Create An Extra Cushion For The Student Loan

Erica's husband is career military, and if he sticks with his career, the $46,000 student loan debt will be wiped out. Where does the second mortgage fall? Dave explains.

QUESTION: Erica in Raleigh and her husband are working her debt snowball. They have a $30,000 15-year second mortgage and a $175,000 first mortgage. They also have $46,000 in student loan debt. Her husband is career military, and if he sticks with his career, the student loan debt will be wiped out. Where does the second mortgage fall? Dave explains.

ANSWER: We say that a second mortgage or home equity line of credit or anything like that on the home that is less than half your annual income would go into your debt snowball, which would mean that’s the next one up. When you knock that out, then you’re in a position to refinance. It’s all got to do with the value of the house, obviously, and with your credit. If you’ve got the credit and you’ve got enough value in your house, then you’d refinance and get rid of the ridiculously bad first mortgage you have, which then leaves us the question of what to do with the student loan that’ll be forgiven by the military 10 years from now that’s $46,000.

I would pay minimum payments on the student loan for 10 years. During that time and immediately as a debt snowball item, I would put $50,000 extra in my emergency fund, meaning if he chose to leave the military inside of 10 years, he’d have the loan paid off instantly with that money. If he stays in the military for 10 years, you’ve got an extra $50,000 laying in your emergency fund at that point invested. That way, you’re not feeling trapped in the military just because of the student loan deal.