Sandra Is a Single Mother And Worried About Paying For College

Posted by Steve Rhode

October 8, 2008

Sandra wrote to me through the GetOutOfDebt.org site and asked the following question. If you have a credit or debt question you’d like to ask just use the online form. I’m happy to help you totally for free.

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“Dear Steve,

I am a 40-year old single mother of one and currently have $22K in credit card debt among 3 creditors: American Express $16K (9.99%), Home Depot $3K (12%), and Furniture Express $3K (zero interest and payment until March 2010).

I have $35K in student loans (6.2%) with Wachovia who is also the holder of my employer sponsored 401K plan. I currently contribute 6% and my employer matches my contribution up to 4% therefore, my current 401K contribution totals 10% of my current salary of $75K annually (gross) and $47,847 annually net (my current 401-K balance is $45K give or take a few thousand).

The student loans are for undergraduate and graduate degrees in business which I just completed this year therefore, the first payment is deferred until March 2009. I just purchased a home valued at $190K and I’m carrying a 30-year 6.375% fixed interest rate mortgage for $169K and I have a $400 car note with a balance of $14K which is about 2.5 years remaining on the note.

My daughter is a Junior in High School and I feel an intense need to get out of debt as quickly as possible to ensure I can fund her college expenses (I have no savings for her college and no expectations of scholarships being offered).

I will readily accept part-time work as an adjunct teacher or preparing taxes during the tax season to help eliminate the debt.

Which debt to I target first (I assume the Am Express) and what other measure should I take to get out of debt the quickest?

Also, once the debt is eliminated, should I contribute more to my 401K and if so, how much more?

Sandra”

Dear Sandra,

Thank you so much for writing and asking for a little bit of friendly advice.

I can sympathize with the college bound worry and the reality is that based on the path your daughter elects, no matter how much you can save right now, it might not be enough.

Luckily there are still some cost affordable ways to obtain an undergraduate degree by doing the community college and transfer to state university path. You just need to make sure that the community college courses will transfer to the state university so you don’t have to pay again for classes.

It’s all the extras that kill the budget for school. Between books, room, meals, etc. it can be significantly more expensive than anyone expects.

The 401(k) question is an excellent one. On one hand some might say to back way off on the 401k contributions and save that money towards college expenses but in this uncertain economy it makes much more sense to put the maximum matching contribution in now. It sounds like you might be able to reduce your contribution slightly just to the point where they provide a matching contribution.

Your 401k investments are a bankroll for the future. It is much better to invest money right now than latter. I get a lot of emails from people nearing retirement or unable to retire because they don’t have any savings or investments to fall back on. You don’t want to wind up in that situation if you can avoid it.

On paying off the debt, I love the debt snowball approach where you would pay off the lowest balances first. However, in your situation I would pay the minimum payment to the Amex and Furniture express and then use all your available debt repayment dollars to pay off the Home Depot card. Once that one is paid off you can then use the now freed up money and double down on the AMEX card.

However, the really big gotcha here is the Furniture Express account. While it is 0% interest and no payment right now, you need to look at your paperwork on that financing. I bet you’ll find that if the balance is not paid in full by that due date that you will then get socked with all the interest that would have been due between your purchase date and March 2010. You’ll also have to look to see what interest they will charge you.

If I’m right about that furniture debt then it would make more sense to pay off Home Depot and then focus your double down efforts on the furniture bill.

Another reason it often makes more sense to pay off the lower balances first is that with those out of the way the minimum payments that were once due on them can be really powerful debt reducers when applied to the remaining larger balances.

If you follow this approach and the extra effort you are willing to make to generate extra income you should be able to get debt free by the time your daughter heads to school. Now, don’t fret. Even if you have not managed to save enough after paying off your debt your daughter can still apply for student loans that you can pay on her behalf.

It might not be money you had saved but it will be cheap money you can use to help her get through school.

Big hug.

Steve

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