Q: I am about to start paying off my $30,000 of student loan debt and am wondering how to approach this. Should I go with the most aggressive [repayment plan] or not? I am a waitress, so I never know what my income is going to be. I do have about $3,000 saved, own a house that I rent out, and have two mutual funds. My student loans and the house are my only debt.
I also want to have enough money saved to live for six months while I go travel and do volunteer work before I start a “real” career? Is that a bad move while I’m facing this student debt? — Annie
A: With your goal to do some extended travel before starting a new career, I would be conservative about repaying your student loans and start funneling more money into savings for travel and the unexpected.
Some people will say that nobody should postpone working to travel for six months with those student loans – that it’s irresponsible. And there is some truth to this point of view. The cost – in additional interest and lost earnings – will add up.
I think that postponing work to travel when you’re in student debt is irresponsible if you don’t have a plan. For example, it would not be wise to simply put loans in forbearance and not pay them for six months without considering the consequences.
But life is about more dollars and cents. If you are fortunate enough to be able to swing some extended travel without creating a major financial setback (for example: adding credit card debt to your student loans), I say go for it. One of my biggest regrets is that I couldn’t travel more during my 20s because of the stupid financial decisions I made early on. Managing your money well is about spending with intention.
If your student loans offer different repayment plans, I would choose either an income-based repayment plan or a longer term (20 or 30 years) for now. This will give you a smaller monthly payment so you can save more for your trip. Then, when you start your career and get settled, you should change to a more aggressive plan as soon as possible.
As you plan for your six months of travel, remember that not only will you need cash for the travel and living expenses, you’ll need to cover your student loan payments during that time and be prepared for any emergencies that come up. For example, what happens if you lose a tenant in the house you own – or it suddenly needs a major repair? Will you be able to cover those expenses without incurring new debt?
Finally, if you’re able to set aside enough savings each month and you want to make more aggressive payments on your student loans, I’d recommend a split approach:
- Take any money you have comfortably left over at the end of each month.
- Decide how much you need to save to reach your savings goal(s).
- Use the remainder to make an extra student loan payment.
- Once you’re comfortable with the amounts, make it automatic.
What do you think? What advice would you give Annie? Did you travel or take time off from work despite student loans? How’d you swing it?
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