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I have about $13,000 in private student loans that I took out nearly 10 years ago before I knew better. To make a long story short, I graduated about 1.5 years ago and began paying these loans. All of these loans have about a 9.5% interest rate, and although I have a good job with lots of possibilities in my future, my salary is ~55k before taxes. I also have some federal student loans, but all of them are between 3-5% interest so I believe it makes the most sense to pay only the minimum and direct the majority of my money towards the high-interest private loans.

Currently, I have about $5k in savings. What is my best approach for getting rid of this high interest loan? My take home is roughly 3200 a month, and about 2600 of it is accounted for right away between my loans, rent, groceries, and auto-related payments (I own my car but this accounts for gas, insurance, and repairs per month averaged across the year). I can trim some fat on groceries and entertainment (currently my budget for groceries is ~600/month, plus another $200 on dining out) and my entertainment budget was in the range of 500. It would be difficult to cut either of these down by more than 33%.

So, what should I do? I have my sights set on making a significant amount more of money 2-3 years down the road (the average salary for my role is in the range of 80k, I would like at least one more year of experience in my current position) and I think there is a solid chance that I will be able to make >100k do to some sweat equity investments. How much will I save by directing the money I've been putting in to savings during 2016 (again, roughly 5k) to pay off the private loans? Would it be safe to dump all my savings into the high interest loan and rely on a credit card (currently carrying 0 balance, limit of 5k) for emergencies?

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    Your grocery and entertainment budgets definitely seem high to me. You're spending an average of $27 a day on food and $17 a day on entertainment.
    – Comptonburger
    Jun 8, 2016 at 18:20
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    We did a budget analysis a couple years back. There are 3 of us, and food came to $10/day/person. This included restaurants. All food. And unconstrained spending. Budget wise people can drop it to half of that. As noted in I've tracked my spending and have created a budget, now what do I do with it? it all depends on your priorities.
    – JTP - Apologise to Monica ♦
    Jun 8, 2016 at 18:34
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    As I said in the other question, budgets reflect choices. I'd track every cent for a while and see what the numbers really are and make the tough choices from there.
    – JTP - Apologise to Monica ♦
    Jun 8, 2016 at 19:03
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    I'm curious why you say "it is not really worth it"? Just a quick search of refi rates shows 3-5%. If you can refi for even a short term (5 years or less) you'd get a much lower interest rate and the payment would be well within your reach. If it works, you effectively cut one of your expenses without any life changes. (Any life changes you make help even more.)
    – TTT
    Jun 8, 2016 at 19:08
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    @USER_8675309: Okay, but in the end you can't reduce expenses on certain things in a systematic way without tracking those expenses. Spending 12.5% of your income on liquor does seem a bit much, so if that is enough info for you to reduce it as much as you need to, great. Eventually you may have to track receipts (at least for a while) to see where to cut if more needs to be cut.
    – BrenBarn
    Jun 8, 2016 at 21:16

1 Answer 1

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There is no magic formula to this, quite simply: earn, cut expenses, and pay. It sounds like you can use a little bit of help in the earning area. While it sounds like you are career focused (which is great) what else can you do to earn?

Can you start a low cost of entry side business? Examples would include tutoring, consulting, or even baby sitting. Can you work a part time job that is outside of your career field (waiter, gas station, etc...)?

One thing that will help greatly is a written budget each and every month. Have a plan on where to spend your money.

Then as you pay off a loan throw that money at the next one. No matter if you use the smallest loan first or highest interest rate first method if you do that your debt payments will "snowball", and you will gain momentum.

I'd encourage you to keep good records and do projections. Keeping good records will give you hope when you begin to feel discouraged (it happens to just about everyone). Doing projections will give you goals to meet and then exceed.

The wife and I had a lot of success using the cash envelope system and found that we almost always had money left over at the end of the pay cycle. For us that money went to pay off more debt.

Do you contribute to a 401K? I'd cut that to at least the match, and if you want to get crazy cut it to zero.

The main thing to know is that you can do it.

I'd encourage you to pay off all your loans not just the high interests ones.

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  • Nothing new to me here, which tells me that outside trimming as much as I can from the non-essential categories, I am pretty much doing the right thing. Can you address what I should do with the $5k I have in savings? What are the rewards/risks of dumping it towards paying off a large chunk of the high interest loan? What is the downside to continuing to pay the minimum in hopes that in 12-24 months I will be in a place where my expenses haven't increased much but my income has taken a large leap, where the loan could possibly paid off in just a few months of income?
    – USER_8675309
    Jun 8, 2016 at 18:57
  • As you may know Dave Ramsey advocates cutting your efund down to 1K during debt pay off. However, that may not be enough for you. Having 1K will cover about 90% of emergencies, but perhaps with your personal life you need more or less. For myself we kept about 3K during consumer debt pay off. One K each for an efund, a couple of hundered in a gas fund (gas prices were jumping around like crazy there for a while) and about 500 in medical. YMMV. We never touched it, we paid emergencies out of current income. So perhaps he was right.
    – Pete B.
    Jun 8, 2016 at 19:04
  • My feelings aside, shouldn't we bump that to $2500, given inflation? It seems to me that a car servicing costs more than $1000 every 40000 miles or so? Regular, but the brake job always feels like a surprise/emergency.
    – JTP - Apologise to Monica ♦
    Jun 8, 2016 at 19:29
  • I do my own brakes, easiest way to earn $150/hour+. It rarely costs me more than $100. That being said you might be right.
    – Pete B.
    Jun 8, 2016 at 19:35

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