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Sandra Is a Single Mother And Worried About Paying For College

“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”

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The Answer

 

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!

Sandra Is a Single Mother And Worried About Paying For College
Get Out of Debt Guy – Twitter, G+, Facebook

Don’t miss our free Get Out of Debt – “How To” Guide Series on a number of topics, for loads of practical advice, tips, and help to beat back debt. – Click Here

The Answer

 

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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
  • http://GetOutOfDebt.org Steve Rhode

    Rob,

    Thanks for the long comment and great tips on savings for college bound students.

    Things have changed a lot over the years Not only do you no longer need to purchase expensive textbooks but you can even rent them now. I never would have imagined that.

    Steve

  • Rob

    I was in a similar situation worrying about my son going to school. It isn’t as dire as you think. She just has to know your situation so that she doesn’t ask for the moon and stars when it comes to going to the school of choice.

    First of all , there is still money to be had out there based on financial need. If you fit the right criteria you can get the lowest cost student loans from the government.

    Have her do her first 2 years at the local community college. Tuition is cheap . Going local eliminates extra money for living expenses. Your state might have extra programs for helping with tuition. For instance, in South Carolina, the lottery will give scholarship money to state resident students that keep a 3.0 GPA.

    If she can transfer to a local university she will save on living costs there too. Many texts can be purchased cheaply used online at websites like abebooks.com and amazon.com . There are other websites for this also.My son just bought a $100 book for $6 online.

    She will also have to work to pay for expenses . She will need to get a part time job to help. Even if she has to reduce her school load some so that she can make enough money to pay for school it beats starting out life loaded down with debt.

    Another thing is that certain fields will actually pay for her education. For instance, I know someone who went into nursing and the local hospital offered to pay for her tuition if she agreed to work there for a few years after graduation. There is also a program for teachers if they agree to teach in areas that are hard to attract teachers they will pay off your loans.

    There are lots of scholarships out there too. You have to hunt for them online.

    So there are things you can do to get your kid through school. Don’t stress out, make a plan. In the end what is important is that she gets the degree and has a low debt load. Where you graduate from isn’t as important as that.

  • http://blogs.creditcards.com/ Emily

    Yes, I agree that you need to be careful with those “zero interest for three years!” financing offers. Those can get you into a world of trouble if you don’t pay them off before that interest rate kicks in!

    Emilys last blog post..Young man seeking a good score

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