taking the time to comment and offer advice! I really appreciate it.

I have read the details of the Public Service Loan Forgiveness program, and I learned the hard way a couple of times not to pay ahead or try to pay extra-- There is a way, if you request, to have any extra that you do pay NOT go towards the following month's balance and only towards the principal (however I didn't know anything about it at the time). I'm glad a friend pointed out the details to me now, and not six years down the road!

I have decided to only pay the minimum payments and not worry about the increasing balance. After thinking about it, I think its more valuable to start saving for retirement and a new car (my goal is to pay cash for a new car in a couple years). Although I don't like watching that balance increase, I think I'll just have to let it go for now!

Many thanks again.

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