Vinny Ross took his first student loan in 2003, figuring that once he had his engineering degree, he’d earn enough to easily pay off what he owed. But by the time he graduated from Penn State in 2008, he’d switched his major to journalism and accumulated $148,000 in student debt.
The result: A crash course in the problems created by big student loans and too little income. With loan payments consuming about 30 percent of his $3,000 a month take-home pay, Ross had real worries about ever being able to afford more than a no-frills lifestyle. So Ross, 26, who writes technical user manuals for the Navy, applied for a Boston Globe Money Makeover, saying he needed help to dig out from his mountain of debt.
Fee-only financial planner Mary Hoey of Braver Wealth Management had no easy answers when she met with Ross at her Needham office. “The reality is that you have $130,000 of student debt remaining, and that isn’t going to just go away,” she said.
Based on his loan schedule, Ross had another 22 years before his loans would be paid off. That meant the Somerville resident would make his last student loan payment in June 2034 at the age of 48.
“My dad is 48,” said Ross, taking a moment to consider himself at that age. “And my mom turns 48 next month.”
But Hoey said Ross could shed his debt more quickly if he was willing to aggressively tighten his belt, accelerate his loan payments, and perhaps get a part-time job.
Her austerity plan started with ensuring Ross’s monthly loan payments were automatically deducted from his bank account. That would cut a quarter percentage point from the interest rate, lowering most of his loans to 3.52 percent.
Next, she told Ross to take advantage of current low interest rates and start putting an extra $5,000 toward his loans each year. “This is a huge window of opportunity,” she explained. “Rates are going to rise, and when they do, you want to have a lower loan balance.”
Hoey suggested Ross start by putting an extra $250 each month toward his loans, boosting payments to $1,127 from $877. The additional money, she said, could come from a weekend job or cutting back on discretionary expenses. The most likely areas to trim: the $311 a month he spends eating out and $152 in ATM withdrawals for miscellaneous purchases.
Since he is paid biweekly, there are two months a year when Ross receives three paychecks. During those months, Hoey said, he can take $1,000 from the third paycheck and put it toward his loans. Hoey cautioned that Ross needs to make sure that the lender puts extra payments towards principal, rather than using the money as an advance on the next monthly payment, which includes interest.
While student loan holders are often told to consolidate debt, Hoey said that’s a bad idea for Ross. Since most of his loans are from private lenders rather than the government, any consolidation would mean higher interest rates and stiff prepayment penalties.
So what’s the bottom line? Assuming Ross sticks with the program and interest rates don’t change, he should be able to pay off all his loans by September 2022, cutting nearly 12 years off his current repayment schedule. And even if interest rates rose 2 percentage points in 2014, Hoey said, it would only extend his last payment by one year.
Hoey's recommendations were equally aggressive when it came to other financial planning issues. She said Ross should start building an emergency fund by transferring $3,000 from his $8,500 in savings and then adding $100 each month until the emergency account reaches $6,500, enough to cover three months of essential expenses.
Turning to retirement, she said he should boost his company 401(k) plan contribution to 3 percent of income to take advantage of the company match. “And I want you to set up a Roth IRA,” she said, advising him to contribute $100 a month.
To finance these recommended changes, Ross would have to cut $576 from his monthly spending. That would leave him with $110 a month for discretionary expenses, including clothes, travel, hobbies, and movies. That’s not much money, Hoey said, noting a part-time job would provide some financial breathing room.
Still, the belt tightening and aggressive loan repayment would pay off. After 10 years, Hoey said, her projections show Ross would not only have paid off his school debt, but also have nearly $61,000 in retirement savings and another $21,000 in the bank.
Ross’s take on Hoey’s tough-love financial plan? “This is awesome,” he said. “I tried getting myself on a budget, but didn’t know if it was worth it.” With plan in hand, he said, it is.
Goal: Coming up with a plan to manage a mountain of student loan debt Ross graduated from college with a degree in journalism and $148,000 in loans. Faced with 22 more years of payments, he wanted help in finding the best way to pay off the debt. Fee only planner Mary Hoey of Braver Wealth Management, Needham, recommended that Ross:
- Boost annual loan repayment by $5,000 a year to cut nearly 12 years off the repayment schedule.
- Trim expenses by taking lunch instead of eating out and reducing ATM withdrawals.
- Start building an emergency fund and increase retirement savings.
- Get a part-time job to help make ends meet.