What’s more important, paying off debt or saving
Student loans burden many professionals trying to get started in life, save for retirement or sock money away for their kids’ future college expenses. This week we look at a couple who feel hopeless, trying to prioritize where their money goes each month.
The situation
Cory and April, both 39, live in Colorado Springs with their two children and Cory’s mother. They feel blessed with their current situation but they are hesitant to make the next move for fear they will make a costly mistake. Cory is a primary care physician with a large healthcare company earning $110,000 per year and is eligible for his company’s pension plan. April is a stay-at-home mom who home schools their boys, ages 7 and 9.
Cory is paying off his student loans. He owes $40,846 on one loan with an interest rate of 1.5 percent and $124,392 on the other with a rate of 7 percent. The family’s monthly payments are manageable, but just barely.
The couple recently refinanced their house and paid off some bills. They have $95,000 in savings from the refi. They wrote to What’s The Plan seeking guidance on the best allocation of these new funds. They don’t believe they’ll ever be able to retire, and they can’t decide if they should focus on saving for their sons’ college expenses, their own retirement or paying down Cory’s student loans. Cory and April view their family as their top priority and this includes taking care of their parents and ensuring their children are not faced with a lot of student loan debt.
Cory has been with his company for 10 years and has a 401(k) worth $120,489. April has a mutual fund valued at $3,377, and two IRA accounts totaling $3,768. The couple has a term life insurance plan on Cory for $1,000,000, but none on April.
The recommendations
Cory and April have done much better than they are giving themselves credit for. Although it is hard to imagine now, Cory’s pension and Social Security benefit will be a key component of their retirement savings.
I recommend they use the $95,000 to pay off as much of Cory’s student loan debt as possible. The couple should hold $20,000 in savings for an unexpected emergency and use the remaining $75,000 toward the loan with the highest interest rate. Pay minimum payments on the loan with the lower interest rate.
One option to research is to refinance the remaining portion of the high interest rate student loan. Some banks are offering great rates — as low as 2 percent — to refinance student loans. Two cautions: the interest expense is no longer tax-deductible and there is no provision for deferring payments for periods of unemployment.
Another option to research is borrowing from Cory’s 401(k) to see if the terms and monthly payments would be easier to manage.
I also recommend they cash out the mutual fund — but not the IRAs — and use this money toward the student loan debt. The fund has done well for them and it would be best used paying down that debt.
Cory and April should seriously consider life insurance on April. She is not employed by anyone, but if something happens to her, Cory could need assistance in childcare costs and help around the home. I recommend they secure a 20year level-term life insurance policy on April for $500,000 worth of coverage.
Putting away for retirement is a much bigger undertaking than it will be for their children to take out student loans. This will be a difficult decision for the couple, but I urge them to plan for their own financial independence. They don’t want to have to rely on their children later because they didn’t plan for themselves now.
Cory and April have done exceptionally well and have much to be proud of. Their “attitude of gratitude” will get them far in life and is a great asset for their children to inherit.