Prioritizing loans to pay off

[dapperfied]

A friend is asking me a question about the situation she is currently in. I told her I don't have the proper answers, thus me creating this thread since it kinda got my curious and I will certainly forward her this link to read upon it.
The situation is that her student loans (provincial & federal) has been defaulted to the CRA. I don't know what she's been spending her money on but she wants to turned it around.

As of now her Provincial loan sits at about 10k, needs to pay around 2k to get the loan back to National Student Loans and come up with monthly payments and good standing.

The same applies with Federal loan (23.6k) but with the lump sum of about 5k.

She got about 16k (with 5k of that being in TFSA/mutual funding) right now in her bank account.

Interest rate as of now for both loans sits at 5.2%.

Should she withdraw all her TFSA/mutual funding and pay off the loans or keep it?

Pay off all of Provincial or pace it out and pay off the lump sum of both loans to regain status with National Student Loans?

What would you guys do if you we're her? I was never in her position and not good with financial stuff.

[Gerbs]

Pay off all the debts with highest interest first. If the interest is like <2%, might be better just to make minimum payments and invest the rest as you'll get a higher than 2% return.

[lowside67]

First, she absolutely MUST repay $2k to Provincial and $5k to Federal student loans. Being out of compliance will risk her credit and given that she has cash in the bank, this is a no brainer.

The decision on whether to spend her remaining $9k against her loans or leave it invested is made by whether she thinks she can earn more than her interest rate in the investment world. At 5.2% for her debt, the decision is easy - she should make a further lump sum to repay debt further.

She should make sure she has an "emergency fund" left over and that she needs to figure out herself as it would be based on many things - does she live at home, does she have a spouse who works, etc.

$16k - $7k repaid - emergency fund = ???

??? should be immediately paid as a lump sum against her loans, if they had different interest rates then obviously the higher interest cost, but if the same, it doesn't really matter. In my opinion, she could probably almost repay the provincial loan entirely which would simplify things down to one loan soon which is always good.

Mark

[dapperfied]

Right now her rent is $1400 + living expensive and what not = $2400-/+. Single.

Net income is about $3200.

As of now she can do monthly payments of $500 whether it's provincial or federal.

I think there's a lower interest rate when the account gets forwarded back to National Student Loans (i can't remember exactly, it's been awhile since i've paid all my loans).

Yeah she can pay off the Provincial completely off along with the lump sum from the federal loan interest.

Doing this will leave her with not emergency money + literally living pay cheque to pay cheque.


On the side note, I guess she could pay off all the provincial loans and go monthly on paying off the Federal loan interest and get it back to NSL???

Originally Posted by lowside67

First, she absolutely MUST repay $2k to Provincial and $5k to Federal student loans. Being out of compliance will risk her credit and given that she has cash in the bank, this is a no brainer.

The decision on whether to spend her remaining $9k against her loans or leave it invested is made by whether she thinks she can earn more than her interest rate in the investment world. At 5.2% for her debt, the decision is easy - she should make a further lump sum to repay debt further.

She should make sure she has an "emergency fund" left over and that she needs to figure out herself as it would be based on many things - does she live at home, does she have a spouse who works, etc.

$16k - $7k repaid - emergency fund = ???

??? should be immediately paid as a lump sum against her loans, if they had different interest rates then obviously the higher interest cost, but if the same, it doesn't really matter. In my opinion, she could probably almost repay the provincial loan entirely which would simplify things down to one loan soon which is always good.

Mark

[H.Specter]

Her rent is almost half of her net income, is this real life?

[jackmeister]

Originally Posted by H.Specter

Her rent is almost half of her net income, is this real life?

sounds like she lives in vancouver, so yep

[PJ]

Originally Posted by dapperfied

Right now her rent is $1400 + living expensive and what not = $2400-/+. Single.

Net income is about $3200.

Yeah she can pay off the Provincial completely off along with the lump sum from the federal loan interest.

Doing this will leave her with not emergency money + literally living pay cheque to pay cheque.

Living paycheque to paycheque is what a lot of people do, especially when paying off loans at ~5% or more.

Personally, I think her rent is too high for the amount she's making, but I guess that's somewhat of a personal choice for her.

So she owes roughly $33k, and she has $16k in her bank.

If it were me, I'd either move in with my parents or live with roommates to cut down living expenses, and just be frugal as fuck until I pay off my debts. If she did that, she could be home free in a year.

It's obviously not her first choice, but if she wants to face the facts she'll have to make a change somewhere. Personally, I'd rather live like a student for a year and then be home free, than be counting pennies for multiple future years. The amount saved on rent used to pay off the loan will be far, far, greater and faster than juggling around a few % on this interest or that interest.

Her choices are either that, or working with the ~$800 a month she has left over from rent and living expenses. Which, at $500 a month, would take her over 5 years to pay off.

[dapperfied]

Yeah her salary is 50k lol

Originally Posted by H.Specter

Her rent is almost half of her net income, is this real life?

[dapperfied]

She says her lease won't be over til another 8 month or so and is currently living in Vancouver and doesn't own a car, moving back is a big no since there are personal issues.

Originally Posted by PJ

Living paycheque to paycheque is what a lot of people do, especially when paying off loans at ~5% or more.

Personally, I think her rent is too high for the amount she's making, but I guess that's somewhat of a personal choice for her.

So she owes roughly $33k, and she has $16k in her bank.

If it were me, I'd either move in with my parents or live with roommates to cut down living expenses, and just be frugal as fuck until I pay off my debts. If she did that, she could be home free in a year.

It's obviously not her first choice, but if she wants to face the facts she'll have to make a change somewhere. Personally, I'd rather live like a student for a year and then be home free, than be counting pennies for multiple future years. The amount saved on rent used to pay off the loan will be far, far, greater and faster than juggling around a few % on this interest or that interest.

Her choices are either that, or working with the ~$800 a month she has left over from rent and living expenses. Which, at $500 a month, would take her over 5 years to pay off.

[Gerbs]

Originally Posted by dapperfied

Yeah her salary is 50k lol

You still take home about $41xxx after taxes, where did the other 9k go if her income is 32k.

[whitev70r]

Find a roomate to share the cost of that apt rental. Just looked for a place for friend, sharing room in any crappy old place starts at like $600/mth. Seeing as hers is like $1400, I assume it is pretty nice. Use that money to pay off debt.

But wow, bit of eye opener, she incurred a lot of student debt for a $50K/yr job. Is that the new reality or a bit of an exception? Just your basic SFU/UBC/College degree? I assume she did it on her own with no family help or support.

[dapperfied]

Travelling

Originally Posted by Gerbs

You still take home about $41xxx after taxes, where did the other 9k go if her income is 32k.

[dapperfied]

She didn't rely on anyone but herself for education.

Originally Posted by whitev70r

Find a roomate to share the cost of that apt rental. Just looked for a place for friend, sharing room in any crappy old place starts at like $600/mth. Seeing as hers is like $1400, I assume it is pretty nice. Use that money to pay off debt.

But wow, bit of eye opener, she incurred a lot of student debt for a $50K/yr job. Is that the new reality or a bit of an exception? Just your basic SFU/UBC/College degree? I assume she did it on her own with no family help or support.

[bcrdukes]

Always gotta be ballin' no matter what.

[ilovebacon]

ahh shit, this is gonna be me soon. But on the good side. I think our prime minister started thinking about us, Canadian students. Hopefully this will help.

Canadians with government student loans who make $25K or less will get some reprieve - National | Globalnews.ca

[PJ]

Originally Posted by dapperfied

moving back is a big no since there are personal issues.

If that's not an option then she's stuck with paying the ~$500 a month and only having ~$300 left over for over 5 years... which by the sounds of it, will take her into her late 20's/early 30's, meaning unless she gets a huge raise, she won't be able to, for a lack of a better way to put it, really do anything. Definitely won't be able to buy a car or travel any time soon. Sure hope she's comfortable living how she's living.. she'll be here a while.

Originally Posted by dapperfied

Travelling

Sigh.

[Nlkko]

I can never understand the concept of being in debt and hold investment for the average person. Dump the TFSA and mutual fund and clear your debt. When you are debt free, you can start investing. She still owe around 17k. Make plan to cut back on monthly expenses and fucking travel. 200 a month is 2000 a year toward paying off debt. Cut traveling in half so that gives you roughly 7k a year to pay off debt. She will be debt free in 2 years gives or takes.

Very simple 4 steps:
1. Aim to be debt free.
2. Check #1. Then put aside emergency funds (4-8 months of expense).
3. Check #1 & #2. Then take some out to treat yourself.
4. Check #1, #2 & #3. Save the rest.

[dapperfied]

Would it be best for her to pay off the Provincial loans completely off and take care of the bigger Federal loan on a monthly payment?

[yray]

apply for RAP

[dapperfied]

If I remember correctly, you can only apply for RPA after you payofff the interest with CRA (defaulted). Then she would have to get that loan back with National Student Loans to apply for RPA.

Originally Posted by yray

apply for RAP

[Verdasco]

let me guess, shes one of those girls that did an arts degree and travels around the world, while drinking starbucks and partying 24/7 when shes back home in Vancouver

please tell me she works as a server at moxies, cactus club, keg, earls, etc as well...

[dapperfied]

Nah, struggled early because no job. But now in her career field, marketing.

[bobbinka]

the biggest issue with confronting debt is that people don't want to compromise their lifestyle. they think that "Oh, i can only afford $300/mth payments" is sufficient. No. you have to change things to make it work. move somewhere more affordable, stop buying brand name things, stop going out or buying starbucks everyday. if it's a luxury and not a necessity, you have to consider where your priorities are at.

some people say invest the money at a higher rate of return. while i would normally agree that is a smart thing to do, i don't believe this is a good path for someone who has difficulties managing her finances. sure, you earn a tiny bit of extra money, but this is potentially someone who would also spend it. you have to have the self control and will power to put money aside and not touch it for any other reason. will someone who spends $1400 on rent and $9000/yr on travelling be able to resist the temptation of going on another vacation next year when there's $16k accessible? she's got $11k sitting in her bank (which based on her salary and spending, takes awhile to save), there's a reason she hasnt invested it already or put it away, and it's because she wants to have the option to spend it when she wants to.

she needs to re-evaluate her monthly expenses and get rid of her debt as soon as possible. unless she's amazing at investing or playing stocks, put the money towards the debt. bringing down the size of the debt is a morale booster, makes you feel good that you made progress, and also makes the amount much more manageable.

people don't like to ask for help. they might be embarrassed to ask or think that they must take on the problem themselves. Truth is, if it comes down to it, you have to do what you have to do and ask (as long as you're not a douchebag that won't repay them). family is the best help, because most of the time it's interest free.

if she puts $13000 from her bank towards the debt ($3k emergency), borrow $5000 from family/friends, all of a sudden, her $33000 debt becomes $15000. if she is willing to move and rent for $1000 instead of $1400, that's already $400/mth she can put towards the debt, before even accounting for any cutbacks to her other monthly expenses, which i bet there's at least another $200. hell, if she is able to move home, she could even have it repaid within 1 year, and then she's free to rent an $1800 place if she wants.

people dont realize how much money they can save till they're forced to do it. but if you can convince them to do it, after coming out of debt, they become much more financially responsible.

[Nlkko]

Things I tell people when I advise them on personal finance is that your plan to erase debt has to be sustainable for you. Unless you are bankrupted, drastically change your lifestyle to battle manageable debt is not sustainable. Do it slowly, small cutback (limiting 4 eatouts a month to 1 or 2 is sustainable; instead of spending 9k a year travelling, spend 4k) are healthy. It takes a bit longer to get there but you will get there. The plan only works if you can stick to it.

[m4k4v4li]

2nd job