How should I manage the increase in my student loan payments?
I am 34 years old and married with no children. I make about $86,000 yearly. I have $21,000 in a savings account, $64,000 in investment accounts (401(k), Roth IRA, and stocks), and I contribute 21 percent of my paycheck to my 401(k) bi-weekly. I owe $89,000 in federal student loans and $6,500 in credit card debt. My monthly bills are $1,600. I contribute $1,550 monthly to my savings account (half of which is to save for a down payment on a house).
My husband and I filed taxes jointly this year which caused my student loan payments to increase to $700 a month. This is a bit too much for me to pay each month. I placed my loans on forbearance because of the increase. What can I do about this? I've thought about keeping them in forbearance and paying a large amount toward them at the end of the year. Is this a good idea?
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Placing your student loans in forbearance would be a mistake. The loans will continue to accrue interest, which will mean less of the money you pay at the end of the year will pay down the debt because you have extra interest payments. I would recommend exploring a few other options first (listed below) and then choosing which is suitable for your goals. You may want to hire a fee-only financial planner to run the numbers on the options and provide some clarity on what each option would mean to your retirement goals, buying a home, and other savings.
REFINANCE THE LOAN
One option would be to explore refinancing the loan to a private loan, allowing you to structure the payments more in line with your goals, possibly over a more extended repayment period. The calculations/information you will need to evaluate this option include the tax ramifications, including whether you will lose the tax deduction for the interest (you are close to being phased out anyway) and how much risk the loss of the forbearance option represents when looking at job security.
CUT BACK ON RETIREMENT SAVINGS
I know this sounds strange, but you may wish to cut back on (not stop) retirement savings to get rid of the student loan debt, then double down on the retirement savings once the student loans are eliminated. You will need to see some projections on how the change in retirement savings impacts your final retirement amount. The financial planner should show you what your retirement savings would look like under both scenarios: (1) continuing current retirement contributions and (2) reducing retirement savings and then significantly increasing them once the loan is paid off.
DELAY HOME PURCHASE OR OTHER SAVINGS GOAL
Delaying the home purchase may not be the most desirable option, but it could help you in the long run. Again, the idea would be to put the down-payment money toward the student loan debt and then save more aggressively toward the home down payment once the debt is paid off. Run the calculation for how long it would take you to save up enough for a home down payment under your current plan. Then compare that to how long it would take if you got rid of the student loan debt and then saved for the home. If the difference is five years, you likely won't want to take this option. But if it only delays your home purchase by a year or two, that may be more desirable for you.
Ultimately, you are doing exceptionally well with your finances, and you are in an excellent position to achieve all your stated goals over time. The choice you will have to make isn't about making the right choice, but the one which matches you and your husband's goals and priorities. Running the numbers will help you to see how each choice impacts your other goals. You might be surprised to find that one of the choices doesn't put you back in your goals in any significant way.