Q. I have $30,000 in student loans and no other debt. I’ve been saving in my emergency fund and it’s now about $25,000. Does it make sense to pay off a chunk of the loans? What happens if some are later forgiven?
— Graduate who saves
A. It’s great that you’ve been saving in an emergency fund.
But we know that having student loans is pretty unattractive to many.
So let’s start with the building block of your financial stability.
A good emergency fund should have at least three to six months of expenses so you can access the funds for an unexpected expenses such as a car issue, medical emergency or job loss, said Jody D’Agostini, a certified financial planner with Equitable Advisors/The Falcon Financial Group in Morristown.
If the $25,000 is sufficient to fund these needs, then you can start to apply some extra monthly income towards debt reduction, D’Agostini said, noting that this can save you a lot of money over time as you will be paying less interest on the debt.
It also depends upon the interest rate of these loans, she said.
“You might want to consolidate and refinance to a lower interest rate so that your monthly payment is reduced, or more is being applied towards principal allowing you to retire the debt sooner,” she said. “There is generally no prepayment penalty towards early retirement on student debt.”
Just note that if you refinance government loans with a private lender, you may lose some repayment plan protections.
Another question to consider is whether you have any credit card debt that has a higher interest rate. If so, you should try to eliminate that as soon as possible while still paying your monthly student loan, D’Agostini said. Once this is accomplished, then you can start to apply more towards your student loans, she said.
One further thought is to try not to ignore your other financial goals such as home ownership, eventual retirement, and possibly children’s educational costs.
These goals should be priorities as well, she said.
“The power of investing early and consistently with the compounding effect is real and will make the lift less over time,” she said.
First, create a budget and determine how much discretionary income you have. I would portion out that money towards all your goals based on your priorities.
You want to start to increase your net worth by having a disciplined strategy towards saving and investing, she said.
And finally, we don’t yet know what, if anything, will happen with student loan forgiveness. You may want to keep an eye on Congress to see if anything progresses before you make a big move on loan payoff.
Email your questions to [email protected].
Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.