# Student loans are \$300,000. Prepay them or save?

## Student loans are so high, couple wonders whether to pay them off early or save \$5,000 a year for retirement. Question on student loans is No. 6 in this reader mailbag.

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What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Renting or selling land
2. My religion
3. College cash and investing
4. Transportation dilemma
5. Drawbacks of ebooks
6. Retirement and student loans
7. Walking away?
8. Garden vegetable choices
9. Roth 401(k) and Roth IRA?
10. Alternate oil choices in playdough

The main floor of our home has a large number of trays spread about, each full of seedlings.

Little green tips are just starting to peek through the surface here and there. Before too long, they’ll be ready to transplant outside.

These are the first steps toward a bountiful harvest later this summer.

Q1: Renting or selling land
My parents recently inherited 137 acres (total) of farmland from their parents, who died this past year. 100 of that 137 is tied up in a trust with other siblings, so I’m going to focus on the 37 here. My mother wants to sell her 37 acres so she can pay off her debt and finally be debt-free. I definitely support her desire to be debt-free. However, I feel that it is going to be financially more beneficial for her to keep ownership of the land and rent it out via cash rent.

In Iowa right now, land is renting for between \$300-400/acre per month and selling at a minimum of \$6,000/acre. I’m not exactly sure how the income tax works on rented vs. sold land, but here is the way I’m calculating the profits:

Renting 37 acres every year: 37 x 300 (monthly rent) = 11,100 x 12 (per year) = \$133, 200 per year of income on the owned land, before income and property taxes

Selling 37 acres of land: 37 x 6000 (assuming the lowest value) = \$222,000 total before income taxes

Now, after doing the math, the right path seems obvious to me. In two years, my mother would earn in cash rent what she had made if she sold the land. Is there anything I’m missing? I want to be able to show her this so she understands that it is much more beneficial to her in the long run to keep renting the land. But I want to make sure I’m understanding this correctly before I go to her with any of this information. Would you consult a lawyer and accountant in this case as well to determine what is the most financially beneficial route? My gut instinct is to never sell the land as the income will not only benefit my mother for the rest of her life, but then benefit me and my children for years to come.
- Linda

Since I live in Iowa and am friends with and related to quite a few farmers, I will say that the value of farmland is mostly pegged to the value of a bushel of corn and/or a bushel of soybeans – or at least the expected value of a bushel over the next year or two. Land values are also being buoyed by very low interest rates, meaning farmers can borrow money to pay for the land with very little interest attached.

I will certainly say that if a bushel of corn drops by 50%, you’ll not be able to find a farmer willing to rent land at \$300 per acre, and the price for selling that acre will drop significantly, too. The same is true if interest rates start to rise.

The real question here is what will grain prices do and what will interest rates do? If grain prices stay high and interest rates stay low, the best thing to do is to rent, as you’ll make more money that way. If grain prices drop and/or interest rates rise, then you would have been better off selling and locking in those high values, as farmers will be unable to pay very much per month per acre to rent.

My personal gut feeling is that your mother should sell the land and eliminate her debts. A lot of factors are working against her if she holds onto the land – the interest rate on her debts, the future of corn and soybean prices, and the future of bank interest rates.

If you need some further guidance, I’d suggest talking to a lawyer in Iowa that specializes in farmland and farm inheritance, as that person should be able to guide you.

Q2: My religion
- Kevin

Religion is something I enjoy studying and find deeply fascinating. My personal spirituality is something I struggle with greatly. I am constantly asking questions and trying to dig down and find answers, and often that just ends up being a cycle.

I call myself a Christian. I participate in a Lutheran (ELCA) church that’s pretty friendly and open. My wife often jokes that our church is mostly a big collection of Americans of Scandinavian descent who like to have potlucks (the NPR show A Prairie Home Companion can be eerily accurate at times). My children go to the Sunday school there, which is mostly a telling of a Bible story, followed by an art project and cookies. I’d pull my kids out of there immediately if I felt like they were being indoctrinated or forced into anything. My children ask a lot of questions and I answer them as best I can, but if they don’t end up being Christians, I don’t feel as though I failed them as long as they’ve followed their own spiritual journey and thought about the issues at hand.

While I have some things I hold to be true for myself, I don’t feel the need to evangelize to others because I feel that people are best served coming to their own answers about issues of faith, even if those answers end up being different than mine. If someone asks me privately about specific issues, I’ll answer, but I don’t think there’s anything wrong at all about having a different perspective than I have.

One of my greatest wishes for the world would be that everyone in it would wake up tomorrow and think, “It’s fine that other people think differently about God and about faith than I do. Let’s sit down over dinner and have a nice non-confrontational chat about it. At the very least, I’ll learn something new.”

Q3: College cash and investing
I am senior in college and in need of some suggestions. I am not sure what I should do with additional cash that I have from working at during my studies at college. Should I open up a high yield savings account or CD’s, or traditional or Roth IRA? I will not need the money for a few years.
- Ronald

If you’re going to use that money before retirement and want to have access to the money you’ve earned while it was saved or invested, then I wouldn’t consider a Roth IRA or a traditional IRA. Those both work best when you’re saving specifically for retirement.

Right now, a CD won’t earn you significantly more than you’d earn in a savings account due to the depressed interest rates. Of course, a savings account won’t earn you much, either. The advantage both have is that they’re insured by the FDIC, which means you’re not going to lose money on them. If you were to choose to invest your money in stocks or something via a brokerage account, you’re going to take on risk and a decent chance of loss, especially over a short period like a few years.

What this really comes down to is goals. What do you hope to do with that money? Are you going to graduate in May? Do you have a job? If you’re about to graduate and don’t have a job, I’d keep the money in a savings account because you may really need it soon. If you have a job locked up and are looking further down the road at things like a house or a car, I would consider putting some of it in a shorter term CD, but I wouldn’t lock up all of it (you still need an emergency fund, after all). If it’s truly for retirement, I’d probably put it in a Roth IRA. If it’s for starting your own business in fifteen years, I’d look at a brokerage account of some kind and invest it in stocks outside of an IRA.

It’s all about your goals, because your goals tell you how much risk you can tolerate and how liquid you need that money to be.

Q4: Transportation dilemma
I’m 27, have no cc debt, own a car that is fully paid off, and have about 50k in student loans (10k of which is at 6.55%, the rest is around 3%). I have about 10k in savings and 30k split between a Roth IRA and 401k. I currently live in southern CA, but my boyfriend and I are moving to DC (where I grew up) to be with family and friends. My parents have generously offered to let me live rent-free with them in order to expedite paying off my student loans, which is my biggest priority right now. My bf is going to rent an apartment nearby.

My boyfriend and I plan to drive his car across county to DC. The question is what to do with my car. I own a 2006 Mitsubishi eclipse. It has about 70,000 miles on it and needs a new timing belt, but other than that is in great condition. Its blue book value is around 9k (assuming I put in a new timing belt). I do not anticipate finding a job that will pay my relocation expenses and have estimated that it will cost \$1,500 to have my car transported back home. I don’t think I could make the drive back in my car to DC on my own, so that is not an option.

I find myself torn on what to do! In scenario 1) I keep my car, pay \$1,500 to transport it and run the car into the ground, as it is fully paid off. I hesitate about this decision as I feel like I’m outgrowing this car and am looking to have a car that has more space and could possible carry children in the not too distant future. Plus does it make sense to pay that much money to transport a car with a low value to it already?

In scenario 2) I sell the car and then buy another used car in DC. I’d want something reliable as the weather and traffic in DC isn’t easy to navigate and am thinking of using some of my savings to purchase something used around 12k or so. But then I also feel like this is delaying me from reaching my main object – paying off my student loans!

In scenario 3) I sell the car and then use public transportation. DC has a pretty good public transportation system so I was leaning toward option #3. My parents home (where I will be living) is about a mile from the metro and is fairly near bus stops. I was considering selling my car and attempting to see if I could just take the metro to work. When I mentioned this to my parents, they seemed to think I was absolutely nuts. They have never not had a car and my mom gets lost easily on the metro – so I think that could be part of their bias. But with that said, if I do sell my car and attempt to use the metro, I could very easily see them offering to drive me places rather than let me use the metro. They can be very giving and I don’t want to burden them, just because I am being frugal.

So any thoughts on my current predicament?
- Leona

If you have a strong sense of the availability of public transportation, I would lean toward option #3 as well. DC does have great public transportation (I’ve used it myself during an earlier stage in my career) and if there’s an easy way to get from your place of residence to the public transportation system, that’s pretty close to a dealmaker.

If you’re making the case to your parents, suggest that by selling the car you could immediately pay off the higher interest loan (or close to it), plus you’d no longer be paying insurance or fuel for upkeep so you’d have more to channel toward your debts.

If your mother is stressed about using the metro, I would show her exactly how you get to and from work when you have employment secured. Turn it from navigating a bunch of routes to a simple matter of “go to the bus stop, wait for bus X, ride bus X to the train station, get on train Y, get off at this stop, and you’re right by my work!”

Q5: Drawbacks of ebooks
What are the bad aspects of having a Kindle? I know you and Sarah each have one and I’ve read so many positives. What are the negatives?
- Alan

There are simply some physical features of a book that a Kindle (or other e-reader) makes very difficult.

For example, if I’m using a book for reference, I often litter it with bookmarks. While bookmarking does exist on a Kindle, it’s not nearly as intuitive as it is for a paper book.

Another issue is when a book is trying to teach a technique. The layout of a printed page has a lot of flexibility when it comes to picture arrangement, for example, and an e-reader just doesn’t have that.

Of course, you could get many of these features on a tablet, but the actual experience of reading on a tablet is pretty hard on the eyes after a while. My eyes get blurry pretty quickly if I read a significant amount on a backlit screen.

My solution is to use a Kindle for a lot of my reading, but stick with real books for things like cookbooks and other reference books.

Q6: Retirement and student loans
My wife and I will be starting our medical residencies starting in July. We will be earning about \$100,000 combined for the next three years. This will be both of our first jobs, and we have no credit card or vehicle debt, but about \$300,000 in student loans combined (most at 6.8%, a much smaller amount at 3.6% and 8.0%). We would like to contribute about \$5000 per year each to our retirement funds. Our hospitals offer 403(b) accounts without any matching. We are wondering whether we should (1) put our retirement savings in the 403(b) and use the savings from the deferred taxes towards our school loans or (2) put the retirement savings in a Roth IRA for the tax advantage when we are retired.
- Randall

If I were in your shoes, I would make absolutely sure that I was hitting my retirement targets before worrying about extra payments on those student loans.

Sit down with a good retirement calculator, like this one, and put in some numbers. Talk with your wife as you’re doing this and make sure you’re on the same page when it comes to your retirement goals. Eventually, you should be able to come up with an idea of what you ought to be saving each year.

So, what should you use? The usual recommended method is to invest in a 401(k)/403(b) up to the employer match limit (which for you is \$0), then max out a Roth IRA, then put the rest into the 401(k)/403(b). This accomplishes a lot of good things – diversification for tax purposes and maximization of “free” matching money chief among them. You’ll need to keep an eye on income limitations on the Roth if you do this, because the income limitations are lower if you’re using your plan at work.

Once you’re saving properly for retirement, see what you have left over for paying off those student loans.

By saving for retirement now, you’re significantly reducing the amount you’ll have to save for retirement each month throughout your career. If you wait ten years, the amount you’ll need to save each month to reach your goals will skyrocket.

The only time you should cut back on the retirement savings is if it begins to look like you’re not going to be able to make minimum payments on your student loans or collateralized debts. Given your income, this shouldn’t be a problem.

Q7: Walking away?
Got myself into a little bit of a pickle during the housing boom/crash. Bought a newly built house for \$145,000 in 2004. Then over the course of the next 2.5 years, I refinanced 3 times, taking advantage of some “pocket cash” opportunities. My employer filed for bankruptcy in June 2010 and cut my pay by 22%, none of which has yet been restored. I’m using maxxed out credit cards to help make ends meet for now. So I’m stuck in a home I for which I owe \$192,000 and which has a value (according to zillow.com) of \$71,400. I have a first and second mortgage, with payments adding up to \$1,557 monthly. So, basically, I’m a prisoner in this home. It’s close to my work, and it’s big enough for my needs. I have a 15-yr-old and a 13-yr-old living at home with me as a 48-yr-old single dad. I live in AZ, meaning I can “strategically default” and only be held accountable for the total of the second mortgage, which is around \$16K. I’d walk away in a heartbeat if not for the damage to my credit score. My question is this: would I be smarter to just stop paying the 1st and apply the whole \$1557/month toward the second, and plan to do a short sale later in the process when I’ve paid a big chunk on the second? I know my credit score would dip into the 400s, but can I realistically expect to come out ahead on this mortgage by riding out the insanely huge underwater amount? I’m torn and conflicted. Any advice would be appreciated.
- Lonnie

The first thing I’d do is understand fully how the Arizona “strategic default” rules work. The right step here is to contact an Arizona property lawyer, since it seems as though the specifics of the laws regarding this have been changing steadily over the last few years due to court decisions.

What I’d suggest you think about in the interim is how important your credit rating is to you over the next several years. Are you going to need to make a major purchase that involves debt? If your plan to rent your home over the next several years and don’t anticipate needing a car loan, I wouldn’t worry too much about my credit and I’d focus on making moves that preserve the most money in your pocket.

Again, I think the best step for you is to talk this over with an Arizona property lawyer who specializes in such things.

Q8: Garden vegetable choices
What vegetables do you and Sarah plant in your garden? I have a patch of land where I could start a garden and am thinking about what to grow. I’m mostly interested in things that are easy to grow but produce veggies I can easily eat!

We plant mostly beans, tomatoes, and cucumbers each year. We eat these three vegetables by the pound in August and September and often end up freezing some for later in the fall and winter. The rest of our garden is perennial herbs and asparagus that are really low maintenance.

Honestly, part of the reason we grow these three vegetables is that they’re pretty hard to mess up. While I like to garden, I don’t exactly have the greenest thumb in the world, and the same is true with Sarah. Through all of our efforts to kill the plants in our garden due to our mistakes, we have the most luck not killing beans, tomatoes, and cucumbers.

I’d suggest visiting your local garden center and asking them for some very hardy and disease-resistant and pest-resistant examples of tomatoes, beans, and cucumbers, and plant those.

Q9: Roth 401(k) and Roth IRA?
I have a 401k with my company and if I contribute 9% they will match up to 8%. They also offer a Roth 401k version and the 8% is matched whether one is contributing to traditional or Roth 401k. I contribute 10% to traditional and 4% to Roth. The company 401k is setup through T Rowe Price. I also have a Roth IRA setup through Vanguard and I contribute \$300 a month to it.

My question, does it make sense to contribute money to a Roth 401k and Roth IRA instead of just contributing to one, specifically my regular Roth IRA? If both Roths were equal in maintenance fees would the only benefit of the Roth 401k be that the money is taken out before I receive a paycheck? I am trying to maximize my take home pay now while still contributing the same level of money to retirement whether its through payroll deductions or after the fact. Thanks for your time and great work on the blog, I read it everyday.
- Patrick

The money that you put into a Roth IRA or a Roth 401(k) is post-tax money. In terms of contributions, they’re pretty similar.

If you’re contributing less than \$5,000 per year and your income is significantly below \$100,000 per year, the only difference between the two with respect to contributions is whether it comes home to you or not. The difference is, as you mention, maintenance fees and investment options.

This of course hints at some of the differences between the two. The Roth IRA has an income cap – if you earn much above \$100,000 per year, you’re going to find yourself unable to contribute the full amount to a Roth IRA. There’s also an annual contribution limit for a Roth IRA, which is \$5,000 a year if you’re under the age of 50. There are other differences, too, such as the investment offerings.

Q10: Alternate oil choices in playdough
When making homemade playdough, can you use other oils besides soy? We have a soy allergy in our home.
- Amanda

The basic recipe for homemade playdough is 2 cups flour, 2 cups warm water, 1 cup salt, 2 tablespoons vegetable oil, and 1 tablespoon cream of tartar.

You can use almost any kind of vegetable oil for the oil, so soy is not a requirement. I generally use whatever we have on hand.

The real key to making playdough is storing it in a sealed container so that it doesn’t dry out after the first use. If you let it dry out, you might as well just toss it.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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