Debt Consolidation question

[itsamoose]

I graduated from college in 2009 and since then have been working like hell to reduce my student loan debt. Throughout college I always paid down the accrued interest, which in hindsight was an excellent decision. After graduating I owed roughly 90k in student loan debt and have reduced that number to about 31k since then. The problem is that in order to reduce my debt I have been relying on my credit card to live and have racked up 11k in additional debt over that time period.

I currently have roughly 50k in total debt including student loans (31k @ 1.5-8%, multiple small loans), a car loan (8k @ 3%) and credit card debt (11k @ 7.24%) (all amounts in USD). The problem is and always has been that I keep needing to tap into my credit card for monthly expenses to make sure I have enough to make the minimum payment each month on those 3 items(850 per month across all debts) and living expenses.

I only make about 2000 a month (full time) and have no savings since I put everything I can toward my debt, and have done so since college. What advice would you have for me to reduce my monthly payment so I can start saving? I have good credit if a debt consolidation loan or personal loan is an option, but I'm not really able to find a rate that interests me (9% to 15% from searching the web). Also for this to be an option I would need a long term loan, probably 20 years or more for the monthly payment to be affordable. My ultimate goal is to be debt free by the time I am 30 (I'm 26 now), and finally start being able to save a little bit each month. Thanks in advance.

[dczech09]

I'm fellow 2009 college grad!

Congrats on paying off $59,000 in student loans! The problem is that you replaced it with $11,000 of credit card debt...

You make $2,000 per month? Is that take-home or gross? What do you do for a living? Is there a way that you can make more? What you are saying is that you went $90,000 in student loan debt for $24,000 of income per year?! Not a good trade-off. And it shows since you have an $850 minimum payment on your debts, which is 42.5% of your income!

I am not saying this to judge or anything. However, I hope that you learned something from this. And perhaps you can use that as motivation to increase your income. Even a $1,000 increase in your income would help tremendously! Depending on what it is that you do, I think you may be underpaid.

It is clear that you are not living on a balanced budget. If you were, then you would not have traded $59,000 in student loan debt for $11,000 of credit card debt. Even simply paying off $48,000 of debt and NOT accumulating the credit card debt would have been infinitely better than what had occurred. I hope that makes sense.

So you need to get on a balanced budget, look for ways to increase your income (more hours, raise, new job, part-time work for a temporary period of time, etc), slash your budget to the bare bones, get after your debt, and DO NOT ACCUMULATE MORE DEBT!

As far as debt consolidation goes...

I am not a fan of it. First of all, student loans are difficult to consolidate; you can only do Federal with Federal and private with private. Secondly, even if you can get a good interest rate, you run the risk of getting a longer pay-off period (which will cost more in the long-run).

Finally, debt consolidation of any kind is not an option if you try to use it as a means of getting out of debt. Debt consolidation alone will not solve your problems. The only way the debt consolidation is advantageous is if you can get a lower rate and pay-off the debt faster. Otherwise you are just moving debts around.

One last remark: how much is your car worth? You said the loan is $8,000, but what it is worth? If the car is worth more than 50% of your income, then you may want to sell it. Based on your situation, you may even want to sell it and buy a less expensive car if possible. For example, I just recently sold my sister my old Toyota Corolla for $3,800 and the car runs great and is very reliable. Trading down on your car for a while as you pay off your debts may be a good idea. Based on everything that you have said, the car is not a deal-breaker though.

If you keep at this, you goal of being debt-free is definitely within reach by the time you are 30 years old. You have $50,000 in debt and about 4 years to go. That is $12,500 per year (not counting the interest). That may be tough on your current income, but if you can boost it even $1,000 per month, you can pay this off very quickly!

[snafu]

While I admire your efforts that reduced your SLs by $ 59 k, your decision to support your income with credit cards at 7.24 % has resulted in an escalating problem. As you've already discovered, consolidation loans are expensive, 9% - 15%. What's worse is that they are rarely successful since consumers usually open new cards for the promotion and spin further out of control. I've a lot of questions...Are you in a high cost of living area? What's the KBB value of your car?
Are you are willing to list your expenses by category like rent,utilities, cell, food/eating out, insurance, entertainment, transportation etc. and $$$ amount? Are you ok with making some changes to lifestyle for the short term to better cope with existing debt?

[itsamoose]

Thanks for the Input! I work as a software engineer for a small independent video game company, so I am significantly underpaid for the work I do but it comes with a nice revenue sharing agreement and future prospects. It was a risk I took knowing I would be put under some financial stress in the short term, plus it's what I love to do and provided me with a solid entrance to the industry that is incredibly difficult to break in to. You raise a good point about the car, I work from home now and only really bought it because my last job had an hour long commute each way.

My main concern at the moment is limiting my monthly payments to where I can focus on one debt at a time. After a bit more research I'm going to consolidate my student loans which should put me in a better position in the long run and afford me the ability to undo my mistake relying too much on the credit card. I'm going to seriously look into selling the car, since it would also likely reduce my insurance payments, thanks for the suggestion!

[itsamoose]

While I admire your efforts that reduced your SLs by $ 59 k, your decision to support your income with credit cards at 7.24 % has resulted in an escalating problem. As you've already discovered, consolidation loans are expensive, 9% - 15%. What's worse is that they are rarely successful since consumers usually open new cards for the promotion and spin further out of control. I've a lot of questions...Are you in a high cost of living area? What's the KBB value of your car?
Are you are willing to list your expenses by category like rent,utilities, cell, food/eating out, insurance, entertainment, transportation etc. and $$$ amount? Are you ok with making some changes to lifestyle for the short term to better cope with existing debt?

The KBB value of my car is listed between 12 and 13.5k, although my best judgement on it's condition puts it at around 13k. I moved to Florida for the reduced living expenses, I pay about 600 a month for rent including utilities. Other expenses would be 40 a month for cell phone (just a basic flip phone), food about 150-200 a month. All told almost all of my income each month is accounted for between bills and living expenses. I spend the rest trying to aggressively pay down my student loans, and I don't go out to eat/drink/party at all. My job is pretty demanding, usually I work 10-14 hour days every day although I sometimes take Sunday off. The only real expense I have other than necessities is my gym membership, which is necessary since I sit in front of a computer all day. I've been living the bare bones lifestyle since college, so there isn't much more I can cut.

[dczech09]

My job is pretty demanding, usually I work 10-14 hour days every day although I sometimes take Sunday off. The only real expense I have other than necessities is my gym membership, which is necessary since I sit in front of a computer all day. I've been living the bare bones lifestyle since college, so there isn't much more I can cut.

I would not cut the gym membership as that probably won't move the needle on your financial life.

My concern at this point is that you are definitely underpaid. As a software engineer, you should be making somewhere in the $50k to $60k range. Not to mention working 10 to 14 hour days...

Just as a point of reference, I am about the same age as you (I would assume based on 2009 graduation) and I make about $60k to $65k per year. You need to do something about getting your income up!

Can you find another job in a different industry? I would assume that you skills as a software engineer can be transferred to another company- one who would be willing to pay you a market rate for your skills. I would not fuss around with this $24k job much longer unless there is a way that you can make more money within the next year. Your employer is not paying you fairly, so why stay with them? There may be "potential" but potential does not pay your bills. I would start reaching out to other companies in the area.

Honestly, as a software engineer, you have a very valuable skill-set that many employers will pay good money for. Stop selling yourself short!

[itsamoose]

My concern at this point is that you are definitely underpaid. As a software engineer, you should be making somewhere in the $50k to $60k range. Not to mention working 10 to 14 hour days...

That is a fair point, but I've made peace with it for the time being. If I were to go to another industry I could be making something similar to your salary. When I took the job I am currently working in I wasn't an experienced programmer and software engineering, in any industry really, is all about what you have done. I actually don't have a degree in computer science (I was a Neuroscience). I taught myself, and without a degree or portfolio I wasn't even making it through the initial screening.

My current contract will most likely end this fall at which point I'll be expecting a market rate for my services. Taking this position wasn't the smart financial choice, I knew it would be tough financially but manageable. I'm not at the breaking point yet. I just can't stand having debt and have been almost maniacally trying to pay it off which I need to budget better.

I've done a bit more research and will be selling my car. I rarely use it since I started working from home, and it seems like the right decision. That combined with the federal loan consolidation will put me in a much better position. All told those two items will cut my minimum monthly debt payments from $850 to $470 and cut my overall debt to 41k and some change. Thanks again for the advice. I understand this won't be solved overnight but I'm optimistic about the future.

[samuelwright]

I wanted to add this conversation: I applaud you for taking your debt so seriously; and for selling your car. Most Americans would tell themselves "I'll pay this off eventually ..." and it never happsn. So, kudos to you for taking positive steps. I'm in Florida too .. near Orlando. Where abouts are you? (If you don't mind my asking.)

[itsamoose]

I wanted to add this conversation: I applaud you for taking your debt so seriously; and for selling your car. Most Americans would tell themselves "I'll pay this off eventually ..." and it never happsn. So, kudos to you for taking positive steps. I'm in Florida too .. near Orlando. Where abouts are you? (If you don't mind my asking.)

I'm actually in Melbourne in Brevard County so we're probably not that far apart. If you are interested in a 2012 Mazda 6 you be sure to let me know! And thank you for the vote of confidence!

[samuelwright]

You're welcome. I'd have to pass, though. I drive a Mazda as well though. (A model 3 in my case.)

[dczech09]

I've done a bit more research and will be selling my car. I rarely use it since I started working from home, and it seems like the right decision. That combined with the federal loan consolidation will put me in a much better position. All told those two items will cut my minimum monthly debt payments from $850 to $470 and cut my overall debt to 41k and some change.

I commend you on your decision to sell the car. Not only will that reduce your overall debt-loan, but that will also reduce your minimum payments on debt by almost $400! That will be a huge help to your budget!