Student Loan Strategy: Start With a Plan


Dear Debt Adviser,I make $57,000 a year and have a student loan of about $100,000. I have no other bills (no credit card bills, no car payments) and I am single with no kids. I pay $900 per month for rent. I currently pay the minimum on my student loan ($600) and put $1,000 per month in savings. Should I reduce the amount I save and increase the amount I pay on my student loan? Or, should I continue to save and, when I have saved about $100,000, use that money to pay off my student loan in full?-- Gelisa

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Dear Gelisa,You sound like a positive, forward-looking person. My guess is that you are on the sunny side of 30. So my advice for a young, vivacious 20-something such as yourself is to develop a framework within which you can enjoy yourself, save what you need and fund your future. It's a concept known as "a plan."

No eye-rolling, please! My plans are fun and exciting. Why? Because they increase the likelihood your dreams will come true. How cool is that?

I recommend you start by formulating some goals. Divide them into two categories: short- and long-term. For example, short-term goals might include a vacation this fall or attending a friend’s wedding in a distant city. See? Planning doesn't have to be boring.

Long-term goals (more than a year out) could include a down payment on a house or building a wedding fund.

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The thing is, you get to decide what your goals are. This is doubly important, because if you don't have goals, you'll be subject to "financial drift." Here's an example of what I mean: Ever notice how convenience stores put the drinks on the wall farthest from the door? You have to drift by all the other tempting stuff to quench your thirst. It's easier to resist temptations if you have a plan and a goal, whether shopping at a convenience store or planning your financial future.

Once you set some very pleasant goals for yourself, determine how you need to allocate your income to fund them. For instance, should paying off student loans be at the top of your long-term list, tinker with different time frames to see how much it will cost to pay them off early.

That said, I was surprised you are thinking about saving up the full amount to pay off your student debt with a huge lump sum. Periodic payments will probably save you some hefty interest charges, compared to what you'd earn in a savings or similar low-risk account.

One other point: When developing a plan, learn to differentiate between a need and a want. Reliable transportation is a need. A $50,000 convertible is a want.

If you get bogged down or are not sure how to proceed, I recommend you seek professional help from a financial planner. You can find one near you on the website of the Financial Planning Association. Or, you could ask trusted acquaintances for a recommendation.

By the way, don't forget to include an emergency fund in your plans. Your goal will be to set aside some "emergency only" money to get you through a layoff or major life-changing event. I'd like to see you save up about six months' worth of expenses (not income) now and a year's worth if you get married and/or have kids.

How fast you should pay off your student loan -- and how to do it -- will be obvious once you have a plan in place.

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