Aggressive approach will pay off with student loans

So Emily, 31, and Jake, 34, applied for a Boston Globe Money Makeover, saying that their limited financial planning experience was no match for the task at hand.

“Our problem is that so much of our income goes to pay for our student loans,’’ Emily wrote in their application.

When the couple sat down with fee-only financial adviser Katie Birmingham Weigel of LongPoint Financial Planning, one of the first things the Concord adviser did was cross the house purchase off the list, at least temporarily.

Even with their current rent of $1,600 a month, the couple was already overwhelmed by debt, she said. Taking on house payments right now simply wasn’t an option.

For one thing, Weigel said, the Newton couple’s debt-to-income ratio - which is calculated based on rent, student loans, car loans, and credit card debt - was already over 40 percent of their $10,375 monthly income. That made their chances of qualifying for a mortgage slim.

“You are really not able to take on additional debt,’’ she said. “And you don’t have a down payment.’’

Simply removing the house from the planning equation was a huge relief to Emily, a physician’s assistant, who had wanted to try for a house but couldn’t figure out how to make the numbers work.

“All of my friends who own houses or condos have had help,’’ she said. “It is good hearing this from someone who is not family.’’

Jake, who works in donor relations for a university, had been less optimistic about the house purchase, saying he “had a pretty good idea’’ that Weigel would tell them to wait.

Next, Weigel tackled the debt, suggesting some changes in the way the couple pays off their loans. If the two simply kept up with minimum loan payments on their combined student loan debt, Emily would be 58 and heading toward retirement by the time she made her last payment.

Taking a slightly different approach, however, would allow the Steinmanns to cut the length of their loan repayments to 12 years, from the current 26.

Currently, the Steinmanns pay about $1,700 a month towards their combined school-loan debt. At that rate, Jake’s 7 percent school loan will be paid off in six years, freeing up $538.74 a month.

Rather than banking or spending that money, Weigel said the couple should put it toward the principal on Emily’s 5.25 percent loan, which would then be the loan with the highest interest rate. And once that loan is paid off, the extra would go toward Emily’s 3.15 percent loan, she said.

The concept sounds simple, but the numbers are powerful. By directing those additional payments toward loan principal, the couple would not only pay the loan off faster but also reduce their overall interest payments - cutting a whopping $31,000 from the $87,830 of interest they’d be paying under their current payment schedule.

The loans could be paid off even sooner if the Steinmanns include their two car loans in the equation. When the cars are paid off later this year and in 2014, the payments of $299 and $374 could be allocated to school loan debt - cutting three years and an additional $16,000 in interest from their loan payments.

But even with this more aggressive payment schedule, the couple still had virtually no savings and no retirement accounts. So Weigel helped them prioritize. The good news: A review of monthly cash flow showed that the couple had about $834 that could be tucked into savings each month to start building an emergency fund.

Retirement, however, was going to have to wait a bit. Emily hasn’t been putting money into her workplace retirement plan even though her employer will match contributions up to 3 percent of income.

Weigel told her not to start quite yet. “Debt needs to be under control before you can take on retirement savings,’’ she said, noting that they can start saving for retirement once they’ve built up an emergency fund.

Having a baby, however, is still on the list. The couple’s two-bedroom apartment is large enough to accommodate a baby. Careful planning and shopping can keep other baby expenses under control, Weigel said.

That brought smiles from both Steinmanns. Financially, said Jake, it looks like “it’s easier to get a baby than a house.’’

To be considered for a Money Makeover, fill out the application at boston.com/moneymakeover, or call 617 929-2903.