Planning For the Future - Episode Two

Yesterday I wrote about making a plan with the funds I'll have 'left over' each pay period, and I briefly mentioned that the money could go towards my student loans.  I'm actually quite surprised that folks didn't put a larger emphasis and paying down this debt. Perhaps it is because student loans are traditionally looked as as 'good debt'

Part of the conversation my mom and I had was about aligning my student loan debt repayment plan to reflect our goal of having all of our debts paid of prior to buying a home in a few years.  With Jordan ramping up his truck loan payments, I think I should increase my payments as well.

So, below I present two cases.  One is to apply this years 'left over' $1,300 towards my debt AND re structure my payments to have them paid off in two years.  The other is to assume the lump sum goes somewhere else and JUST re structure the payments to have them paid off in two years.

As of August, 2009 I owe the following:

Alberta Student Loan Owing: $ 5,593.78
Canada Student Loan Owing: $ 3,118.16 

Scenario One: Use the $1,300 towards student loan debt.


I would of course use that money towards the debt with the highest interest, which happens to be the debt with the lowest principal owing which would bring my balances to the following:

Alberta Student Loan Owing: $ 5,593
Canada Student Loan Owing: $ 1,818
If I continued my current payment ($75) as a minimum payment on the AB loan and had a payment of $375, it would take me approximately 5 months to pay off the Cnd loan.  After that I would have a full $450 to pay down the remainder of the AB loan.  In those five months, my AB loan would be brought down to (with the $75/month payment) $5,218.  It would take me about 12 months to pay this amount off with payments of $450/month. For a total debt reduction timeline of 17 months.


Scenario Two: Use the $1,300 towards something else entirely.


If I had a minimum payment of $75 on the AB loan and had a payment of $375, it would take me approximately  9 months to pay off the Cnd loan.  After that I would have a full $450 to pay down the remainder of the AB loan.  In those nine months, my AB loan would be brought down to (with the $75/month payment) $4,918.  It would take me about 11 months to pay this amount off with payments of $450/month.  For a total debt reduction timeline of 20 months.

So using scenario one will only actually save me about 3 months if I choose to increase the money dedicated to paying off my student loans by $300/month AND use an extra $1,300 to help pay them down.

That's not actually a very big difference between the two.  Of course, I would actually have to be able to come up with $300/month for this to work as well, which should be doable because I did have $500/month going towards my credit card debt.

With that in mind, I don't think I'll use the $1,300 for my loan - but I do think I'll look at increasing my payments again.

3 comments:

  1. Hahaha... I actually had a comment typed about the student loan and then decided that since you didn't present it as an option in your last post that you didn't want to put your money there. You sneaky, sneaky girl... testing us bloggers huh? ;)

    ReplyDelete
  2. HI Jessie, even though scenario one would only allow you to pay off the debt 3 months faster, I think you should still apply that $1300 surplus to the student debts. The faster you can get out from under them the better in the long run, in my opinion. As someone who has been student debt free for about 5 years now, it is nice to have those counted as a positive on my credit score and not have them dragging around with me while I quest for CC freedom to buy a house.

    Personally for me I like not having that debt, or any debt for that matter. My current CC balance was from stupidity on my part in the last three year. Prior to that I lived gloriously debt free for about 2 years. It was a nice feeling - and the letter you get from the government saying they are paid in full is a great day indeed!

    One very large vote for paying off the student debt!!

    ReplyDelete
  3. I found myself thinking about your situation over the past few days...it really mirrors the big themes of most the personal finance blogs. Do I pay down my debt as fast as possible? How much of an emergency fund do I need? Do I snowball from high interest to low interest? Or from smallest debt to largest for the feeling of getting things accomplished?

    If you are going to carry debt, student loan debt is most likely the best kind to have. Government student loans are probably the only ones I know that if life gets you down (sudden unemployment, major change in life) that the creditor may actually help you with repayment assistance or interest-relief.

    If you try to fast-track paying off your loans too quickly and then right after, life gets you down, you could end up in a situation where your emergency fund could be depleted and the next creditors who are funding your debt won't be so understanding.

    I guess like everything in life, balance is key. I would totally do what you are doing. Look at increasing the amount of your monthly payments to pay it off sooner (hopefully around the time when you want to buy a house!) and start building up that E-fund. It will feel great when those loans are gone but you'll feel even better knowing that you have a backup in case something unexpected happens.

    ReplyDelete

Hi! Thank you for stopping by and leaving a message.

Links ♥