A career poised for take-off
Question: I have been out of college for just over a year now and am waiting to be hired by the Federal Aviation Administration (FAA) as an air traffic controller (a 2 to 3 year process, on average). I was lucky with scholarships and waivers and have about $20,000 in student loans (all federally subsidized) and am currently on a standard payment plan for a 10-year repayment period. I have enough saved up in CDs, money market accounts, savings and mutual funds that could pay off all of the loans but only leave me with about $5,000 left over to deal with any "unplanned" expenses (I have no credit card debt and a full-time job with a major airline).
Is it smart to get rid of all of my debt immediately but be left with little to fall back on? Should I pay off half of the loan and repay the rest over time? My main motivation for hanging onto the money is to use it in a future purchase of a house or in the long-term, retirement; paying off all the loans, however, would essentially put be back to square one. Any advice would be a great help and I'd love to speak with you about this. Michael, Minneapolis, MN
Answer: You're on a fascinating career path. You have a job. You have a lot of savings for a young college graduate. Your student loan debt burden is modest. While it's always nice to be debt free, I think your instincts are spot on: Don't drain savings to eliminate student loan debt. Hold off.
Instead, I would follow through on your idea to reduce the principal, say, by about a third? There's no reason to get too aggressive about it at the moment. By the way, when you do send in money to reduce principal on the student loans make sure you tell the lender in writing to direct the payment toward principal.
For now, I would keep the rest of your savings intact. It gives you the financial flexibility over the next several years to deal with the expenses associated with your new career, including moving to another part of the country. You can always target the loan later on when your career and income is better established.