Hey guys and gals! I'm so glad I found this! I have around 100K as does my husband. I have a question for the board. I am returning to graduate school for a one year program that *should* boost my income by at least 20K. It will also cost me around 20K to pay for the program. I currently have just about that amount in a retirement account. I am only 25, so should I take that money out and pay cash for my tuition so that I do not acquire any new debt? If I take out a student loan, it will be a federal one, and I think it is 6.8% interest. I am concerned about my ability to pay ANOTHER 20K in student loans, but it is also stressful to think about cashing in my retirement. But my goal is debt free... I just do not know where to go from here!

Thanks everyone for your help and your inspiration.

I would strongly advise that you preserve your retirement savings until you have no other option. I would only begin to consider using retirement money if you can use it without paying taxes or penalties on that money... unless it's a Roth, I'd forget about it. And even if it is a Roth... I think you're better off just paying off the loans little by little until you can gradually attack them more aggressively as your sallary increases.

Remember: don't cash out completely just to pay off chunks of debt. Economic hardship could be around a corner, and you need a cash cushion just in case. Using up all of your savings to pay off one debt will not completely free you of debt, and without an economic cushion the rest of the debt will ruin you.

How certain is that boost in income? And have you calculated in the cost of not being able to work for one year? As that's an opportunity cost you should factor in. And if you're doing the math anyway, also see how much you would pay off on your debt otherwise and include that interest in your opportunity cost.

I'd consider holding off on the extra eduction for a few years until you have some of your current debt in check. If you're afraid you won't be able to manage with the extra debt that means you'll also not be able to restore your retirement fund after going back to school. At least, not for a long time.

I'm somewhat suprised by the way that with an 20k increase in income you'd not be able to handle an 20k increase (+ a bit of interest) in debt. The increase should more than offset the increase in debt payments.

In short, I recommend to look at the maths again and see what it'll actually cost you to do this course, and what it'll actually cost you to pay of the debt compared to what you should(?) make.

Thanks for all of the input. It is much appreciated. It is a lot to think about- which is why I love being able to bounce these ideas off of people in similar circumstances with a little more experience. I probably will not touch my retirement account after consideration. I just have a lot of people around me telling me "you're young, you can make it back up". Thanks again for the feedback!

So, I just got notified that some of my loans are eligible for Special Direct Loan Consolidation. Here's the page for that:
http://studentaid.ed.gov/PORTALSWebApp/ ... dation.jsp

I've been told that this this will take four of my loans, consolidate them, and drop the interest rate by 0.50% (as long as I choose direct debit). I was wondering how the new interest rate was calculated, and the person I spoke to said it's just a straight average, not a blended rate or weighted average. I'm a bit leery of this info- it seems like that wouldn't be the way they'd choose to do it. If it is, I am glad, because that'd work in my advantage in my particular situation. (I have four eligible loans, 3 at 6.8% and 1 at 2.37%). It'd still be advantageous even if it was blended rate because of the drop, but still.

Actually, I just ran some numbers. If they did blended rate, it'd come out to 5.718% (with my balances) and if it were a straight average it'd come out to 5.693%. So barely a change. I suppose their method of interest calculation doesn't matter. It's the 0.5% drop that makes a difference.

Alright, with that issue dispensed with, here's a question- on the application, they give me an option to consolidate a whole bunch of loans- four that are eligible for Special Direct Consolidation, and another six that aren't. I'm not sure how that works.

What advantage do I have to consolidating either the eligible-for-special loans, or all of them? I see a slight disadvantage to consolidating all of them, since some of my ineligible loans have really high interest rates, and I would lose the ability to pay those down first debt-snowball style.

Is it still worth it to gain the 0.5% interest rate reduction on the eligible ones? The 6.8% loans are the third highest, so I would like to retain the ability to pay on them directly- but consolidating them to 5.7% would not change their order in the debt snowball sequence.

Any thoughts?

Hi Jake!

Ned,

I would advise against this unless you have truely huge amounts to pay. What is your balance now?

Your balance on all your loans would be helpful to know.

Although a .5% interest rate reduction (IRR) is nice, you should be eligible for a .25% IRR now, if you sign up for auto bill pay. Also, some student loans offer an interest rate reduction for 36 on time payments. Maybe your lender you have now offers that, so the .5% IRR might be a wash (although the deduction now is better than the deduction in 3 years.

Also when you consolidate, you are stuck with that interest rate. When you make a payment, that interest rate never changes. If you don't consolidate, and you can pay more than the minimum, it is applied to the 6.8 interest loan, and your balance goes down. I have been paying more than the minimum and (obsessively) tracking my interest rate. Just like you, I had some loans at a high rate (6.8), and some at a low rate (2.11). When I started tracking the interest rate, It was 6.14%, by July it was 6.05, and even got below 6% this month. (plus this was after I got the .25% IRR for auto bill pay, what I'm trying to say is you can probably achieve the .5% IRR (or more) on your own with some work.

flinch13, I have about 71k to pay back. The eligible loans only total about 9k.



This is a new concept to me. I didn't know that my interest rate would drop with payments. How does that work?

Because your effective interest rate is a weighted average. Lets do some simple math. Assuming you owe 5k at 6%, and 5K at 8%. What is your effective interest rate? 7%.

Lets say you pay off 2.5k in loans. You apply it to the 8% loans. You now owe 7.5k, and the average interest rate is now 6.66%, so your effective interest rate went down .66%.

Now, when you pay the minimum payment, it is applied evenly to all loans. Only the extra payment you can make will be applied to the loan with the highest interest rate. In my case, I chose the graduated repayment plan, so the minimum payment required was very small for the first 3 years, then increased. I then paid about 4.5 times the minimum, so more money would go to the highest interest rate loan first. This really only works if you have the financial ability, and discipline to pay more than the minimum payment every month.

Travis is right. My effective interest rate just went down because I paid off in full my highest interest rate loan. The loan company wants to consolidate so that you won't have that kind of control over your interest rate.

Hey guys,

Great convo! Welcome Ned!!
What follows is purely my opinion...
I'm a huge advocate of having more control of your money. As I see it, direct debits takes that away. Are you willing to trust Sallie (or any lender with the full contents of your checking account? I'm not. I'll take the responsibility of making my own payment on time each month.

I don't get hung up on interest rates. I believe if you're serious about attacking your loan, snowball it from smallest to largest, regardless of rate. It will work both ways, but I believe this way is fastest and has lower failure/ dropout rate.

Just sayin'. Cause its working great for me so far! Ned-- so glad you are here!

Best,

I don't get this. First of all, can't you reverse the direct debit immediately with a single click if it goes wrong? I use direct debits for everything. (again, other country). I've only ever had one telephone bill gone wrong. And that wasn't due to the direct debit. I get an e-mail (or text) whenever any money is taken from my account, so I always know what the status is.

Second: Isn't the chance of mistakes a lot larger if you manually transfer the money? You may get sick for a few days. You might want to go online and transfer the money but your computer breaks down. You might be on holiday. You might just forget.

Third: How often do direct debits go wrong? Is this a realistic fear to have? You trust them with your loan, which is a lot more money than is in the checking account (for most people).

What single click would that be? Sure you have to type in or click on some URL or bookmark; type in some login information; find the transaction you wish to reverse; click on some reverse button; and then perhaps fill in a form as to why you believe it should be reversed.


You are assuming good faith on the part of the direct debiter. There are many stories about gyms continuing to debit people's accounts after multiple requests to stop doing so. And it can be hard (for some reason) for the bank to block the debits without closing your account and giving you a new one.

I have used direct debit in the past, but only for companies I really trust.



That's why you should use your own bank's online bill payer system to automatically send the payment. It's a "push" payment instead of a "pull."

Automatic scheduling is great for a payment that's the same every month, but not if it changes.

(at least over here) you pay quite a bit extra administration fees for just about everything if you do not use a direct debit. I think it would easily cost me 200 euro's a year if i stopped using direct debit. That fee is there for taxes, for insurances, for subscriptions, for electricity and water and basically every other scheduled payment.

Also, it sounds reversing a direct debit is a lot easier here. Yes you have to login and find the faulty withdrawal, but then there's a simple button where you can cancel it, and also deny that party access to your account from then onward. The money is back in your account immediately. The only time this would not work is if the company has not funds in its account, which is unlikely.

Even if it goes wrong once, the 200 euro savings per year are easily worth it.
---
I guess the payment systems are set up quite differently

Hey guys,

How's your loan progress going?? With my Aussie dollar so strong the last few weeks, I've been sending every available dollar to the US, and getting around $1.05-1.06. So I've sent about AUD $1840 over and now have about US $1933 toward my next Sallie loan (which is $4170). I should have the next bit saved up over the coming 90 days or so. Rock on!!

Also-- I'm excited that I've just done my first interview on the DoMoneyBetter online radio show! My guest was our very own flinch13. He shares his encouraging story on slashing his loan down from $25k to $7500 and how he's done it. Have a listen and let me know what you think! I'd love feedback as this was the first time I've done a show like that. Huge thank you to flinch!

One more thing: I'm currently planning an eBook and would love your input. It will be a guide on how to go from utter Sallie Mae despair to having hope and a plan of action. What specific topics would you like to see covered in such a book? Thanks in advance for your thoughts!

Go have an awesome day and smash that loan balance!

Best,