Dear Helaine: I’m about to graduate from a master’s program and start a job with a $60,000 salary. Currently, I have a $10,000 student loan with my credit union at a 4.5% interest rate and two federal loans (undergraduate and graduate) at 5.4% and 6.8% interest rates. I am single.
My payments will be about $475 a month, which is definitely doable while still saving for other goals. But ... my parents have let me know they are giving me $10,000 as a very generous graduation gift. Should I (1) pay off my private student loan entirely, which has the lowest interest rate but is the least flexible -- there’s no income-based repayment plan or deferment should I need it or decide to enter a Ph.D. program; (2) put my money toward the highest-interest loan, which is a government loan and does offer flexibility; or (3) put the money in an emergency fund and make my student loan payments as normal? After setup costs (move to a new city, new apartment), I believe I will have $3,000 left for an emergency fund.
Or should I do something different I haven’t considered? I’d love your input on this! -- New Graduate Getting Started
Dear New Grad: First, congratulations on your achievement, for both graduating and already having a job lined up. Second, it’s terrific that you have such generous and loving parents, who gave you a gift you must certainly need on graduation. You should absolutely choose option No. 3.
Life has a way of throwing curveballs at all of us, and it’s best to have some money set aside for when things don’t work out as planned. And, as you said, you do have the ability to save money even as you are paying down the loans. You could choose to use that money to make extra payments on the loans, for other goals (say, money to live on if you do return to school for the Ph.D. so you don’t need to borrow money for that purpose), or simply, sometimes, to have fun.
If you do decide to work toward eliminating one of the loans, I would absolutely start with the privately issued one, which could, as you note, trip you up the most should you encounter a rough patch. Good luck with all of it.
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