Student Loan Debt

[Shane]

Hey guys!

Well, my search for another car has ended. Driving around town this week I came across an older car in posh little town near my neighborhood up for sale.

I looked it over; test drove it; asked numerous questions; hired my mechanic to inspect it (no major issues); and, tonight, I'm pulling the trigger and buying it if for no other reason than because I can go ahead and pay for it in full today with the hopes that it will last four or five more years.

How old is it?

It's a 1989 Mercedes Benz with 75,000 miles. It belonged to a now elderly woman. And it is in pristine condition (even though it is a vinyl paradise, oozing with gobs of 1989-ness). I got it for around $3000.00.

I pray I made the right decision, but I do feel good about it so far. Time will tell.

[4jacks]

Hey Shane Welcome to the boards.

I would do the following:
1) Pay minimum only on Student loans
2) Save $3k with all financial margin you have
3) Put $3k in bank, go back to paying as much as you can on the student loans.

Hopefully all that happens before the car goes kablow.

4) Car goes Kablow
5) Sell car/ trade in for as much as you can get ($500?)
6) Spend $3500 on used Honda or Toyota compact

7) pay off loans
8) pay off house
9) get new car
10) live happily ever after


That would be what I did.

[KrozFan]

I do have at least 5 months of an emergency fund established, if that helps.

I would hang on to that money and start paying down the student loans fast. Then when your car dies I would use the emergency fund to buy a car with cash, keeping at least $1,000 in the bank. Then keep paying on your loans.

[tim_v]

I wouldn't plan on using the emergency fund for buying a car. In my mind, an emergency fund is for unexpected needs and replacing a 14 year old car isn't exactly unexpected.

My recommendatation is to figure out what type of car you want and start making 'payments' into a saving acccount for it based on the cost and when you expect to get it. I've been doing that for many years and one nice issue is when I have to make a choice between repairs or replacement I consider the repair cost relative to the monthly 'payment'. Usually the repair is very affordable compared with the monthly payment times the # of months I expect the repair to extend car's life. But I've only kept cars 12 years so you might have a different experience.

Also, having the money for a car ahead of time serves as an additional/substitute emergency fund.

[Shane]

I wouldn't plan on using the emergency fund for buying a car. In my mind, an emergency fund is for unexpected needs and replacing a 14 year old car isn't exactly unexpected.

My recommendatation is to figure out what type of car you want and start making 'payments' into a saving acccount for it based on the cost and when you expect to get it. I've been doing that for many years and one nice issue is when I have to make a choice between repairs or replacement I consider the repair cost relative to the monthly 'payment'. Usually the repair is very affordable compared with the monthly payment times the # of months I expect the repair to extend car's life. But I've only kept cars 12 years so you might have a different experience.

Also, having the money for a car ahead of time serves as an additional/substitute emergency fund.

Then you recommend I start the car saving fund, funneling the remainder of my disposable income to the student loan debt?

[tim_v]

Then you recommend I start the car saving fund, funneling the remainder of my disposable income to the student loan debt?

Yes. Estimate how much you need to save and how long your car will last and get into a routine setting money aside for a car.

[4jacks]

Trying to estimate how long a 14 year old car is going to last, unless you are a seasoned mechanic, is going to be impossible.
You would just be setting yourself up for failure, if the car goes before the fund is built, then you are dipping into the emergency fund.

Just do one thing at a time, either knock the car fund out of the way as quickly as possible, or like Kroz says plan on using $4k from the emergency fund.

Kroz has a good point, your emergency fund is kinda large for a starter emergency fund, generally you don't increase it that much till after you are out of debt.

[Shane]

Hey Shane Welcome to the boards.

I would do the following:
1) Pay minimum only on Student loans
2) Save $3k with all financial margin you have
3) Put $3k in bank, go back to paying as much as you can on the student loans.

Hopefully all that happens before the car goes kablow.

4) Car goes Kablow
5) Sell car/ trade in for as much as you can get ($500?)
6) Spend $3500 on used Honda or Toyota compact

7) pay off loans
8) pay off house
9) get new car
10) live happily ever after


That would be what I did.

I checked around my area (within one hundred miles of my zipcode) for a used Honda or Toyota for the amount you specified. I could find nothing for $3500 or less unless it was as old or had as many miles as my car. Sigh.

I guess this is what they mean by Hondas and Toyotas retaining their value over time?

[tim_v]

Trying to estimate how long a 14 year old car is going to last, unless you are a seasoned mechanic, is going to be impossible.
You would just be setting yourself up for failure, if the car goes before the fund is built, then you are dipping into the emergency fund.

Just do one thing at a time, either knock the car fund out of the way as quickly as possible, or like Kroz says plan on using $4k from the emergency fund.

Kroz has a good point, your emergency fund is kinda large for a starter emergency fund, generally you don't increase it that much till after you are out of debt.

In my experience cars don't die on a particular day but I've only kept cars 12 years. We could have kept both for another year or two but we got tired of dealing with the hassles of small things not working or concerns about reliability. I've found it easier to be regularly saving for a car but you if you find it easier to focus on one saving goal at a time then that's the way to do it.

Also, if you're saving for a $3500 car (which I think is low) over 1 year you need to save ~ $300/month. That will help with many repairs.

If you think the emergency fund is too large then I don't have an issue with reducing it (I don't have a specific emergency fund). But I recommend not getting into the habit of using the emergency fund for 'planned' purchases.

[Shane]

In my experience cars don't die on a particular day but I've only kept cars 12 years. We could have kept both for another year or two but we got tired of dealing with the hassles of small things not working or concerns about reliability. I've found it easier to be regularly saving for a car but you if you find it easier to focus on one saving goal at a time then that's the way to do it.

Also, if you're saving for a $3500 car (which I think is low) over 1 year you need to save ~ $300/month. That will help with many repairs.

If you think the emergency fund is too large then I don't have an issue with reducing it (I don't have a specific emergency fund). But I recommend not getting into the habit of using the emergency fund for 'planned' purchases.

I doubt I would use my emergency fund for the purchase of a used vehicle. I can live without a car. I may hate it. I may find it a vexing nuisance; but I can live without it. There is always the public transit system.

[KrozFan]

In my experience cars don't die on a particular day but I've only kept cars 12 years. We could have kept both for another year or two but we got tired of dealing with the hassles of small things not working or concerns about reliability. I've found it easier to be regularly saving for a car but you if you find it easier to focus on one saving goal at a time then that's the way to do it.

Also, if you're saving for a $3500 car (which I think is low) over 1 year you need to save ~ $300/month. That will help with many repairs.

If you think the emergency fund is too large then I don't have an issue with reducing it (I don't have a specific emergency fund). But I recommend not getting into the habit of using the emergency fund for 'planned' purchases.

It gets the the point where you have to ask if it's worth it to repair the car. I had a car that died on me that would have needed the engine replaced. For a car with 200,000+ miles like mine had it just didn't make sense for me to put that much money into a new engine.

I guess what I should have said is I think your emergency fund is too high so I wouldn't call it an emergency fund anymore. I would take 1,000 for an emergency fund and make the rest of it a car fund, then hit the debt hard.

[pochax]

since he has already saved up so much for an Emergency Fund, i think the cushion of having that helps him to sleep at night. it is one thing to start with nothing in the bank, save up $1k a la Dave Ramsey baby steps, and then starting the debt snowball. it is another to take what took so long to save up and use a large chunk to pay down debt, buy a car, etc. perhaps he will feel more comfortable as time goes by, but i wouldn't want him to lose his peace of mind in the process.

back to OP, i think you will get lots of opinions on what constitutes a used car you can "afford" right now. it sounds like you are ok if the car dies on you even tho it would be hassle. i agree with timv to earmark some savings towards buying the new car, pay minimums on the student loan debt for now, and if your car dies in the meantime and you change your mind about not being able to live without a car, use some of your emergency fund (it will be an emergency at that time). once your car issue is squared away focus on getting rid of the rest of your debt. God bless!

[4jacks]

I checked around my area (within one hundred miles of my zipcode) for a used Honda or Toyota for the amount you specified. I could find nothing for $3500 or less unless it was as old or had as many miles as my car. Sigh.

I guess this is what they mean by Hondas and Toyotas retaining their value over time?

Where do you live?

Yeah, Honda's and Toyota's retain thier value much better than any other brand (Jeep too) why? Becuase they run a lot longer. The difference between a 14 year old Ford and a 14 year old Honda is the Ford is worth $500 in scrap and the Honda will run for another 2 years and is worth a couple grand.

http://baltimore.craigslist.org/cto/1943035292.html

http://baltimore.craigslist.org/cto/1942820662.html

http://baltimore.craigslist.org/cto/1942810696.html

http://baltimore.craigslist.org/cto/1941818769.html

http://baltimore.craigslist.org/cto/1942122582.html

http://baltimore.craigslist.org/cto/1941603788.html


Remember, you just need to replace your car, a Honda or Toyota under 200k miles will run for 2-3 years, while you pay off all other debt, then you can save up and buy a better car with cash.

[Shane]

The ones in my neck of the woods (Toyotas under $3500) were early 90s models, like my own car, with 200,000 miles. I guess I just have reservations forking over any money for a car with such high mileage. I'd buy one if I had to, though.

As for my emergency fund, some of you act as though I'm sitting on a small fortune. Five months of living expenses, although sizeable, is by no means a great source of wealth.

In the event of unemployment, it would all evaporate in 150 days. Let's keeps things in perspective.

[pochax]

The ones in my neck of the woods (Toyotas under $3500) were early 90s models, like my own car, with 200,000 miles. I guess I just have reservations forking over any money for a car with such high mileage. I'd buy one if I had to, though.

As for my emergency fund, some of you act as though I'm sitting on a small fortune. Five months of living expenses, although sizeable, is by no means a great source of wealth.

In the event of unemployment, it would all evaporate in 150 days. Let's keeps things in perspective.

Shane, the reason why is because people are used to hearing the Dave Ramsey minimum $1000 E-fund when you are debt snowballing. if that is all you have for a 5-month E-fund that means you only have $200 of monthly living expenses which seems outrageous. many people on this forum are getting by with that mere $1000 saved up and using up any extra cashflow to pay off debt. you are right, it's all relative and must put things in perspective. you haven't given any numbers but assuming you are an average joe making the average US salary of $40k yearly, making about $3k/month and spending $2k/month, you probably have ~$10k saved up....$3500 for a used car would use a chunk, but not blow you out of the water.....i could be way off on my assumptions, so correct me if i am.

[Shane]

Shane, the reason why is because people are used to hearing the Dave Ramsey minimum $1000 E-fund when you are debt snowballing. if that is all you have for a 5-month E-fund that means you only have $200 of monthly living expenses which seems outrageous. many people on this forum are getting by with that mere $1000 saved up and using up any extra cashflow to pay off debt. you are right, it's all relative and must put things in perspective. you haven't given any numbers but assuming you are an average joe making the average US salary of $40k yearly, making about $3k/month and spending $2k/month, you probably have ~$10k saved up....$3500 for a used car would use a chunk, but not blow you out of the water.....i could be way off on my assumptions, so correct me if i am.

I do follow Dave Ramsey's plan but only to a certain extent. I have major reservations allocating all my disposable income to certain or all debts. I am one of those persons who must, must save at least a small percentage of my income or else I suffer from worry, a sin.

Before I heard of Ramsey's baby steps I had already started building an emergency fund with the goal of three to six months of living expenses. I attained that goal and then came across the baby steps. From that point I started snowballing all my debts except for two of them: my student loans and my mortgage. Even then, as laughable as it may seem, I still refused to apportion every last disposable dollar toward my debts. I've simply got to save something. It's who I am.

I am a full-time clergyperson, and I doubt I will ever snowball my mortgage since my denomination ensures I move every few years (and since I receive a modest housing allowance). My student loans, however, and my need for a car will follow me wherever I go.

So yes, I have a fair amount of cash saved as an emergency fund. Trust me. Once one has built such a fund it is hard to part with one's hard earned savings--even in the event of an emergency!

I think what I will do, then, is begin building a car savings account, begin making minimum payments toward it, hoping my 1993 model car will go the distance, and apportion the rest toward my student loans.

And about Ramsey's philosophy of snowballing all one's disposable dollars toward one's debts. I think it's a fine idea for short term debts, debts one can knock out in a year or two. As for long-term debts, debts that may take years to pay off, I think his plan founders somewhat. It is a little reckless to save nothing for what could be, as it will be in my case, five to six to even seven years.

A thousand dollars can vanish in no time nowadays.

[4jacks]

Shane,

You can drive to any city in America and find deals on cars like the ones I posted. If you tell me the city you live closest too, I'd be glad to do a quick search and show you. If you live far away from an urban area, then you have to look at the drive to a city as part of saving $1,000+ on a car.

I can understand reservations about spending money on a car with high mileage. But that is seriously how car dealers make so much money. The sell the New. You just have to keep in perspective the fact that you only need this car for a couple years till you Upgrade yourself into a decent ride.

A Honda or Toyota will get 200k miles no problem 99% of the time. So if you purchase one with 170k mile, and you generally drive 15k miles per year, then you can easily count on 2 years of driving that car. And as you see at that mileage, you loose only a small portion of the value when you sell it. So if you buy one for $2,500 and spend a grand getting it past inspection and registered, etc. You have a car for $3,500 and in two years you can turn around and sell it for $1,500. That's pretty cheap driving.

Honestly if you have an early 90's Toyota with under 200k miles on it. Then it's probably not going to blow up anytime soon. I was somehow thinking you were rocking a 96' Ford Tempo or something. The problem is you are worried about the car going up, and really there is no way to reassure you that it's not going. I guess one thing you could do is check out a Car Forum for you car. I know there are plenty of corolla forums out there and talk to people with the same car.

anyhoo, My 02 civic has 145k on it. And seriously dude, God willing I will be driving this thing till I hit 300k.

About the Emergency fund. I honestly know more about cars then finances, I’ve only been doing this for a little bit. But I figure Dave Ramsey, Crown Financial, and Suze Orman all say pretty much the same things with their “steps” So I just started doing it. I started with the $1,000 Emergency fund. Got everything but my wife’s student loan paid off. Then with the economy my job wasn’t as stable, so like Dave often says on his radio show, I stopped the snowball and built up the emergency fund to $2,000. Then I went back to the snowball. But I also figure in some of my vacation time as an “unemployment emergency fund” In most states the employer HAS to pay you all vacation time, I have 190 hours racked up, so I keep rolling over the maximum, that way if I’m laid off, I get that extra month+ salary. So that is kinda how I handled the job instability. But yeah if your job is unstable you should save up more than the $1,000. Dave says that.

[tim_v]

Shane, the reason why is because people are used to hearing the Dave Ramsey minimum $1000 E-fund when you are debt snowballing. if that is all you have for a 5-month E-fund that means you only have $200 of monthly living expenses which seems outrageous. many people on this forum are getting by with that mere $1000 saved up and using up any extra cashflow to pay off debt. you are right, it's all relative and must put things in perspective. you haven't given any numbers but assuming you are an average joe making the average US salary of $40k yearly, making about $3k/month and spending $2k/month, you probably have ~$10k saved up....$3500 for a used car would use a chunk, but not blow you out of the water.....i could be way off on my assumptions, so correct me if i am.

There's a huge difference between a credit card debt paying 20%+ interest and a student loan paying 3% interest. If your only debt is a 3% student loan I think it's risky to only have 2 weeks spending in an emergency fund.

That being said much of personal finance comes down to personal motivation and if having a larger fund causes you to spend more then maybe it's not a good idea.

[pochax]

There's a huge difference between a credit card debt paying 20%+ interest and a student loan paying 3% interest. If your only debt is a 3% student loan I think it's risky to only have 2 weeks spending in an emergency fund.

That being said much of personal finance comes down to personal motivation and if having a larger fund causes you to spend more then maybe it's not a good idea.

Tim, i agree with you which is why i suggested that he not knock out his E-fund just to buy a car (if his current car is working okay despite the high mileage). i did not suggest he spend on a car to cut down to 2-wk E-fund.

to Shane, your plan sounds fine to save up for a car for now (i personally pay myself a car payment as i save up for my next car even though it is many years off). just remember, student loans are not bankruptable (not suggesting you would declare bankruptcy) and basically the money you "save" is cancelled out by the student loan debt. your net worth is your assets minus your liabilities. so long as you have a long term plan to pay down the student loan debt, i don't have a gripe how you do it, since there are many roads to Dublin, as they say, but i do think you do need to just bite the bullet and execute a plan at some point. for now, the imminent need for a car seems more urgent so go with that but don't lose the intensity to pay off the student debt after that issue is squared away. God bless!

[4jacks]

There's a huge difference between a credit card debt paying 20%+ interest and a student loan paying 3% interest.

They also have a lot in common.

If your only debt is a 3% student loan I think it's risky to only have 2 weeks spending in an emergency fund.

The risk is the same, regardless of what kind of debt you have.


But I understand what you are saying about keeping the risk in perspective.
It's worth the risk when you are paying off 20% interest
It's not worth the risk at 3%

[Shane]

[QUOTE=4jacks;5047]Shane,

Honestly if you have an early 90's Toyota with under 200k miles on it. Then it's probably not going to blow up anytime soon. I was somehow thinking you were rocking a 96' Ford Tempo or something.


I'm actually rocking a 93 Dodge Spirit!

[Shane]

They also have a lot in common.




The risk is the same, regardless of what kind of debt you have.


But I understand what you are saying about keeping the risk in perspective.
It's worth the risk when you are paying off 20% interest
It's not worth the risk at 3%

Another thing regarding a student loan debt: I can always place the debt in forbearance for a period of time in the event of unemployment or some other emergency (of course, the interest will accrue to a great extent during that period of time). Please correct me if I'm wrong.

Having this conversation has motivated me much more to knock out that $35000 debt, I have to admit. I guess I'm somewhat overwhelmed by it, considering it will, even with a snowball, take up to seven years to pay off. Good grief. Then again, I'm on track to pay it off in twenty years (in addition to the gads of interest I'd pay).

[4jacks]

Another thing regarding a student loan debt: I can always place the debt in forbearance for a period of time in the event of unemployment or some other emergency (of course, the interest will accrue to a great extent during that period of time). Please correct me if I'm wrong.

I thought you said you refinanced it? You called it consolidated. If it is still a student loan, then yes you can do that, just have to jump through some hoops.

Having this conversation has motivated me much more to knock out that $35000 debt, I have to admit. I guess I'm somewhat overwhelmed by it, considering it will, even with a snowball, take up to seven years to pay off. Good grief. Then again, I'm on track to pay it off in twenty years (in addition to the gads of interest I'd pay).

20 years is way too long, that is under $2k of principal a year. 7 years is $5k of principal a year, which is a reasonable good pace. You can probably do it sooner, but you would have to get pretty hard core about it.

I'm actually rocking a 93 Dodge Spirit!

Ahhhh, Yeah I wouldn’t replace another timing belt in that. I’d save up the money for the Honda or Toyota w/ about 170k miles and drive the spirit till something needed repair that was more than $200.

How many miles a year do you drive?

[Shane]

How many miles a year do you drive?

I drive about seven to eight thousand miles per year. I primarily drive the car for commutes to work. The rest of the time I bike. Exercise + gas savings = Win!

[4jacks]

Bikey Tighties = Lose

Well keep in mind you don't drive a lot, you're car might limp along for a year or two and a civic with 170k miles would probably last you 4-5 years easy.

[Shane]

Bikey Tighties = Lose

Well keep in mind you don't drive a lot, you're car might limp along for a year or two and a civic with 170k miles would probably last you 4-5 years easy.

Believe me when I say I own no pair of bikey tighties. It's regular shorts or bust.

[Thomas Robert]

Student loan debt, especially that combining both undergraduate and professional school debt like medical school debt, puts a huge burden on students.
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[Denilson]

Tim your plan sounds fine to save up for a car for now and you have to pay your self a car payment as to save up for your next one. And student loan debt may really put pressure on you.
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