Student loans: paying off loans with different interest rates

Student loans can come with different interest rates. Is it better to pay off students loans that you owe the most on, or that have the highest rate first? Look to question No. 6 of the reader mailbag.

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.

1. Guilt for every little purchase
2. Handling partner without money skills
3. Auto insurance challenges
4. Handling elderly relative in decline
5. Preparing for a growing relationship
6. Handling student loan repayment progress
7. Used car decisions
8. Partner with terrible credit
9. Housing choices in expensive area
10. Gencon thoughts

For once, I’m going to break my stance against politics and offer up a few thoughts about the debt ceiling issue.

After watching the debt ceiling debacle of the past month and doing some research of my own, I’ve come to the conclusion that virtually everyone involved with the negotiation is much more interested in furthering their political ambitions than solving America’s problems. This goes for Obama, Boehner, Reid, McConnell, and virtually everyone else involved with it.

The root of the problem is pretty obvious if you look at our federal budget. Our entitlement programs – Medicare, Medicaid, and Social Security – are simply unsustainable. If we continue them as-is, our nation will go bankrupt.

Social Security created a “retirement age” of 65 at a time when the life expectancy of the average American was 63. Today, the life expectancy of the average American is approaching 80. Even worse, each generation now is smaller than the one before it, whereas back then generations were growing larger.

Programs like Pell grants are tiny in comparison to things like Social Security. When you’re speaking about the budget and spending more than a word or two about Pell grants, you’re missing the boat on solving our nation’s real problems.

The solution is also pretty obvious, but it takes a lot of political courage to do it. They simply have to restrict these programs. In simplest terms, this means raising the age requirement for Medicare and Social Security and lowering the income requirement for Medicaid.

We don’t have to do this all at once. It can be graduated in slowly, as they did in the 1980s when they raised the entrance age for Social Security a bit. Someone who is 60 today won’t have the carpet pulled out from under them – they may just have to wait until 63 for the first level of Social Security and 68 for the highest level of Social Security. For someone in their early 30s (like me), it might mean waiting until age 75 for the first level of Social Security and 82 for the highest level of Social Security – or even higher. I am absolutely fine with this if it means getting our nation’s financial house in order. When you start running numbers like that, Social Security quickly becomes sustainable and our budget concerns look far less scary.

Show me a politician with the courage to work directly to make this type of thing happen (not just pretty speeches, but actual legislation) and I’ll show you someone who will vote for that politician.

Q1: Guilt for every little purchase
Here’s my specific situation: I’m a recent college grad, living at home with my parents, working full time while paying off student loans. I really dislike living at home and want to move out, but the cost of living in Los Angeles is so high, I feel so afraid. Especially when there’s a lot of uncertainty in my future–I have no idea what I want to do for a living, but I know I don’t want to be at my job forever.

I feel guilty every time I spend money, even if it’s just on a bag of chips–I think to myself, those few dollars could go towards a down payment on a house. I know I need to reward myself once in a while or I’ll be miserable, but when I have such a large financial goal in such an expensive city, how am I supposed to decide when and how much I’m allowed to spend money on unnecessary wants?
- Marissa

At first, I faced this exact same problem. I felt guilty every time I spent any money on anything that wasn’t absolutely necessary. After a while, I somewhat resented that guilt and would sometimes spend money just to show that I “could” do it.

As time passed, though, I began to realize that guilt and resentment weren’t taking me to where I needed to go.

My solution was to simply budget a certain amount per month for frivolous purchases. I usually did this by keeping that amount in cash in my wallet. Once a month, I would withdraw that amount from my checking account. Then, if there was cash in my wallet, I knew I could freely spend it without guilt or worry.

I still do this, except without directly using cash. I’ve just become accustomed to keeping my frivolous spending in reasonable check.

Marissa has a second question.

Q2: Handling partner without money skills
I’m in a relationship of almost three years, and we believe we’re in it for the long haul, although we’re nowhere near ready for marriage (both still living at home, not ready financially, etc.). He has $50,000 in student loan debt, and his part time job barely covers the payments. I’m really concerned for his financial well being. Although he isn’t a reckless spender, I still feel that he’s not saving enough, earning enough, or making large enough payments on his loans (at his current pace, interest will add on over $20,000 by the time they’re paid off).

I’ve nagged about finances, but he feels comfortable with how things are. But I think the only reason he’s doing okay is because his parents are supporting him. He plans on going to grad school and would like to move out of home as well, which would add to his expenses and debt. I feel like his financial decisions now will affect both us in the future, but what is my role, given that we’re not married or living together? Do I have a right to tell him to spend less money, when he doesn’t even splurge much in the first place? (I do feel like he should be spending even less–as little as possible–since he’s $50,000 in the red)
- Marissa

Your role is to figure out whether this is a person that you want to be with over the long haul, given both his good traits and his bad ones. Trying to “mold” someone to be something you want does both of you a disservice.

The most impact a partner can really have on the other person is to help them find new channels for the person that they are. You can’t really change the person, but you can change the situation.

It sounds as though you’re deeply concerned about his personal finance decisions. Is that a deal breaker for you? I can’t tell you that, particularly since I don’t know what you value and I really don’t have a full picture of his behavior from your description. It’s going to require some soul-searching.

Q3: Auto insurance challenges
We are getting quotes from several different companies for home and auto insurance. Company A consistently ranks among the best in customer service and satisfaction, but its premiums are more expensive than Company B for a similar level of coverage. Company B offers cheap coverage, but has a mediocre reputation. Is it better to pay more for a policy from a reputable company, or is it better to save money now and keep your fingers crossed that you won’t need to file a claim any time soon?
- Charlie

It depends on why you’re buying the insurance. If you’re buying it just to fulfill a legal requirement and don’t really value the insurance itself, go for the cheap one.

However, if you’re actually buying it with regard to protecting yourself against the unforeseen, your insurance company is not one you want to battle with in a situation where you actually need home or auto coverage.

If I were in your shoes, I would probably get the more reputable coverage.

Q4: Handling elderly relative in decline
My 88 year old grandmother has lived in a senior apartment complex for some time, but it’s clear that she needs assisted living now (she’s had several falls, my father brings her medications to her every day because she can’t manage them on her own, she can’t really do her laundry or clean her home anymore…). She’s not really sick, just elderly and fragile. My parents pay her rent, and it is the maximum they can afford living the lifestyle they do now. They are in their 60s, well established in their careers and have made a lot of money in the past, but they just started a new business this year that has the potential to make money but is restricting their cash flow now. Additionally, they spend a LOT of money on “lifestyle upkeep” (luxury vehicles, hobbies, trips, a big mortgage, maintenance services, etc) that they don’t even get to enjoy very much because they work all the time and spend a lot of time taking care of my grandma. I have no idea what their plans are for retirement, and I’m not sure they do either.

When I see the way they are spending, I get really angry. How can they keep spending all this money on these things that don’t seem to matter to them very much, and aren’t willing to give anything up to give my grandma a better living situation? My grandma took care of me when I was young so they never had to pay for child care. Why aren’t they willing to help her now? It’s true, they’ve taken care of her for a long time, and maybe they are tired of it. But would they want me to make a decision like that when they are elderly and dependent on me?

They might try to get her in a nursing home if Medicaid will pay for it. She has spent time in nursing homes before, and she gets more depressed. She also doesn’t really need that level of care yet. I think they should either bring my grandma to come live with them in their large house, or give up some of their ongoing expenses to pay for assisted living in a small apartment for her (which Medicaid won’t pay for).

My husband and I don’t make very much money, and our home is too small for her, but we’ve offered to put what we can afford toward my grandma’s care. My parents have flatly refused. We visit my grandma frequently and try to help out by cleaning her home, taking her meds to her when my parents can’t, and other things, but what she really needs is assisted living or a daytime nurse.

My questions are these: is there anything else my husband and I can do to help my grandma while my parents dither around not making any decision and my grandma’s care just keeps getting worse? I’ve tried talking to my parents, both together and separately about this situation, but not with this much honesty. They are pretty touchy about how they spend their money, and hate talking about it with me.

Trent, what do I do? I want my grandma to have a comfortable, peaceful life. I want my parents to be less stressed out because they spend a lot of money on her and provide her so much care, when it still isn’t enough.
- Ellen

There’s a lot more going on here than just money.

Most likely, your parents are so used to your grandma being a steady and strong fixture in their life that it hasn’t really clicked for them that she is fragile now and that her life really won’t continue forever. It is often difficult to imagine our parents growing old and it often sneaks up on us without us really realizing it. Mom and/or Dad have just always been there. They’re the constant in our life, from infancy onwards.

I witnessed this happen with my own family, where an elderly great grandmother who had been such a rock in so many people’s lives began to weaken and many people simply failed to acknowledge it.

Since this is not your money we’re talking about here, you have little control over the situation. I think you are already doing what you can, and all you can do from here is keep the subject alive in the mind of your parents.

If your family is like mine, it’s not so much a money issue but a “not wanting to face the real situation with grandma” situation. That just takes time.

Q5: Preparing for a growing relationship
I have been in a relationship with my boyfriend for over 2 years. We moved in together a few months ago. I know that eventually we will get engaged and married, and this was something we discussed multiple times before cohabitating. We are in no rush to get married. I am very happy with our relationship, and so is he. We are in our mid-twenties, and I feel so young. I have seen my friends marry young and divorce already. So I do not want to put unneeded stress on our relationship by setting demands to be engaged or married within a certain period of time. Another reason that I am not pressuring him to propose to me is that weddings cost so much money.

My boyfriend and I have stable jobs, and we make $60K and $72K. Our financial situation is pretty good. We each contribute 12-15% of our gross salary to retirement funds. We have emergency funds. Our only debt is student loans and his car loan. He has $13K in student loans and $10K on a used car he bought in December. I have $32K in student loans. (It was $40K 3 years ago, but I am making progress!) We have no credit card debt. We put all our living expenses on one credit card that is in his name, but I am an authorized user. We pay that off in full every month. I also have a car/house fund, and one of his benefits is money towards our first home purchase. We are not big spenders, and we do a lot of research or give a lot of consideration before purchasing any big ticket items (e.g., vacations, furniture). Our primary long-term goals are paying off our loans and saving for a house.

So my question is how we are supposed to afford a large, glamorous wedding that people keep hinting about? If I had $20-30K extra laying around, I would love to have a big wedding with all our friends and family. The reality is that we do not have such funds. My family also does not have the money. My dad passed away a few years ago, and I would never ask my mom to pay because she needs to focus on her retirement plans. My boyfriend once suggested that we borrow the money from his parents to pay for the wedding. I cannot get comfortable with borrowing that much money from anyone for a wedding. I feel that given our financial situation and all the uncertainty in the economy these days, we should have a small, intimate wedding with just close friends and family or even a destination wedding with just a handful of people that are closest to us. I think there will be a lot of pressure for us to have a big wedding, particularly from his family. His sister was married last year, and it was a large wedding with about 150 guests and cost $30K. And I feel like his family will be disappointed if we do not have something similar so that all his extended family can attend. That is another dilemma – his family is from the North and mine is from the South. So neither location is convenient for everyone, and weddings are even more expensive where we live (DC area).

I know it may be a bit early to be asking these questions, but I just want to be prepared to have these conversations once we get engaged so I can get people to see my side. My boyfriend has gone back and forth on big or small wedding. We could save the money ourselves, too. But saving that much money for a wedding as opposed to a house is not in line with our priorities. How would you handle this potential situation?
- Kelly

You do not have to have any sort of “large, glamorous wedding.” If it does not fit with the values that you and your boyfriend share – and it sure sounds like it doesn’t – don’t have one.

The nature of your wedding is no one’s decision but your own. Have the event in a park and make it a potluck dinner. Go with your parents and a few close friends and talk to a justice of the peace or your preferred religious leader. Get married privately, then have one small reception-type event with your husband-to-be’s family and another one the next weekend near your family (or vice versa) to save everyone travel costs.

Who cares if someone’s extended family is “disappointed” by your big day? Their thoughts about your wedding can take a long walk off of a short pier.

Create a day that reflects who you are and who your husband-to-be is. If his extended family doesn’t like it, that’s their problem, not yours. Don’t spend a second of your life or a dime of your money trying to live up to such nonsensical expectations.

Q6: Handling student loan repayment progress
So here’s my situation: 31 year old female, bought first home last year with long term domestic partner (we hope to be married in the next year or so). Total mortgage payment $1000 which we split equally, so I pay $500. We have a shared checking account that we use to pay all common expenses (bills, dog food, trips etc). We each keep separate checking accounts.

I owe $10,740.84 in student loans broken down as follows (graduated in ’08 with a BS):
acct 1: 6.8% variable owe $3,991.53
acct 2: 4.399% mixed owe $4,331.04
acct 3: 1.36% variable owe $2,457.89

I pay $500 a month total towards this debt. I think my actual payments are supposed to be around $250 but I chose to start paying $500 at the beginning of this year so I could be debt free in 2 years (inspired by your blog!).

What I want to know about my student loan situation is how should I pay this debt off? Should I divide the $500 payment equally among the accounts or pay off the one I owe the most on first? I’ve been putting $200 into each of the first two and $100 into the third as it has the lower interest rate.
- Kathy

Make minimum payments on all three, then take the remainder of that $500 and throw it toward the highest interest rate debt. This will eliminate that set of debts the quickest.

At the rate you’re paying, you’ll probably have a lot of this paid off before there’s a rate adjustment. These interest rates are relatively low, as are the balances.

Kathy asked a follow-up question about her car.

Q7: Used car decisions
I save $260 per month that I put into a separate savings account for car/house insurance and taxes. I also have been saving about 20% of my paychecks for the last year or so into another savings account as an emergency fund. These two accounts total ~$11,500. I have no credit cards. I have no car payment.

Per one of your recent posts, I just started a 401k at 12% (since I’m not debt free I chose a lower percentage) which my company matches up to 7%. Retirement savings has my mind totally boggled but I opened the account and keep reading about so I figure I’ll eventually get a grasp on it.

Ok so now to my question! (well it’s in there at the end!) I drive 500 miles a week for work as a consultant dietitian in nursing homes. I am paid ~$1000 a month by my company for mileage expenses which I don’t count as my income, I pay myself back for gas and oil changes and put the rest in savings. My car was a gift from my boyfriend’s parents and is a 1996 toyota camry with ~175K miles. I’ve owned the car for about three years and it is fairly dependable. I have recently replaced the alternator and the timing belt, both costly items. I’ve asked one car rental chain about renting a car for the month and was given an estimate of ~$1300 per month (rental plus optional liability insurance). I currently only have liability insurance on my own vehicle, not collision.

What I want to know about the car situation is when I buy a new (used) car, what would be my best option? Should I look for something low-cost that’s dependable that may only last a few years? I just worry about buying a relatively newer car at a good price just to put so many miles on it! Should I shop around more at the rental places and try to find a place that will get close to my reimbursement level?
- Kathy

I would buy the best car you can with the cash you have on hand. Do not take out any debt for the car. Use the balance of the “emergency” account minus $1,000 (meaning you should leave behind a $1,000 emergency fund).

Focus on reliability with that purchase. Look for the car that will last the longest at your price point. It’s going to be used and it’s going to be older, but the point is that it gets you reliably from point A to point B for the next few years.

Yes, you’ll probably drive it into the ground. That’s fine. Remember that driving a car is the point of owning a car. If you didn’t have a need to get from point A to point B, you wouldn’t own a car.

Q8: Partner with terrible credit
I am 53 years old and divorced. Recently my ex-husband and I got back together. He owns the house that we built together and I bought a new house after our divorce. Currently, we are living in my house as it is smaller and more practical for empty nesters like ourselves. My husband has put our old home on the market but there has been little interest in it so far. His salary barely covers the mortgage and utilities so he can’t really contribute to our current living expenses much. He is wondering how long he should struggle to make the mortgage payments before giving it up to foreclosure or a short sale. I feel if we have no offers before winter, we should give it back to the bank. My question is this, I am in good financial shape with savings and no debt except my house. He may have a foreclosure and has 10′s of thousands (he won’t give me a number) of credit card debt. He wants to get remarried but I am afraid of the financial consequences to me. My credit score is 814 and I would like to keep it that way. I also don’t want to be responsible for any of his debt that he accumulated during our divorce period. Any advice?
- Marjorie

As long as your name doesn’t wind up on any of the debt, you should be okay.

The problem comes with things like insurance (if you get insurance together, your rates will be higher because of his likely poor credit score) and future loans (if you get a loan together, his credit score will raise the interest rate). Any financial arrangement you enter into with him will likely find his credit being a problem.

Most likely, your credit score won’t be affected, but you’ll still feel some of the financial consequences of his score unless you keep your finances very separated.

Q9: Housing choices in expensive area
After 3 years of unemployment, my husband has received a job offer and plans on taking it. Our combined income is close to $200K but we live in a very expensive city. We have a condo that we rent (rent doesn’t cover the entire mortgage and HOA dues – about $150 short) and a house that we live in. We are currently underwater in both of them due to the turn in the real estate market.

We have about $20K in student loans (at 3% interest), $6K on a car loan, $4000 in credit card debt and the mortgages on both our properties (currently paying interest only on all 4 – 1st and 2nd mortgages). I’m on track with my 401K (we’re both 38 years old) but my husband falls behind due to not being employed for a couple years. We have about $10K each in IRA and plan on adding $5K a year to each of these and about $10K in savings.

We need a larger house (we are about to have our 3rd child and our current house only has 2 bedrooms), we need a new-used car as one of our cars is about to die and is too expensive to keep fixing (neither one of us can take public transportation to work as there isn’t any) and I’d like to start adding more to our retirement and 529 plans. My plan is to pay off the credit card debt first, then tackle the car loan and then start to pay down our 2nd mortgage on our house. This would free us up to one day rent the house to cover the mortgage. Then save up for a down payment on a house. Given where we live we’re looking at a HUGE down payment to get the 20%. We can’t count on selling our current places to make up for the down payment.

Can you let me know if my plan is a good one or should we be putting our focus on something else first?
- Patricia

We have three children in our current home and use only two bedrooms. It is certainly doable, particularly when the children are younger.

That being said, I think your plan is a good one, but expect that it will take a few years to reach it.

My recommendation is to do what we did. Put a free-standing loft (with a railing) over the crib in the children’s room and have the oldest child sleep in the loft. This has worked wonderfully for us and still will even when the crib becomes a toddler bed.

Q10: Gencon thoughts
I know you went to Gencon this year. Did you see any new board games that you really liked?
- Mark

My favorite game I saw at Gencon this year was Eminent Domain. It’s a card-based game where you (and one to three other players) are exploring a previously-unexplored region of space. You’re looking to colonize (or conquer with your military) the planets in this region and utilize them for resources. It’s very thought-provoking with little downtime for any of the players (meaning you’re not sitting around waiting for others to take their turn) and plays in about forty five minutes.

Honestly, though, I spend most of my time there actually playing games. When I’m not doing that, I sit in the auction room looking for bargains. I don’t wander around the relatively expensive dealer hall too much or else I’ll start convincing myself to buy things I really don’t need.

At least in the auction room, if I convince myself to buy things I really don’t need, I’m only out $5 or so. I usually bring along a certain amount of cash I allow myself to spend on games and it lasts much longer in the auction room.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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