Dear Alpha Consumer,
I need help deciding what to do with my money. My husband and I are college graduates with a total of $28,000 in college loan debt. Since graduating, I've had a hard time finding full-time work. (I have an environmental studies degree.) I was unemployed for eight months and put my loans in deferment. Neither my husband nor I earn very much; we each make around $11 an hour. To save money, my husband and I moved in his parents' basement. (His family is happy with us there but I'd like to move out and start a family.) My current job ends in December and I doubt I'll be able to find more work until next summer.
Right now, we have some extra money, since we're not paying rent. Should we take advantage of the housing market and $8,000 tax credit to buy our own place? Or should we pay down our student loans? Or should we just save it?
-- Lincoln, Nebraska
It sounds like you're unable to earn enough money to support the lifestyle that you want. You would like to own your own place, have a family, and pay off your debt, but your low income is preventing you from accomplishing those goals. Let's take these issues one at a time:
Student loan debt: Carrying almost $30,000 in debt clearly weighs on you. But since it is student loan debt and not a more expensive type, such as credit card debt, you can afford to make the minimum payments over a long period (usually up to 30 years) without worrying about paying the loans off quickly. Since the interest rates are probably lower than the amount of interest you can earn on your savings, there is no reason to pay more than you need to now. But you want to avoid deferring your loans, because the interest continues to build while they're in deferment, which means you ultimately will have even more to pay. The bottom line: Make your minimum payments, but no more.
Living situation: While few people dream of growing up and moving in with their in-laws, the situation is increasingly common. In fact, many families find that this kind of intergenerational arrangements works well for everyone involved. You say you are eager to move out and start a family on your own, but could you consider living together, even after you start a family? Writer Nan Mooney has described how well this arrangement works for her.
[See "Affording Kids on a Recession Budget."]
Savings: Since you have extra money saved now since your living costs are so low, you have the opportunity to use that cash to your advantage. Your idea to jump into the housing market, though, would commit you to a mortgage that it sounds like you could barely afford, given the fact that you anticipate being unemployed for much of the year. And there's little reason to pay off your student loans early, for the reasons described above. Instead, how about parking that money in a money market fund for your emergency savings? That way, it will be easily accessible to you while earning a reasonable rate of return (around 3 to 5 percent).
Your income: The main source of your financial stress seems to be your household income. As two college graduates, you and your husband are earning relatively little -- barely more than the minimum wage. Can you re-evaluate your job searches and see if there's a way to turn your degrees into jobs that command higher salaries? You can start by reaching out to other graduates in the field. What do they do? What full-time jobs are available? You may even want to consider switching fields or locations, if the jobs aren't there. Your primary goal should be to find a full-time job that pays you a wage that reflects your skills; that will make all your other goals more attainable.
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