Dave Ramsey and paying off school loans

[zoebartlett]

If you follow Dave Ramsey's Total Money Makeover plan, what did you do when it came to school loans? We've modified his plan a bit, but I think that's pretty common. I'd love to use his debt snowball plan to pay off our school loans but my husband isn't in a hurry to do so. He thinks that because our interest rates are low (I can't remember what they are) and because he'd rather save for a house and other stuff, we should hold off on paying school loans off for now.

If you follow Ramsey's plan, what did you do when it came to school loans?

 

[natascha]

I don't follow ramseys plan (only debt I have is student loans and I am still a student). My recommendation is to look up the interest rates of your student loans and the interest rates for your future mortgage ( at least what hey are on now) and compare them. For example in my case the interest rate I pay on the student loans is lower than what I would pay on a mortgage, then it would be financially stupid to pay off my student loans only to get a more expensive mortgage.

If it's the other way around then look at you short term future plan ( 5 years), are you planning to buy a house? Do you have enough for the down-payment, if not will you be able to pay of the student loans while you are saving up the down-payment? Also do you have a big enough buffer? If you have that and you have enough/ can still save up for your downpayment then snöball those student debts to death

 

[zoebartlett]

Thanks Natascha!

I know that our school loan interest rates are much lower than our mortgage rates, although I can't remember the percentages right now. So based on that, it might make sense to wait, but the total payoff amount on our school loans are smaller. That's why I wondered if it might be worth it to take care of paying them off first.

 

[Haven]

I love David Ramsay and the other personal finance gurus like David Bach and Suze Orman. I think we use a mixture of all their advice to keep ourselves financially healthy.

In your case, I'd figure out how long it will take you to pay off the student loans. If it will take a relatively short amount of time, such as a year or two, I'd get them paid off so I could wipe that account off my debt list. I know it may not be the most financially beneficial approach based on how much you'll pay in interest on the mortgage, but for me, there is an EMOTIONAL benefit to getting rid of a balance, and it just plain feels better and more motivating to do it.

Then, your snowball will get bigger and you can pour everything into your mortgage once those student loans are wiped out.

You have to do what you're most comfortable doing, of course. The thing that really helped us decide which to wipe out first was that we put a list of the student loans and the mortgage in Excel with their balances and interest rates. We listed them in the different possible payoff orders, with their balance, interest rate, and minimum monthly payoffs. Then, we calculated the dates we would pay each off based on the various orders we could choose to pay them.

In the end, we opted to pay off the smaller loans first just to get them off our plate. It works for us because we got all jazzed up every time we paid off a loan, and then whenever we have an extra chunk of money we poured it into the next loan and ended up paying everything off earlier than we'd hoped.

I know everyone is different, but that's what we did.

 

[centralsquare]

Another thing to consider is whether your education loans have some protections in them, like if you lost your job could you pause on your payments. My education loans (at least some of them) had those, which makes them (in some scenarios) more attractive to keep around than other debt.

 

[MissStepcut]

Another thing to consider is whether your education loans have some protections in them, like if you lost your job could you pause on your payments. My education loans (at least some of them) had those, which makes them (in some scenarios) more attractive to keep around than other debt.

Yup. It depends on your loan/educational institution. For example, if I get a job serving the public, my school will pay back a lot of my loans for me. Also, income-based repayment will cover more of it if I end up doing a less lucrative job in a couple years. Furthermore, very low interest rates are only guaranteed by the Fed until 2013. We plan to do what we can to scrape together a down payment and get ourselves in a low rate mortgage ASAP, which means putting our massive student loans on the back burner. One issue I have with Ramsey and Orman is that they issue rules that work for most people, but not everyone in every situation.

 

[megumic]

We don't follow Dave Ramsey at all, however, we are in the house buying vs. paying off student loan boat as well. We've been strongly advised to pay our loans down first and then pursue a home. We have no debt except student loans, but it is a lot - over $100k. The fact that homes in our area start at about $400k, it's an uphill battle to accomplish either.

We are paying down our student loans, meaning we're paying a significant bit more than the minimum each month. That said, we're also saving for a home and plan to buy a home in the near future.

 

[chemgirl]

We don't follow Dave Ramsey at all, however, we are in the house buying vs. paying off student loan boat as well. We've been strongly advised to pay our loans down first and then pursue a home. We have no debt except student loans, but it is a lot - over $100k. The fact that homes in our area start at about $400k, it's an uphill battle to accomplish either.

We are paying down our student loans, meaning we're paying a significant bit more than the minimum each month. That said, we're also saving for a home and plan to buy a home in the near future.

We're doing the same thing! Instead of paying off all of our student loan, we're paying off more than the minimum, but also building our savings at the same time. We're lucky though and our loans are Ontario government student loans and we're only required to pay back $7k for each year we were in school. Our interest payments are also tax deductible because its a government loan. Given the terms of the loan, we don't feel that we have to pay it all off as quickly as possible.

I think it really depends on the type of loan you have.

 

[zoebartlett]

Haven -- I like Suze Orman too, and I occasionally watch her show. I catch David Bach and Jean Chatzky when I get a chance to watch the Today show and they're on. They have good advice, too. You're thinking is exactly what I want to do. I'd prefer to pay off school loans because to me, that counts as any other debt in Ramsey's debt snowball. My husband doesn't count school loans or mortgages for some reason. I think his reasoning is that because the amounts we owe are so high, if we focus on paying those off ASAP, we'll never be able to put $ away n savings like we'd like to. I see his side and he sees mine but we just disagree on who will cave. We just need to sit down and figure it all out. Thanks for your help!

Centralsquare -- I hadn't thought of the possible need to defer loans for a period of time. We've been there, done that, and I hope we don't have to do it again. It's something to think about though, so thanks! I'll keep it in mind.

MissStepcut -- I definitely think it's important to take what you need from people like Ramsey and others, but then tweak their advice to fit your own needs/situation where needed. I love the idea of loan forgiveness programs. I don't know if my loan co. has one of those or if I qualify. I have heard that teachers need to work in low-income areas or something like that. If that's the case all around, I don't qualify. Maybe I'll call my co. anyway. It can't hurt. Thanks so much!

Megumic -- I hear ya! Houses are pricey little buggers, aren't they?!

Chemgirl -- It's interesting to learn about how other places like Canada handle loans. I wish we had something similar. There are days that I kick myself for not going to my state school for undergrad instead of my private school.

 

[Haven]

I completely agree that you need to take what you can use from these financial gurus and leave what doesn't apply. Of course, this applies to everything, right?

We did what your DH wants to do, we paid of our loans and ALSO put money away in savings at the same time. It was important to us to grow our savings while shrinking those loans at the same time. Similar to your DH, I don't think of student loans and mortgages as evil debt in the same way I think of credit card debt or car loans or something. We don't carry credit card debt or car loans, but if we did I would put everything extra into paying those off, and THEN save. It totally depends what works for you.

The other thing to remember is you can start with one approach and then shift it as time goes on. We were originally paying a huge extra payment toward the principal on our mortgage every month, but after a while we reconsidered and decided to scale that back and sock more into savings. The key is to come up with SOME approach, and to implement it. For us, at least, once we got started with a plan of attack the momentum really picked up and it became a real priority. We did a lot of discussing beforehand, and that was important, but as soon as we laid out our goals and plans on paper and started hacking away at those student loans it all took off from there and we were super motivated to pay it all off ASAP. That, of course, led to some great lifestyle changes that really supported our goals.

The best thing I did was to keep track of the original balances on our loans and how much we paid off and when. I set it up in an Excel file so we could see a running total of how much debt we'd paid off to date, and it was a really effective motivator. We still have it for our mortgage, and whenever I feel tempted to really splurge on something that I'm not sure is worth it, I go into that file and feel the itch to see an even larger number in that cell that shows how much debt we've paid off. It might sound silly, but that totally works for curbing my appetite to spend money on things big and small.