In just the last week, two readers emailed in with similar situations. They are beginning to set up their debt snowball plan, and both have large student loans (large, as in excess of $50,000, more than half of their annual salaries). Fortunately, both readers took advantage of consolidation opportunities and have locked in very low rates on their student loans. Still, they are concerned about owing so much money on school loans in addition to other smaller debts.
We basically subscribe to the Dave Ramsey “baby steps” method of managing our finances, though we’ve tweaked his plan a bit over time to fit out needs. According to Ramsey, things like large, second mortgages should go to Baby Step 6, “Pay Off Home Early,” which comes after paying off other debts, setting up an emergency fund, and funding retirement and college savings. I believe this is also a good spot to move large student loan debts.
Both readers indicated it would take “years” to pay off their student loans. If they could pay off the student loan debt, and all other debts within 12-18 months I might offer different advice, telling them to stick it out to become debt free before jumping on the remaining baby steps. However, putting other goals on hold for years could be detrimental to their financial health, particularly the missed opportunity of compounding growth for things like retirement and college savings.
My advice is to continue to pay minimum payments on student loan debt until the following three things are in place:
- All other non-mortgage debts have been paid.
- A solid emergency fund of six months of living expenses is funded.
- Contributions are being made to retirement and college savings accounts, if applicable.
At that point, I would continue to pay my mortgage payment, and begin tossing every additional penny I could scrape together towards repaying the student loan. When it is gone, use that same intensity to pay off your mortgage early. The entire process may take ten or fifteen years, but when you reach that point you can begin to build some serious wealth.
Please share your thoughts in the comments section, in the spirit of helping out these two fellow readers. In other words, feel free to disagree with me!