Keep My Savings or Pay Off My Debt?

[mikazukipie]

I had undergrad debt of about $20K, and after 2.5 years will have paid off around half of it (yay living at home and buying nothing. . .my youth!). I'm going to start grad school this fall (if I'm fully funded, if not, I can't afford to go, period), and I will probably have enough in my bank account to pay off the rest of my undergrad debt, with a little bit left over.

Should I do that and enjoy being totally out of debt, hopefully forever, and saving a little on interest payments, or keep my savings around for worst-case scenarios while I'm in school, and defer the rest of my remaining loan payments until I'm done? Living on a grad student budget is certainly tough, but I feel like that extra money would just get wasted on frivolous things like food and rent. What do you think?

[LifeIsGood]

I'd keep a couple of grand in a non-ATM or debit card savings account for emergencies, then would pay down the debt with the rest. It's nice to be completely out of debt, but better to have a contingency fund.

[hubris]

I had undergrad debt of about $20K, and after 2.5 years will have paid off around half of it (yay living at home and buying nothing. . .my youth!). I'm going to start grad school this fall (if I'm fully funded, if not, I can't afford to go, period), and I will probably have enough in my bank account to pay off the rest of my undergrad debt, with a little bit left over.

Should I do that and enjoy being totally out of debt, hopefully forever, and saving a little on interest payments, or keep my savings around for worst-case scenarios while I'm in school, and defer the rest of my remaining loan payments until I'm done? Living on a grad student budget is certainly tough, but I feel like that extra money would just get wasted on frivolous things like food and rent. What do you think?

Given the near zero pay of a graduate student I do not think you would have the income to "waste."

That aside, what is the interest rate you are paying on the loans?

Another thing to keep in mind is that your tail-risk or "worst-case scenarios" will most likely be a relatively small dollar amount to most people, but not a grad student. So, if something does move against you, it could be a drag for sometime.

Something else to consider is making payment on the interest while in school to keep your draw-down on the savings in lock-step with your progression in the program and guard against going into revolving debt with the remainder of the savings.

[Katzenmusik]

I say pay off a few grand in loans but keep the bulk of your savings. The savings give you a bit of freedom and protection in life. And you don't want to have something drastically bad happen, need money, and be forced to take out a loan or credit cards at a much higher interest rate!

[eikko]

I'm wondering the same thing, because if I were to pay off my undergrad debt I would probably/maybe qualify for a federal Pell grant. But, like you, if I am not fully funded I can't afford to go. I think the answer depends on what kind of loans you have. Are they subsidized Stafford? If so, the govt pays your interest while you are in school, so you should not pay them off. (Plus their value would depreciate over the 5 years you will be in school.)

But if they are unsubsidized or private loans... you should calculate how much the interest will be over the next few years. If it seems like a lot, you could consider paying off a chunk. Personally, I feel more comfortable having some debt but also a little bit of money in the bank for emergencies than having no debt just for the principle of being debt-free (although that would be a nice feeling!).

Edited February 7, 2010 by eikko

[flgirl]

In general, I think it's better to pay off debt -- after all, what's the point of having savings if you're going in the hole because of interest every month? It's not real security unless you don't have exorbitant monthly payments at the same time that you have money sitting in the bank. This is a bit different with student loans than with, say, credit card debt.

I say pay off as much as you can now and use a low-interest credit card for emergencies (if you have one). You will feel better to get rid of a regular payment and probably free up enough that you can put more in savings on a regular basis and not even have to use the credit card option.

[liszt85]

I say pay off a few grand in loans but keep the bulk of your savings. The savings give you a bit of freedom and protection in life.

Not true if everybody starts doing this (in some ways, this behavior is exactly responsible for the current economic situation here in the US). If you have the money now, pay off your debts. If you get funded, you will have enough (and more) income to support yourself. If not, you are living with your parents now and you say you'll also have some money left after you pay off your debts. Do it now or you'll end up spending all of it! (I guarantee it).

[artschoolhopeful]

I'm definitely not an expert in this, but I think it really depends on what kind of kind of loan you took out. I believe that certain loans for education purposes have very low interest rates that do not accumulate while you are still in school. You also have to think about what kind of person you are. From your short post, it appears that you are a very financially conscious and responsible. If these two things are in play, then I say either defer the loans completely, or keep paying it off bit by bit. Keep a good amount of money in a savings account that you only touch for emergency purposes.

I say this because as a graduate student, you will barely be able to meet ends. If an emergency is to arise (medical bills, car damages/accidents) you want to have some money in hand to cover those things and these education loans have much lower interest rates than any other kind of debt you may acquire. While the philosophy of living debt-free is honorable, there are different kind of debts to be had.

That being said, if you happen to be more of a spender than a saver, then I would say pay off your debts now because the money would be spent frivolously anyway. I do agree that it is better to have a little debt and cash on hand rather than debt-free and broke.

[pea-jay]

Do not, I repeat do not use credit cards to make ends meet. You will come out way ahead if you use your savings to cover the unexpected.

Consider this, you have savings, you are receiving interest. Not much but it IS growing.

If you have to use a credit card, you will pay 10-20% or more for the privilege of paying off an expense over time.

It's better to have that reserve with terms favorable to you.

As for the student loan, they are fixed rates and deferrable in school. Some continue to add the interest into the principal-others dont. If yours rolls your interest into the principal while you are deferring payment, it may be helpful to pay the interest only, even if it means that comes out of your savings. At the very least the student loan debt wont be growing.

Bottom line keep the loan, pay interest only and use savings to cover what your salary/stipend/grant fails to.

Edited February 8, 2010 by pea-jay

[chemdoc]

What programs are you guys in that make you say that you're getting almost no money? By my research and calculations I should have ~$700 in savings every month. I don't have a car loan though so that probably helps a lot.

[artschoolhopeful]

Humanities--the stipend ranges from about $15,000-$22,000. I believe most sciences are about $29,000-$32,000 so that makes a huge difference. It also depends where you're located because the rent between a city and elsewhere can range.

What programs are you guys in that make you say that you're getting almost no money? By my research and calculations I should have ~$700 in savings every month. I don't have a car loan though so that probably helps a lot.

[liszt85]

Humanities--the stipend ranges from about $15,000-$22,000. I believe most sciences are about $29,000-$32,000 so that makes a huge difference. It also depends where you're located because the rent between a city and elsewhere can range.

I get $18K before taxes. I have a wife who cannot work (due to dependent visa restrictions). We manage just fine and already have ~$1500 in savings (its been just 4 months). So we never use more than $1000 a month (what I receive after taxes is $1500). The cost of living in this city is quite low, which is one reason. However, by low, I mean the rents are cheap. We pay $400 for the studio we live in (yes, we don't live in a mansion, we chose to live in a studio because we knew we'd be poor but we also knew that by making the right choices, we'd have enough savings to fall back on).

So I find it surprising that students who only have themselves to support talk about not paying off their debts just because they want to feel nice about the huge amount of savings that they have in the bank! I think its not the right attitude to have. Medical emergencies can happen to anybody..not everybody is prepared for such life altering events, and not everybody just goes ahead and dies. You will probably go into a little bit of debt if that happens (you will have your insurance paid for by the school, remember?). So you choose to continue being in debt for the fear of having to go into debt (with a really minute probability) in the future?!

[liszt85]

I get $18K before taxes.

18K is the highest anybody gets in my department (~$1500 a month after taxes). That is because I already have a masters degree. I know people who get $1200 a month and live luxuriously (and not surprisingly.. if you are single, you can just rent a room in a house with others. That should cost you a maximum of $400-500 in moderately expensive cities. It will cost about $300 here. If you live in NYC, its a different story.)

[mikazukipie]

So I find it surprising that students who only have themselves to support talk about not paying off their debts just because they want to feel nice about the huge amount of savings that they have in the bank! I think its not the right attitude to have. Medical emergencies can happen to anybody..not everybody is prepared for such life altering events, and not everybody just goes ahead and dies. You will probably go into a little bit of debt if that happens (you will have your insurance paid for by the school, remember?). So you choose to continue being in debt for the fear of having to go into debt (with a really minute probability) in the future?!

I don't know what your medical insurance situation is, but this is actually a much bigger problem than you seem to think. Half of U.S. bankruptcies are due to medical bills. HALF. That's scary even to a relatively healthy person like me. Not to mention that student loan companies are more flexible and have more options than the collection agencies that health care conglomerates hire.

I have a range of interest rates, from 2.48% to the standard 6.8% (I have six separate loans from the same lender, three are subsidized Stafford, two unsubsidized Stafford, and one small private loan. I also have one small Perkins loan). I'm not sure how to calculate interest because of the varying rates, though, and most online calculators only provide for one interest rate at a time. Should I use a median value or do them all separately?

I don't even have a credit card now (because I think they're a scam, to be perfectly honest), and I definitely won't be getting one when I don't really have an income. I will probably pay off a chunk of the debt and keep the rest, at least until the end of my first year, see how much I needed to use, and adjust accordingly. Thanks for all the advice so far.

[artschoolhopeful]

I get $18K before taxes. I have a wife who cannot work (due to dependent visa restrictions). We manage just fine and already have ~$1500 in savings (its been just 4 months). So we never use more than $1000 a month (what I receive after taxes is $1500). The cost of living in this city is quite low, which is one reason. However, by low, I mean the rents are cheap. We pay $400 for the studio we live in (yes, we don't live in a mansion, we chose to live in a studio because we knew we'd be poor but we also knew that by making the right choices, we'd have enough savings to fall back on).

So I find it surprising that students who only have themselves to support talk about not paying off their debts just because they want to feel nice about the huge amount of savings that they have in the bank! I think its not the right attitude to have. Medical emergencies can happen to anybody..not everybody is prepared for such life altering events, and not everybody just goes ahead and dies. You will probably go into a little bit of debt if that happens (you will have your insurance paid for by the school, remember?). So you choose to continue being in debt for the fear of having to go into debt (with a really minute probability) in the future?!

You are very fortunate that the city that you live in happens to have low rent--that makes a HUGE difference as to how much money you save. Most places I applied to, the rent for a studio will be nearly double that amount or more.

Second of all, I completely agree that people should not avoid paying off their debts. I stated that in this particular case where it appears the the OP is referring to student debt which has little interest AND appears to be fiscally responsible, judging from the fact that he/she already paid off half of it, perhaps it would be better for the OP to sit on this nest until he or she is guaranteed a bit more of an income. There are different kinds of debt, and there is no reason not to pay off educational loans bit by bit while you do not have substantial savings or income in the minute risk of an emergency that would require you to go into credit card debt.

I do not like taking risks, which is probably why I can never be a good business person.

[rising_star]

I agree with the suggestion to pay off a chunk of the debt and to keep the rest in savings. Why? You can never predict when you'll slip, fall, break a few bones in your wrist, and need a MRI that costs $450 after insurance, just for example. Or needing a root canal, not having dental insurance, and learning that it's going to cost you about $1500 out of pocket. Or your car might need four new tires = $500 or a new transmission = $1000. These things happen and can be backbreaking if you don't have any savings.

Also, OP, do you have any pets? If so, I would definitely try to keep at least $1000 set aside for any medical emergencies that arise.

So, I guess what I'm saying is I'd keep ~$2000 in savings and use the rest to pay off debt. Then, I'd use websites online to find the lowest interest rate credit card (under 10%) you can that has no annual fee and try to get a limit of about $5000 so that you could use it for any emergencies that arise.

liszt85, while it's admirable that you've been able to save so much, there are many considerations. For example, some programs pay over 9 months, so you have to set aside money each paycheck in order to pay for your summer living expenses. Cost of living varies from one place to the next, which you can factor in somewhat when making your decision about where to attend. Furthermore, a lot of people out there, whether in the social sciences or the humanities, would be entirely envious of making $18K/year before taxes. There's not a single non-science department on my campus that pays that much, and it sounds like rent here is more than rent where you are. But really, I don't want to get into another debate about money with you; last year was enough.

In a nutshell, I agree with everything artschoolhopeful said.

[liszt85]

You are very fortunate that the city that you live in happens to have low rent--that makes a HUGE difference as to how much money you save. Most places I applied to, the rent for a studio will be nearly double that amount or more.

Second of all, I completely agree that people should not avoid paying off their debts. I stated that in this particular case where it appears the the OP is referring to student debt which has little interest AND appears to be fiscally responsible, judging from the fact that he/she already paid off half of it, perhaps it would be better for the OP to sit on this nest until he or she is guaranteed a bit more of an income. There are different kinds of debt, and there is no reason not to pay off educational loans bit by bit while you do not have substantial savings or income in the minute risk of an emergency that would require you to go into credit card debt.

I do not like taking risks, which is probably why I can never be a good business person.

All I'm saying is none of the grad students I know come with savings in their bank accounts. You should also consider this. You have family here in the united states. If you are in a real emergency, you have help at hand. Some of us are international students, moving half way across the globe (in my case, newly married) with no savings. We get lesser benefits from the US govt too (eg: my wife cannot work..cannot tutor, nothing..just partial health insurance benefits on the student dependent health insurance plan).

If you want some savings to fall back on, keep aside maybe $1500-2000 and pay off the debt! Anyway, that's what I'd do. Preparing for emergencies for pets, for the end of the Mayan calendar in 2012, etc don't make sense to me as you can think of a hundred such emergency situations if you wanted to. Grad students are expected to be unprepared. If you wanted to be prepared for all financial emergencies, maybe you should look for a high paying job in the industry. Some of these are pearls of wisdom (sometimes exact quotes) that rising star offered me last year when I was applying and making my decisions.

[rising_star]

Have you thought about moving expenses assuming you get into a program? You'll need first month's rent and security deposit, plus deposits for electric and other utilities to get them turned on. Then there's either moving your stuff or buying new stuff, transporting your car if you have one, moving your books, etc. Both times I moved it cost me more than I thought, particularly when I moved across the country. And, depending on the program, you may move in August and not get paid until sometime in September (ouch!). So definitely keep that in mind when deciding what to do with your savings.

I agree with the suggestion to pay off a chunk of the debt and to keep the rest in savings. Since you're in the position of being able to have money for those emergencies, rather than having to try to borrow it either from a credit card company or from friends/family (and that's making the huge assumption that any of them are even in a position where they could help), I think it's a good idea to keep a few dollars set aside. Some would consider this foolish because you're planning for any number of things that may or may not happen. But the thing is, costly things crop up all the time. I think preparing for them, when possible, is a good idea.

So, I guess what I'm saying is I'd keep ~$2000 in savings and use the rest to pay off debt. Then, I'd use websites online to find the lowest interest rate credit card (under 10%) you can that has no annual fee and try to get a limit of about $5000 so that you could use it for any emergencies that arise that would cause you to run out of savings.

In a nutshell, I agree with everything artschoolhopeful said.

[mikazukipie]

I agree with the suggestion to pay off a chunk of the debt and to keep the rest in savings. Since you're in the position of being able to have money for those emergencies, rather than having to try to borrow it either from a credit card company or from friends/family (and that's making the huge assumption that any of them are even in a position where they could help), I think it's a good idea to keep a few dollars set aside. Some would consider this foolish because you're planning for any number of things that may or may not happen. But the thing is, costly things crop up all the time. I think preparing for them, when possible, is a good idea.

This is what I'll be doing, for certain. Believe me, I've thought about several possible financial contingencies and how to avoid them because I'm in a position where there is no way my family could help me out with money (although the emotional support would certainly be there). I'm totally on my own moneywise, which is another reason why I'm reluctant to part with my savings.

[liszt85]

This is what I'll be doing, for certain. Believe me, I've thought about several possible financial contingencies and how to avoid them because I'm in a position where there is no way my family could help me out with money (although the emotional support would certainly be there). I'm totally on my own moneywise, which is another reason why I'm reluctant to part with my savings.

You know what's best for you, good luck.

[NsciApp]

Ok, this might be weird, but I think Suze Orman has good advice: if your loan will be subsidized (not accumulating interest) while deferred, WHY WOULD YOU THROW YOUR MONEY AT IT??????? Just keep it in a high interest checking (locally I found 3.9%, no joke) or do some low risk short term bonds. You'll make money on your money and will be less tempted to spend it.

If they aren't subsidized, pay the minimum every month, and do an extra payment that will go primarily towards principle. I could be wrong about this, but keeping the loan around longer and doing payments really boosts your credit score.

At this stage in your life, with lack of financial security you should keep your savings. If shit hits the fan you should call your loan company right away to make arrangements so that non-payment doesn't affect your credit score. Student loans are "good" debt, not "bad" debt like credit cards.

Good luck!

[artschoolhopeful]

Ok, this might be weird, but I think Suze Orman has good advice: if your loan will be subsidized (not accumulating interest) while deferred, WHY WOULD YOU THROW YOUR MONEY AT IT??????? Just keep it in a high interest checking (locally I found 3.9%, no joke) or do some low risk short term bonds. You'll make money on your money and will be less tempted to spend it.

If they aren't subsidized, pay the minimum every month, and do an extra payment that will go primarily towards principle. I could be wrong about this, but keeping the loan around longer and doing payments really boosts your credit score.

At this stage in your life, with lack of financial security you should keep your savings. If shit hits the fan you should call your loan company right away to make arrangements so that non-payment doesn't affect your credit score. Student loans are "good" debt, not "bad" debt like credit cards.

Good luck!

This. I also believe that keeping the loan and doing your payments boosts your credit score, but we may have just been reading the same Suze Orman books.