Hi, Helaine: I am a Peace Corps volunteer in Africa. I have been in my assigned country for about a year, and I have one more year to go.
I'm writing because of my student loans. I was fortunate enough to only need to take out about $8,500 combined to earn my undergraduate and master's degrees. Before I left for Africa, my payments were $90 a month. But even though my debt is manageable, I can't wait for some of it to be canceled.
Peace Corps volunteers accrue a small readjustment allowance for their two years of service, somewhere around $8,000 in pre-tax income. The money is supposed to help me when I return to the United States and begin looking for a job. I also recently opened an IRA and rolled over the very small amount -- I mean very small, it's about $700 -- I earned from my job before my Peace Corps service. I know I could max out my IRA contribution with part of my readjustment allowance, which would make me more comfortable about my long-term financial situation.
My questions: Should I take my readjustment allowance and pay down my student loan debt in its entirety, or as much as I can? Should I put 15 to 20 percent in my IRA? I know my monthly loan payments are manageable, and an easy way to maintain good credit, but I would also rather not pay more interest than I have to. I'm torn between the two ideas. Help! -- Torn Between Two Options
Dear Torn: You need to take a step back. First, it's quite possible you'll need to live on your readjustment allowance for a time. Unless you are planning to move in with family, you'll need it not just to get by day-to-day, and not just to pay rent, but you'll also need to stretch it so it can cover a security deposit at your new residence. As you noted, $8,000 is not a lot of money, and you will find, especially if you decide to set up in a high-cost metropolitan area, you'll go through the sum quicker than you realize.
If, however, some of it is left over after you get a job, I notice you don't mention a third option: emergency savings. You need to put money aside for when things go wrong -- and make no mistake, things will go wrong occasionally. (Just ask the 800,000 federal workers who were recently furloughed, with their pay delayed.)
I understand the desire to pay down your student loans, but given the low monthly bill due, I would not consider it a financial priority. As for retirement savings, remember what I said about an emergency account? Once money goes into an IRA, it can't be withdrawn without paying a financial penalty except in limited circumstances. My advice: Unless you already possess three months of savings for unexpected events, use this money to make that happen.
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