Since starting this blog, I’ve gotten lots of questions from friends and family about their current financial situations.
I get great questions regarding something they’re thinking about doing, whether or not they should consolidate, etc.
I love being able to help people decide what their best options are, but sometimes, their questions frighten me at first.
Recently, I received a text from a friend that said:
“I either just did something great, or really stupid with one of my student loans.”
My mind started racing – did she consolidate with a shady company, or pay it off with a credit card balance transfer?
I asked what happened, and braced for the worst:
“I had set up an automatic payment for like $200 more than the minimum. When we got married, we changed bank accounts and I didn’t realize my payments weren’t going through (yikes!). I never got a letter telling me they weren’t getting paid, and when I called they weren’t helpful at all.
I was so mad that I took my personal savings and just sent a check to the loan company to pay everything off. My savings is wiped out but I was so over it. I don’t know if that was smart or stupid because my savings is gone.”
Of course the first thing I said was “Congrats on having a loan paid off!”
Paying off debts is awesome regardless of the situation.
Once I found out that the loan was 7% interest, I was elated – “you did the right thing.”
Saving vs Paying it Off
Having an emergency fund is very important, but you won’t even come close to the same return on your money as you would by not having to pay 7% interest on your loans.
Let’s say you have $10,000 in a bank account as your emergency fund, and $10,000 of student loan debt at 7% interest. While it may seem beneficial to have that extra money in the bank just in case, that money is likely earning less than 1% interest. On the other hand, you’re paying 6% more than that by keeping your student loan balance.
This isn’t to say that you should take the entire $10,000 and pay off your loan, although that is an option. What I’m getting at is that you might want to take some of that savings and pay down your loans.
What’s the right amount of money to keep in your savings? It’s hard to say, and is very dependent on your situation. If you have children, or others you are taking care of, $10,000 might be the lowest you should keep there.
I personally keep around $1,000 in my savings because I don’t have a car, kids, or anyone who is dependent on my income for survival. That $1,000 gives me a small buffer just in case something comes up, but doesn’t keep too much money locked up that I’m losing out by paying more in interest than I make through my savings.
A student loan with an interest rate that high is not something to just snuggle up with. You want it gone ASAP.
My friend also told me that she owed more than she had originally borrowed.
To give you an idea of how ridiculous that is, she graduated college in 2009 like I did, so she’s been paying this company for 6 years and hasn’t even been able to decrease the balance.
I wanted to tell you this story to remind you that sometimes your emotions are more important than doing things by the numbers.
These days, student loan companies can be very shady. They run their companies like debt collectors, not a bank striving for customer service (do those even exist anymore?). I get that it’s a business, but most of the time they are out to make every single dollar possible, not to help you.
If you are in a bad situation and have the ability to pay off a sizable chunk of your loans, or even the entire balance, it might be wise to do so.
Don’t be hard on yourself if you pay off a debt with a low interest rate either – just remember you are that much closer to being debt-free.
Wondering whether or not you should put some of your savings towards your debt?