Student loans: the more you can pay at once, the better

Student loan bills reach six figures for one married couple, who wonder if they should throw as much money at the loan as possible or stick to the payment plan. Student loans are question 6 in this week's 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. Back to school dilemma
 2. Precautions before romantic trip
 3. Pool membership dilemma
 4. Favorite vegetable garden plants
 5. Telling a story to kids
 6. Handling massive student loans
 7. Spending and saving focus
 8. Is having another child hard?
 9. Useful IRA tips for education
 10. To refinance or not?

When school is in session, my work day begins when the kids leave and more or less ends when they return home.

This is a good thing in that it gives me a set period of quiet time in which to work, which mostly means writing.

This is a bad thing in that it puts a cap on things when I’m in a writing groove. There are days where, if I did not have such an end cap, I’d write until midnight.

In the end, the good outweighs the bad. I’d far rather prepare a snack for my children when they get home than continue to work.

Q1: Back to school dilemma
 I am in a position to go back to school for a post-graduate degree using my husband’s GI bill. This could not have come at a better time for a variety of reasons, which I won’t go into here. We are truly fortunate – and here is my dilemma, as I do not want to squander this opportunity:

Do I go back and get the most bang for my buck and get a law degree/MBA or something along those lines, even though neither one of those areas really float my boat (that I know of!), though I think I would be fairly good at either?

Do I totally go the other way and just go back and get say, a degree in music, or theater, or French – all of which totally excite me, but are less….practical, in terms of ROI?

I suspect the answer lies somewhere in between, but I am at a loss as to how to objectively assess my skills/interests/talents moving forward. Do you know of any online assessment tools/books/resources for 40-year old wannabe grad students looking for a subject to study? One that will both be practical with regard to longevity (what if, god forbid, I become a single parent to my son and have to support him on my own) but also tap into my talents and interests (“if you love your job, you’ll never work a day in your life” type idea)?
 - Augie

There are a lot of skill assessment tools online, such as this one from iSeek, that can help point you in a solid direction when it comes to pairing your skills with a worthwhile and potentially lucrative career. If you want more, the best book I’ve found for digging into one’s career path is What Color Is Your Parachute? by Richard Nelson Bolles.

I think the best option for you is, as you mentioned, somewhere between the two. I don’t think it’s a good idea to go into a field that you have no interest in whatsoever, because unless you’re exceptionally gifted, you’re not going to make a strong career out of it. From what I’ve seen, most people can make it in a field with natural talent or a lot of passion and drive, and people who really succeed tend to have both. If you don’t have either… it can be pretty tough.

Dig into the assessments above and see if you can find a career that excites you (at least a little) and earns a good income, too. I’m a firm believer that there’s something out there like this for everyone.

Q2: Precautions before romantic trip
 Next month, I’m going to fly to Boston to meet a guy I met on a discussion forum. We’ve been talking for months and our relationship has moved to the point where we’re going to meet. I’m really excited!

In that excitement, though, is a little bit of worry. In all honesty, I’ve never met the guy and I don’t know for certain what will happen when I go. Do you know of any financial precautions I should take?
 - Jill

A friend of mine did this a few years back. I’ll tell you what I told her.

First and foremost, never go anywhere without your cell phone – and don’t go anywhere without letting someone you know at home know where you’re going. If you need a moment, go to the restroom before you leave to go anywhere and send a text to a close friend letting them know where you’re going. This is a safety precaution, nothing more, nothing less. If the guy seems stressed out about this, then there’s a big red flag for you. He should understand the situation you’re in and, if anything, encourage you to do this. The more info you can share with people at home, the better.

Before you leave, make sure several of your friends have your flights, the address of the hotel you’re staying at, the address of the person you’re going to visit, and info on any other locations you’re sure you’re going to go to – restaurants and so on.

Also, if I were you, I’d try to live on cash as much as possible and leave my credit and debit cards in a separate secure place. If the guy is a good guy, this will work fine. If the guy is just trying to scam you or something, your cards would be a good target. I also wouldn’t take any excessive pieces of personal identification. A driver’s license will probably be needed for the trip, but things like a Social Security card are probably best left at home (or better yet, in a safe deposit box at a bank).

This might seem to lean toward paranoia, but the entire reason for doing it is to keep you as safe as possible. If you do this and things turn out well, it won’t have a negative impact on your trip. If you do this and things go bad, you’ll be incredibly glad you took these steps.

Q3: Pool membership dilemma
 A couple of years ago we moved into a new house that we love and don’t plan on moving. This past June our daughter was born. Recently we’ve discussed the community pool that is only 2-3 blocks from our house. The pool is open Labor Day to Memorial day and costs $400/year for a family membership. There is a lifetime membership that costs $4,000. It seems to us that the lifetime membership is the better option but we’re unsure whether to do it now, or wait until our daughter would enjoy the pool more.
 - Will

Before I spent any of that money, I’d want to know everything about the pool. Is it crowded during the times you’d want to use it? Is there always a lifeguard on duty (for that kind of money, the answer needs to be yes)? Are there times when the pool is closed? Does the fee include swimming lessons for your daughter? Would you use the pool right now, with your daughter being less than a year old?

The real question is whether that pool provides enough value for your family at a rate of $400 a year. If it does not, then I wouldn’t get either membership.

Now, if you do decide that the pool has enough value for that $400 a year rate, I would buy a single year and see how it went, particularly if that $400 went toward the $4,000 lifetime membership. At the end of that year, I’d reevaluate my long-term situation as well as the value I got from the pool. I’d also look into additional issues with such a membership, such as whether lifetime memberships are transferable and whether or not the $400 invested in a year’s membership can go toward an annual membership.

Will had another question.

Q4: Favorite vegetable garden plants
 We just planted seedlings for our garden a few weeks ago. This got me to thinking, what are the best (cost savings or taste wise) items to plant. Here’s my top 3.

Tomatoes (taste)
 Green Beans (taste)
 Bell Peppers (cost)

What’s your top 5?
 - Will

I agree with those three. They’d be in my top three for reasons much like what you name. They’re all rather easy to grow, too.

On top of those three, I’d add cucumbers. They’re similarly easy to grow and can be eaten in a variety of ways. Our family loves to make what we call “refrigerator pickles,” where we put fresh cucumbers in a vinegar and water solution along with some dill and eat them at our convenience over the next few weeks.

If I had to pick a fifth one, I’d choose strawberries. Again, they’re pretty easy to grow (if we haven’t killed them, they must be easy) and they produce such wonderful fruit late in the summer.

Q5: Telling a story to kids
 I read my kids a story every night before bed. Some nights, though, they ask me to tell them a story. I manage to make something up and get through it and they seem happy, but it always seems awful to me. I know you tell your children a lot of stories. Any tips?
 - Alan

For starters, I usually include my children (and often myself) as some of the characters in the story. My children love tales where they are the protagonists, perhaps receiving help from a grizzled old mountain man known as Dad along the way. Doing this immediately ties the children into the story.

I also often borrow plots wholesale from movies I’ve seen that perhaps they haven’t seen. I’ve reused pieces of The Princess Bride countless times as a general plot guidance, for example. I don’t completely duplicate the story, but I use enough of it so that I know where the story is going when I start.

As I go along, I constantly allow them to add details. In fact, I usually prompt them for it. “The heroes are passing through the forest when they come upon a very unusual tree…. what’s unusual about the tree, do you think?” They come up with some idea and then I just roll with it. It keeps them engaged throughout the story and often adds flavor I would have never considered.

The end result is usually a memorable bedtime story for the children. They often request that I do this.

Q6: Handling massive student loans
 My husband of less than two years has quite a student loan bill that we are going to begin paying back now. You would think by the amount he owes, $110,000 that he was a doctor. But no, this is what happens when you have a terrible paying job for years, go into forbearance on your loans and end up paying $40K+ in capitalized interest alone. I think the original bill for his private college education was about $40K…I’m not totally sure based on the paperwork I have seen.

He went to this private school after serving 2 years active duty in the army and 4 years in the reserves. I don’t really know what kind of government discount or benefit he got from that. I do know that he took every cent of his student loan and used it not just to pay for school but also to pay for books and general living expenses. His career is in communications and he was in an extremely low-paying job for at least 5 years. During that time he was outrunning creditors, car reposessors, etc. and paying back his student loan was not a priority.

Today, 15+ years later, he is finally making good money at his alma mater within the last three years. He began taking classes for a masters degree a couple years ago, which delayed the need to pay back these loans yet again, but now they have become due as he is nearly finished his degree.

We have looked into public loan forgiveness options where he would pay it back 120 times in a row and be forgiven on the loan. The trouble I have with that program is that you make 120 payments and there isn’t much in the way of forgiveness…by my calculations, you pay back the entire loan. They gave him a quote of $1600 per month, which would more than cover the cost plus interest.

The loan is approximately $110,000 at 8.5% interest, and he owes $754 per month. It’s certainly do-able for him/us, but slows down our cash savings. I wondered if you have any suggestions as to ways to get this loan down or if we are stuck? They didn’t offer him a lower interest rate, and I don’t even know where to begin to look to try to find one for a student loan. He actually thinks that there is going to be some miracle plan that will relieve him of this debt, whether that is some sort of grant, something from the military, etc. I don’t know what planet he thinks that will come from, especially if he doesn’t do the legwork to find it.

We got a decent tax return back, about $3,500, and he used $2,000 as a payment towards the principle on the student loan. Do you suggest tossing extra money at this loan as often as possible or sticking to the outlined payments? On one statement it estimated that he’d end up paying $220,000 over the course of this loan with all the interest due!
 - Shauna

If you’re stuck with this loan, tossing extra money at it is always going to be a good idea. It will mostly affect you in terms of reducing the length of the loan, but every extra dollar you throw at it will trim a couple of dollars (or more) off of the last payment you make on the loan.

Now, are you stuck with this loan? Probably. I wouldn’t expect a miracle out of the sky to fix it. However, you likely do have at least some options regarding the loan. The first thing I’d look at is loan consolidation. I’m unable to tell if he’s eligible for loan consolidation or not from your email, but if he is, it’s well worth looking into as it will significantly reduce your interest rate. Even if you’re not eligible, you may want to talk to other lenders besides your current lending institution to see if they can make a better offer and take over the loan.

How do you begin looking for these types of offers? The first place I’d check is the financial aid office at his alma mater. Given that he attended there and that he currently works there, I’m pretty sure they’ll be able to offer some suggestions for his situation and perhaps find you guys a better lending institution to work with.

Shauna had a second question.

Q7: Spending and saving focus
 What is the best way for us to spend our money when we have some left over?

We have a mortgage that is too high to refinance, but we are looking into it anyway. $281K in a 30-year fixed at 5% that we bought in late 2009. According to Zillow, our house is now worth about $259K. The house appraised for $279K when we bought it (we got a seller’s assist hence the higher mortgage). We recently did some home renovations (again, money burning a hole in the pocket plus want versus need…did we NEED to renovate half of the kitchen? no. Are we hoping that this would have added to the value and aesthetic of the home? Yes. Not sure how to find that out…) that cost about $6,000. We took a wall out between the dining room and kitchen, cut a doorway into another wall, bought a kitchen island and installed granite countertops (didn’t need to redo the cabinets or appliances).

We have approx $10,000 in savings at the credit union account we opened together (less than 1% interest rate) that is going to be minus about $3,000 after these home reno bills are paid. I have an additional $4,000 in a savings account that he has equal access to, plus a $6,000 ING savings account (about 3% interest) that he doesn’t know exists (until we do our SCFR worksheet). We don’t have any particular goals for these savings other than having an emergency fund set up. We like to travel, but when we go to pay the bills for the renovation or the travel, my husband prefers to take it out of what he has left in his checking account rather than pulling out of savings, therefore strapping himself for the month a little bit. I prefer to pull out of savings, though it really pains me to do so.

His car has 129K miles on it and he plans to keep it forever. My car has 84K miles on it, only about $700 left on the loan (will be paid off in June), and I plan to keep it as long as I can, or until we have a child. Since I am going through infertility treatments right now (about $150 a month), that means I’ll have the car a while yet (we do not plan to do IVF…if we aren’t meant to have children we are perfectly ok with that.)

As for retirement accounts, I save 5% with a company match of 4% that started in January 2012. I am currently considering changing jobs even though I have only been here a little over a year. I do not know what percentage my husband saves, but I know he does make contributions.

I try to cut my expenses as much as I can. I clip coupons and bring my coffee, breakfast and lunch to work as often as is feasible. I only shop sales and never buy clothes full price. I hardly ever buy new clothes…maybe a few new pieces each season. My credit card bill is not great, however. I have about $1,500 on it and I can never seem to keep it under control. I am trying to use it less and less but sometimes I use it to pay for things I purchase over the internet (like 5K race entries or Amazon.com/paypal purchases), and I don’t count it in my monthly budget as expenses…it just goes into my budget as a Visa payment of around $300 a month. I can definitely do better there.

Should we be saving more cash, investing our extra cash, making extra payments on our mortgage? When my husband’s money burns that hole in his pocket, where should I tell him to put it?
 - Shauna

Given your student loan situation and your mortgage, I think the best thing for you guys to do any time you have some extra money that isn’t needed for anything urgent is to put it toward one of those debts, preferably the one with the highest interest rate. Every dollar you put toward such a move will save you three (or so) off of the last loan payment you’ll have to make.

I don’t see anything that you’re doing wrong, though. You have a solid emergency fund when you consider the whole of your cash savings. You seem to have your spending largely under control and are slowly whittling down your debts rather than watching them escalate. You’re doing the right things. It just takes time.

One thing that might be useful is to just sit down together one weekend afternoon and spread all of this out. Together, get a picture of how much you have (savings, retirement, home value, etc.), how much you’re spending each month, how much you’re bringing in each month, and how much debt you have. Talk about where you want to be in the future, and I strongly encourage you guys to really think about debt freedom (trust me, it feels fantastic). Just talk about things. You’ll feel better about everything if you get it all out there on the table together, trust me.

Q8: Is having another child hard?
 My husband and I are thinking of having another child. Our first one was a real life changer and our biggest worry is that our second child will bring some disharmony into our life after we finally feel like we have a good balance. Are there any things we should be thinking about?
 - Andrea

The biggest change our second child brought into our life was during the first year. Since our oldest was only two at the time and still needed a lot of help with basic things (diaper changes, bedtime routines, etc.), we found ourselves pairing off, with one adult handling one child and the other adult handling the other child.

That wasn’t too much different than what we did before, but with just one child, one parent found themselves free to take care of household tasks or just to relax. That vanished, particularly during the first year, and that was the biggest challenge.

Once our second child got to about nine to ten months or so, we were able to have one parent handle the routines with both of them while the other parent was able to return to housework and other tasks. (This whole pattern, of course, repeated with the third child.)

The first child was the one that caused the real life changes. The changes with the second were more subtle. The changes with the third were pretty easy.

Q9: Useful IRA tips for education
 [Y]ou can pay for higher education expenses (tuition, books, fees, and even in some cases lodging) from funds in an IRA without the early withdraw penalty. If it’s a Roth IRA you dont have to pay income tax on the earnings either.

The funds can be used to pay for expenses for yourself, spouse, OR children.

You can see where this will save even more money since you wouldn’t have to pay extra income taxes. Obviously you would need to choose wise investments here, but you could go for some more conservative investments or just buy up some money market funds, but if you went ahead and invested it in a decent portfolio (mine is all ETFs) then you could actually make some money on it and cut that monthly savings requirement by a large amount.

Wish I had known this last year, so now I have to pay off the student loan I got, but at least this year will be much easier to afford.
 - Wayne

This certainly works, and it’s one approach to saving for college.

My only hesitation is that doing this shoots your annual window for IRA savings for retirement. You’re only able to save about $5,000 a year in IRAs for retirement purposes and for many people, IRAs can be invaluable retirement savings tools. Using them for the education of your children is going to postpone your own retirement, no two ways about it.

For some, that might be an acceptable outcome, but why not use the IRA for your retirement and start a 529 for your children’s college education? I may use my IRA for education in a pinch, but I’d far rather have it as a retirement asset. The best gift I can give my children is to not be a financial burden on them when I’m old, and my IRA will help to ensure that.

Q10: To refinance or not?
 I’m looking at refinancing a condo (I rent it out) using the the new HARP 2.0 program. I’m currently owe around $73K @ 7% in year 11 of a 30 yr mortgage. The loan I’ve been offered is for $78K (closing costs & anticipated spring taxes) @ 4.5% for 20 years. The loan is a $5K difference, but $2K of that will be be offset by exchanging escow accounts between the 2 lenders, which I would sink the payout back into the new loan. If I do the deal, it will save me about $135 a month on my payments. So, I figure the $3K+ on the new loan would be paid off in under 2 years by saving the $135 a month. I’m not looking to keep this property as rental income forever. I’d actually like to get it to the point where I could sell it off for what I owe on the loan, which I hope to be in about 5 yrs. Currently properties in the area go for $45K-$50K. I already pay an additional $150 a month & would continue to just pay that same amount on the new loan since I’ve already figured that amount into my budget. Does it make sense to do this deal? Should I refinance this loan at a larger amount, even though I’m itching to get out as soon as I can? I would love to get out now, but I’m so far under water, I can’t get the funds to cover the difference. What are your thoughts?
 - Jim

If you’re going to stay in the home, this refinancing makes sense. It lowers your interest rate, doesn’t significantly extend the length of the mortgage, and reduces your monthly payment. Those are all good things.

I don’t know how much you’ve shopped around for this deal, but depending on your credit, this is either a good offer or a great offer. You could try for a better one (and you might get one), but it won’t be significantly better, as the interest rate is pretty competitive.

There is always the option to walk away. However, when you’re in a fixed rate mortgage that low with that relatively low balance, it’s probably not a really good option.

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.