‘Focus on paying for current school, making minimum payments on existing loans, and taking new loans if needed’: How should I allocate my funds to balance school costs and loan repayments efficiently?

Hi Money Minder,

I need your help! I’m trying to get my finances in order, and I could really use some advice. Here’s what’s going on:

Right now, I’m making around 100k (around 120k next year) in a high-cost area in the US. I’m about to move to a cheaper place, saving about $600 a month on rent, and I’m in my early 30s.

I’m starting a part-time educational program that will cost me about 25k a year for the next four years. I’ve already taken out some loans for this year, but I’m hoping to avoid taking out more for the next three years.

I’m contributing to my 401k to get my employer’s match, but I haven’t put anything into my Roth IRA in a while. I also only have about 50k in retirement savings (scary, I know!) and an emergency fund that covers about two months of expenses in a high-yield savings account.

I have two loans from grad school, one at 7.6% interest and the other at 6.6%. I’ve been on a payment plan that’s now on hold due to the pandemic. One loan doesn’t even cover the interest, and the other just barely chips away at the principal.

I’ve been eligible for PSLF for a while, but I only started making eligible payments recently. I’m not sure what to do next, so here are my questions:

Should I keep making minimum payments on my loans and focus on paying for school to avoid taking out more loans?
Is it a good idea to take out new loans to pay off the old ones?
Should I focus on paying for school, making minimum loan payments, and possibly taking out new loans to start contributing to my Roth IRA again?
If I have extra money after paying for school, should I focus on my Roth IRA or paying off my student loans? And if I focus on loans, should I make extra payments or save for a lump sum in the future?
Is there anything else I should consider that I haven’t thought of?

Thanks in advance for your help!

Response from THE MONEY MINDER:

Hello There,

I understand the dilemma you are facing with managing your finances while pursuing further education. First and foremost, let me acknowledge the proactive steps you are taking towards enhancing your financial literacy and seeking guidance in this moment. It’s commendable that you are addressing these concerns head-on.

Considering your current financial scenario, it seems crucial to prioritize managing your student loans effectively while balancing the costs of your educational program. Given the interest rates on Loan A and Loan B, it may be beneficial to continue making the minimum calculated payments, especially as the payment for Loan A does not cover the interest entirely. This will help in managing the accruing interest while you focus on your ongoing education expenses.

When it comes to the question of taking new loans to pay off existing ones, it’s essential to weigh the terms and interest rates carefully. In your case, with the focus on avoiding further loans by allocating funds towards your education costs, this might be a more prudent approach. You can also explore income-driven repayment plans to make your current student loan payments more manageable.

As for your retirement savings and Roth IRA contributions, it’s understandable that you have concerns about prioritizing between student loans and retirement. If you have extra funds after covering your educational expenses, a balanced approach could be to allocate some towards your Roth IRA and potentially consider making additional payments towards your student loans. This way, you are gradually building your retirement savings while also working towards reducing your debt burden.

In conclusion, it might be beneficial to create a financial plan that outlines your priorities, including managing student loans, educational expenses, retirement savings, and other financial goals. Reviewing your budget regularly and seeking assistance from a financial advisor can also provide you with a clearer roadmap for navigating these financial decisions. Remember, it’s all about finding a balance that aligns with your long-term financial well-being.

Best wishes on your financial journey, and remember, THE MONEY MINDER is always here to provide support and guidance.