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May 04, 2010

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I hate getting help, but the loan rate your parents can get is just too good. I'd take them up on their very kind offer and then pay them back completely in 10 years or less. A 10 year loan at 2.75% on $90,000 is a $860 payment a month. I'd pay at least $1000 and shave off 1.5 years.

At $60k a year, you're going to have about $4250 in take home pay a month.

Here's how I'd budget:

Loan Payment to Parents - $1000
Rent - $1250
Emergency Fund - $200
401k to Maximum Matching - I'll guess 5%, so $250
Roth IRA - $400
Food - $200
Electricity, Gas, Water - $200
Car - $300
Gasoline - $150
Cable (Entertainment) and Internet - $100
Miscellaneous (cell phone, pets, extra to parents, etc)- $200

Obviously, you can work that around as needed, but I'd definitely put your loan to your parents first since it's extremely nice that they are willing to do this. Any extra raises or side hustle money can be thrown at the loan as well. You'll probably be able to pay it off in 8 years or less and then be able to decide what to do with that extra money every month (you'll be able to save up for a house real quick...).

I'd avoid taking your parent's offer of using their HELOC--because they may need that money more than you do sometime in the next 20 years. Medical bills, job loss, etc. can happen to anyone--why make them risk their house just to make your payoff easier?

You took the loans, you got the education, you have the income generating power that should also increase in the next 20 years--I think you should pay these loans off yourself and leave your parent's assets alone.

I think you should immediately liquidate all your taxable investment accounts and pay off as much of your loans as you can, from the highest rate on down. You are unlikely to make more than 9% in equities in the next year or so, yet you are guaranteed 9% by paying down that debt--seems like a no-brainer. Just save back $10K or so for emergencies.

If it were me, I'd avoid consolidating the loans--you will have to pay fees for that. Just go ahead and pay down your loans. Don't bother with investments (other than 401K/IRA) while you have those loans outstanding.

I'm with MC. In addition, (knowing what I know now), I would find a one-room "economy" for cheap cheap and focus on wiping out that debt in two-three years.

I'd go for option #1.

You should be able to handle that debt load yourself with your income. Sell your securities and pay off that high 8.8% interest loan. I'd look into consolidation and find out how much it costs and what you'd save in interest. It may or may not be a good idea.

I would avoid owing the money to your parents. Their HELOC is adjustable so it will go up in future years. Sure the rate may be ~3% today but it could hit 8% or more in 4-5 years. What if you end up unemployed or otherwise unable to pay the debt, then your parents house is on the line. Owing large sum to your parents would potentially cause tension in the relationship or even outright bitterness. You probably have a good relationship with your parents, but I wouldn't risk hurting it to save some interest on loans you are capable of handling yourself.

Also keep in mind that for your income level the student loan interest is tax deductible (without itemization) and loans from your parents aren't. You'll be in the 25% bracket so paying 6% on student loans is really like 4.5% after taxes.
BTW, Your parents may be thinking the interest on the HELOC will save them on taxes, but they will have to declare the interest you pay them so it will be a wash.


About this bit: "one with about $4k in securities which I do not want to sell,"

Why don't you want to sell this security but you're willing to sell your other $20 in investments? This doesn't make a lot of sense to me. Is the security something special? Whats the deal here? I'd be selling all my stock if I was in your case. You've got debts to pay.

Surely you can find a place to rent much cheaper that 12-1600/month? Especially if you are not married. You need to find some roommates or other creative ways to pay about half that in rent.

I would caution borrowing money from you parents - to me this creates much more risk that is not worth the lower interest rate. This debt would also not be discharable in the event you die or become disabled as I know the federal student loans are.

Finally, I think its evident that you are given this some serious thought. Therefore, I would encourage you to set a realistic goal for paying off the debts. I would think something like 3-5 years. Do not keep these things around for 20 years.

There is no need for alarm or concern. You should be able to easily pay off these loans.

I did a quick, rough calculation. If you are able to commit $1500 to the loans every month, you should be done with the loans in a little over 6 years. This is without taking out a loan from your parents and without pulling any money from your current investments.

If you can't commit $1500, $1200 will pay off the loans in just under 8 years. That's pretty easy to do, and shouldn't put a strain on your lifestyle, etc.

Do not put your parents house at risk!
some time in the next 10 years you will be layed off, downsized , fired or
messed over some how then dinner with your folks will taste different. Of course then you might have to move back with them.
With a 6ok income and single , live like a starving artist and pay massive amounts down on the debt. It is debt not a pet, get rid of it.

As others said, do not put your parents at risk. Also, when you borrow from family, the dynamics change. Next, do not cash in the investment/savings. You need to have reserves. Based on your expected income, you should be able to pay this off in a reasonable time period. Loan consolidation is a good idea as rates are low now, but will probably go up substantially in the future.

Agree with Seth, that is way too much for rent. Get a roommate and you can pay half that. No matter which U.S. city you live in.

I had a similar situation last year, although with about $25,000, not $90,000.

I went with a split approach. For the low interest loans, I am keeping them and will pay them off. For the high interest ones, I went with the HELOC from my parents and am making payments each month. We assumed 10 years, but it will be less than that.

The issue with the HELOC is that the rates will rise if it's variable, as mine is. In that case, you'd be trading in some fairly low interest rates for a low variable rate now, but an unknown rate in the future. Over the course of 10-20 years, you have no idea what will happen.

My suggestion is to find rent closer to $1,200, keep living like a college student, make larger monthly payments, and keep saving! In about 5 years, if you keep saving and paying off debt, you'll be far ahead of your peers, even though you started with almost $100,000 of debt!

Good Luck!

You do not say what city you are moving to, so it is hard to estimate "reasonable" living costs. I lived in a low cost city, so after college 3 friends of mine and I lived in a house for $1k in rent a month, so $250 each. The house was nothing to write home about, but none of us cared. My advice, if you can find a place with friends, do it, especially for the first year. There are a ton of upfront costs with furnishing a new place, etc. and living with some people for the first year or two stretches those costs out. In essence, continue living like a college student for a year or two (or 4 like I did).

As for the HELOC, not sure what to tell you there. It is a great deal, but then your parents are on the hook if you cannot pay it back for any reason. Plus, what happens if you want to get an MBA or something in a few years and have no money coming in while in school. Or if you want to take an expensive vacation when you could be taking a cheaper one and giving your parents the difference.

If it were me, I would sell the taxable stuff to pay the interest and knock off some of the private stuff. I would keep your emergency as is so you are not left short if something happens. After that, 401k to the company match, Roth, then debt snowball time. 90k is tough, but sounds like you have a good job and should be able to knock it out quick enough.

Hi, I'm the subject of this scenario and want to thank everyone for the advice it's very helpful. I have some additional info to add: 1. I will be working in NYC so the housing in that area is quite expensive. I am looking for cheaper housing options, but estimated 1200-1600 as a worst case scenario of sorts based on glancing at housing on Craigslise (does anyone have suggestions about where else I should look?). 2. @jim It's not that the securities are particularly special, but I had funded that account with the intention of using it "later in life." I can sell the securities but I like the investments and don't want to pay taxes on the gains. 3. Regarding the HELOC rate: yes, it is variable but it will always be cheaper than my private student loans because they are both indexed to prime, but the heloc subtracts a bit. It seems to me to be sensible to sell the 20k fund to pay off the highest interest rate and then use the HELOC to replace my variable loans. The Federal loans could possibly be consolidated or else I will just keep them. It's a bit of interest rate diversification between the Federal and private/HELOC loans. 4. My parents will both likely retire within 1-3 years so they are not a stage where they are concerned with job loss. Whatever equity remains in the house is part of an inheritance for my sister and me in the future, which obviously adds incentive to pay off the loans (my sister will also pay off her loans with the HELOC if we take that path, her loans are fixed at a much higher 10% rate so her decision certainly seems easier). 5. I do want to pay off the loans as fast as possible and my thinking is that if I can manage the payments on the loans as they are now, I will easily be able to make payments for the HELOC (and could pay off my loans much faster at the lower rate).

Thanks again for the advice. Please add anything else you think of.

John, I'm more concerned about what might happen if you lose your job and your parents are left paying a HELOC. Can your parents safely afford the HELOC if you aren't able to pay it? Do you want to risk your parents losing their house? Unless your parents have other assets to draw on then don't think that can't happen.

Thanks FMF and John for this very helpful post. I'm sure this is going to be useful for many people.

The diversity of advices is interesting.

Jose

If you're going to be in NYC, consider living in Jersey, Brooklyn, or Queens, which is lots cheaper, and you are still only a couple stops away on the train in most cases. Get a subway map and do some homework with Craigslist.

As for the paydown strategy, I'd go for keeping as much of your cash as possible but paying down the loans quickly and hugely - in today's economy, you never know when you'll need cash, and once it's gone, it's gone. Cook dinner at home, bring your lunch or grab a bite off the taco trucks, and save dining out for big events.

Become a "member" of the Met, the Natural History Museum, and other museums - you can spend a month in the Met or MOMA and not see the same stuff twice, and you can buy a membership for $100/year or so. When you aren't doing that, hanging out in Central Park is always good for free fun.

Even NYC won't break you if you pay attention...

Spend all of your salary enjoying the city and meeting people. You never get bumped into if you're not in the way. In NYC being in the way costs money. If you dont start making more in a few years, leave NYC... dont get sucked in. Then start working on your financial life. 60k is a great salary right out of school, but NYC will chew that up faster than you can blink.

When I graduated I had zero debt, but only maybe 1k in a savings account. Did you make all your ROTH, Savings, other assets? Or is it from the debt you incurred? I am totally interested how the asset side of your balance sheet is so developed at this point in time.

All these great comments have given me a lot to think about. I hadn't even considered the risks to my parents if I lose my job. They have substantial retirement assets and some income, but I doubt they would be pleased about covering the HELOC payments for me if I lost a job.

@Tyler: No, I did not generate all of the assets I know own. I have always been a saver and the savings, Roth, and $4k in securities has all come from me (I've been earning money through various jobs for a long time). The $20k in securities is the combination of an account started for me by my father, some contributions from my uncle, and a few contributions of my own. It's been fully invested for years and suffered a big drop recently (obviously...). All of these assets are managed at my discretion. My plan was to use some to make a big one-time payment against my debt, and to keep some reserved for future emergencies or else long term capital appreciation (I own exclusively stocks at this point).

One thought I had which has not been raised in the comments is the questions of ROI for the different choices. If I put $20k against the 9% loan, that seems pretty good since I have no way of knowing what market returns will be. However when it gets down to the lower variable rates, currently 3-4%, it's a tougher question. I'm inclined to let my securities grow and hope growth beats the low interest rate. Then if/when rates rise, I'll be in a position to aggressively tackle the debt. Another point in favor of consolidation: The rate will fix now at the all-time low. Then if rates rise substantially over the coming years, I could be faced with a situation where I can easily earn more return for my dollars than I am paying in interest.

John,

I am reading this entry much later but I feel you are missing an important point. You would do well to stop thinking about math and interest rates for a second and reread the advice at the start of this column. It is clear to me that you should NOT use your parents HELOC. Just by the way you are proposing the problem they don't have the money to take on your debt. Note: You didn't say that they would just pay your loans and you would pay them interest. Your parents are about to retire and don't need the stress of your loan on their house.

However, I am not sure you will agree with my above point so let me put it in financial terms. Consider all of the comments about about tax deductible interest, using your 20k to prepay, and that your principal balance will decrease over time and calculate your net annual savings by using the HELOC over 10 years. Lets say the number comes out to $400/year. Is that worth the risk you are placing on your parents house and your relationship? Once you start thinking in dollars instead of interest rates, I hope this problem gets easier to think aobut.

I really doubt you would do this for $400/year.

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