Should I dump my savings into my student debt?

Question

I've got about $5000 saved up in my savings account.

At the same time, I've got about $8500 left to pay off on my student loan, with all the interest that includes (6%/year, compounded monthly).

I want to pay my student loan off as fast as possible, and I have been considering just dumping my savings into the loan, either once the two equal each other, or immediately.

I'm not currently putting any money into my savings because I'm trying to pay off that loan first.

Alternately, I could dump some of my savings into the loan so that I'm not left without a safety net in case of emergencies - but I'm not sure how much I should reasonably keep in Savings for such emergencies.

FTR: Breakdown of my income/expenses. I have no other debt besides my student loan, and while I use a credit card, I use it only to make purchases I can pay for, and always pay off the full balance.

Income: $2900/mo

$1400/fortnight my income(ususally $2800/mo, steady job).

~$100 Wife's income/mo (Not consistent - based on commissions)

Expenses: $2160/mo

$975 Rent/mo

$110 Elec/mo (higher in the summer due to air conditioning needs)

$75 Internet/mo

$160 Phone /mo

$500-600 Food/mo (2 people)

~$100 set aside for luxuries/mo

$250 Student Loan Payment /mo

So, in short, should I dump some or all of my savings into my student loan, should I do it now or when I've paid off a bigger portion of that loan, or is this an entirely unreasonable plan?

Side Note: Since it's getting mentioned a lot, there are a few 'hidden' expenses that aren't being shown here because they get taken out of my paycheck pre-tax. There's $100/mo for 2 month-long bus passes, $185 for health insurance including dental (going independent right now would be insanely expensive, so we're planning to switch once my company's open enrollment starts) and 3% of my pre-tax paycheck going into a deferred compensation plan.

Answer 1

Keep 3-6 months (or more if you need to, for me the number is 9 months) worth of expenses in an emergency fund. Put the rest against the student loan.

The length of time depends on your situation. I have family, and work in IT. Changing jobs takes me longer, because ... reasons. Having less than 6-9 months of buffer means that I have to rush and possibly take a position that is not a good fit, or get behind on payments.

So, set aside your emergency fund, add to it if you need to. Once it is fully funded, take the money you were using to fund the emergency fund and budget that to clearing student loans. Also, don't start new credit cards, and be sure to never carry a balance on them.

I know it seems like a lot, but keep in mind that yours is small, and you'll likely be able to knock it out in a very short time.

Edit (after OP listed expenses): Taking into account the expenses you listed, it looks like you have about 2000 per month in expenses (if you're in emergency fund mode, luxuries can wait, and you can tighten the belt on food, so go with the lower end of your estimate.) Lets say you have 600 a month to work with. My suggestion would be bring savings up to $6000. That will take you two months. Then pay 850 a month to student loans. You'll be paid off in a year, and still have 6000 for emergencies.

Once you're done, you will have 850 a month to save and invest. With patience, persistence and care, you can start a nest egg that will allow you to remain financially independent. Search around for FIRE (financial independence, retire early) and other strategies for retirement savings and investing. Be sure to save for retirement. The worst inheritance to leave your loved ones would be to become financially dependent upon them in your later years. And watch out for credit, it's a trap.

Answer 2

Liquidity. That's the issue. You rent, and that's not bad. No new roof, boiler, etc. But, you have a car? Your savings is a guarantee that you'll not have to charge a $2000 transmission on an 18% credit card. You job may be secure, but employment (aside from self employment) is never 100% guaranteed. With $3000 income per month, I'd not prepay the student loan until I had at least $9000 in savings.

We don't know your country, although we don't have fortnights in the US, so if you are in the US, you have a non-US background. Either way, if your employer offers any kind of matching retirement deposits, I'd prioritize that. Never leave that matched money on the table.

You are off to a great start, this relatively low student loan debt shouldn't keep you awake at night.

Answer 3

Great work so far, and good question. I think a lot of it depends on how risky your financial life is.

For example lets say that you are working a temp or contract job that ends in 3 months. That is also the same month your savings and student loan will be equal. I think most would agree that it would be foolish to empty out your savings in such a risky month.

Now same situation one month later. The company you were working for takes you on as a full time employee. I would go ahead and empty out my savings and make the student loan go away.

There could be other risks to consider like needing a different car, moving to a new place, potential medical bills, or a needing to travel. Anything like that on the horizon I would hold off emptying out my savings. However, once it is smooth sailing GO FOR IT!

Being debt free is wonderful and it is a worthy goal.

Answer 4

Here's what I'd do. Show these figures to your bank, and ask if they can offer you some type of account with a small overdraft, say up to $2000. Typically this won't pay the same kind of interest as your savings account, but it doesn't matter.

If such an account is available, then yes, dump most of your savings into the student loan, and keep a few hundred in your new account. The overdraft on this account is your emergency fund. This means that in the more likely scenario (no emergencies) you're saving yourself 6% interest on something like $4000 to $4500. In the case of an emergency, you're still covered; but you'll be paying a larger amount of interest. Let's say you have an emergency cost and need to dip into the overdraft for $1000. If the interest is 15%, then you've cost yourself an extra 9% on that $1000 over leaving that debt in the student loan. This seems to me like a really good gamble - more likely to gain 6% of $4000, less likely to lose 9% of $1000.

If your bank won't give you a low-interest account with a small overdraft, then use your credit card as your emergency fund. The same kind of logic applies; but since credit card interest rates are typically higher than overdraft interest rates, you'll want to keep slightly more in your savings account. About $1200 to $1500 feels right to me; and move the remaining $3500 to $3800 to your student loan.

So yes, pay off the student loan. That 6% interest really is worth having, even if you'd be taking a small gamble.

Edit - Alexander Kosubek has suggested that I should compare this to matched retirement plans. The 100% gain in a matched retirement plan isn't 100% per annum; it's 100% divided across the length of time you have to wait until you can get your hands on that money. Suppose the money is accessible when you turn 60 - a matched plan is a good deal if you're in your 50's, but not so good if you're in your 20's. The 100% matching is equivalent to 6% interest per annum compounded over slightly under 12 years.

So if you're less than 12 years away from retiring, go for the matched plan. Otherwise, pay off your student loan first.

Answer 5

I would not advise you to go entirely broke in order to clear debts. You could use the cash you have to invest, or render some other services other students need in school while you raise cash from doing so.