Should I Pay Off Student Debt or Save Money?

by Ryan Guina

I recently received a question about paying off student loans and saving. Here it is:

I recently graduated and moved to start a new job. I’m living rent-free for a couple months with my GF in order to save my first few paychecks but I’m not sure what to do with that saved money (1600-2000/month). I have appx 5,300 in debt that will start earning interest at about 6.25% in late May. My initial instinct is to put 100% of my savings towards paying that down, reaching a zero balance by late June. Yet, I’ve always been told that an emergency savings level of 3-months pay should one’s top priority when transitioning from full-time student to full-time worker, especially given the current economic conditions. What should I do? Should I mix my approach? 70-30? 50-50?

Confused in Houston

Should you pay off debt, or build your emergency fund?

Hi, Confused, this is a great question, and one that most new college grads face. The first thing I would do is set parameters with your girlfriend. “A couple months” is very broad and can mean different things to the both of you. I recommend having a clear understanding of how long you will be living rent free, and under what conditions (until the debt is paid off, longer than that, etc). I would also highly recommend chipping in by paying some or all of the utilities and groceries. A relationship is about sharing and compromise, and it is asking a lot for her to pay for everything while you are saving a lot of money.

Regarding paying down the debt or saving, there are a few ways you can go. You definitely want to reduce your debt as quickly as possible, but you also want to have an emergency fund in place. Dave Ramsey, a well-known money guru, recommends saving a $1,000 emergency fund, then paying off your debt as quickly as possible. I think this is good advice for your situation. Your debt is not overwhelming, and you should be able to pay it off very quickly. And the 6.25% interest rate is not very high, so taking an extra month or two to pay off your loan will not cost you very much money. After your debt is paid off, I would recommend continuing to build your emergency fund.

Pinyo @ Moolanomy

Before thinking about paying down debt or building an emergency fund, have you considered paying your fair share of rent? It really crossed me the wrong way when you said you’re living rent-free because your girlfriend is paying. If you can save $2,000 a month in in a high yield savings accounts or high interest checking accounts, you can at least help her with some expenses.

Now, let’s get to your question regarding paying down debt or starting an emergency fund. First, there’s no wrong way. If you are more conservative, you can follow Dave Ramsey’s Baby Steps, start a $1,000 emergency fund first, and then use Debt Snowball to pay down your $5,300 debt.

If you’re a little more aggressive, there’s nothing wrong with putting everything you can toward your debt. And instead of paying down your smallest debt first per Dave Ramsey’s method, try paying down your most expensive debt first (i.e., highest interest). After you’re debt is gone, then focus on building up 3 to 6 months worth of emergency fund.

I hope this helps. Good luck.

Plonkee @

I would reconsider the rent-free aspect, it’s easy to let that extend for longer than you mean to and your GF may not be comfortable asking you to pay rent. But that’s not what you asked about, so let’s get on to the main question. I think I would do 50-50 to each. That will let you get the debt down significantly while still giving you a nice sum of money for an emergency fund. But then I’m all about putting off decisions as long as possible.

Glblguy @ Gather Little By Little

I agree with Pinyo on living rent free as well. I think you need to pay your share of the rent. That’s the responsible thing to do.

Regarding your debt and savings. I would save a small emergency fund of say $1000.00. This will keep you from utilizing credit in the event of an “emergency” such as you car breaking down, unexpected medical bills, co-pays, etc. Once that is saved, I’d apply the remainder to your debt. Once your debt is paid off, I would then begin saving the 3-6 months emergency fund.

If you are familiar with Dave Ramsey’s baby steps, my advice should look familiar. I’m a firm believer in Dave’s plan.

Good luck, and pay 1/2 that rent!

Do what is best for you. Our responses are similar, but they are based on what we would do in that situation. In the end you need to talk with your girlfriend and make the decision that works the best for your situation. I’d like to remind you that it may not be possible to answer every question and none of use are financial professionals, so please consult with a professional before making any major financial decisions!

Published or updated February 16, 2017.
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{ 11 comments… read them below or add one }

1 tom

Leaving the rent payment to your GF may or may not be a good idea, it depends on what happens 6 months down the road when you are debt free, will you be comfortable with pulling your own weight again?

Will your GF get annoyed for supporting you for that time while you pay off debt?

To be on the safe side and not risk the relationship, you should keep paying rent and bills while saving and paying off debt. You essentially may need to live under a rock for a while until the debt is paid off.
I mean you made the jump into moving out with poor planning, at least that is how I see it, and now is not the time to slack off and let your GF pay your bills.

Don’t be surprised if a few months down the road, she tries to sue you or something because she gave you a “loan” to pay off your debt and now wants it back, cases like this have happened before.


2 Alan @ Saving For Serenity

Why not run the math and see if the extra interest would be worth the peace of mind of having an emergency fund first?

Every month you don’t touch that student loan debt, you are paying approximately $30 in interest. How comfortable are you with your situation? If something unexpected comes up (job falls through, car breaks down), do you have a support network to rely on, or is it just you and your girlfriend?

Only you can answer for your own situation. If you would rather pay off the debt as soon as possible, and feel comfortable doing that, then go for it. If you’d rather save a small emergency fund first ($1000 or so) then understand that you’re only paying about $30 a month in interest, so that might be worth it to you.


3 Abigail

Given how tenuous almost everyone’s jobs are right now, I would split the difference between saving and student loans. Sure, you’re saving money in interest if you pay down that debt. But if you get laid off in the near future, you can’t get that money back. So I would make a larger payment than you have to, but also sock away extra funds if you can. (And this is coming from someone who has a knee-jerk, pay-down-debt-first-and-always reaction to loans etc.)


4 Manshu

Personally, having cash to last an year is worth much more psychologically than saving up on interest payments. But, that’s just me.


5 MoneyEnergy

Wow, it’s a tough question to answer. Mostly I agree with Pinyo, Plonkee Monkey and the others. Save a small emergency fund first, then get rid of debt. Or do both at once by allocating percentages to each. I don’t know the rest of your situation, or your GF’s situation, so perhaps it isn’t as unequal as it seems to be just reading your question. But if you’re able to leverage the situation to get rid of debt, and the two of you are still together long-term, well, getting rid of debt will help you both.


6 DDFD at DivorcedDadFrugalDad

Split the money– part to debt and part to savings.

If the savings becomes large enough, crush the debt balance in one shot . . .


7 Curious Cat Investing Blog

I would be significantly biased toward building up an emergency fund in your situation. I might put about 20% toward the debt and 80% toward savings.

Only if the interest rate were very high (over 9% say) would I be swayed to focus on paying it down. I would still want to build up the emergency fund but I would do so more slowly in order to pay down a high interest rate date (certainly at rates over 15% I would do so at the expense of any significant emergency fund savings).


8 Charles

First off, ignore Dave Ramsey. His advise is not very good. Saving the $1000 emergency fund is a great idea, but stopping there and concentrating only on debt is a recipe for disaster. a) If you have any emergency greater than $1000 you are going into debt. b) You will have no funds for anything you may want to spend on yourself. This idea of “no life until the debt is gone” is an addictive behavior that will fail for many people. Save up to at least $5000, which is what most people would consider a reasonable credit limit. Then anything you need comes from savings instead of a credit card.

Second, why has no one mentioned that the interest on student loan debt is deductible, and above the line at that? It may be costing you less than you think.

Make a plan to save and pay a good chuck. This small of a debt is something you can plan out to pay over a year or so and get done, while still having money for a reasonable lifestyle, money to help your girlfriend with expenses, and money to give you peace of mind should something happen.


9 Corey

Hi, I graduated a couple of years ago from Le Cordon Bleu, I am currently working full time. I used up all of my forbearence time that I had because I had taken out a lot of money for school. My schooling was 40,000 for 1 year and I had to take out extra money for living expenses because I couldn’t afford to live in South Florida with just my income alone. So to make a long story short, I just had a baby and my wife hasn’t been working for a while due to pregnancy difficulties. My loan provider won’t let me use anymore forbearance time. What should I do?


10 Corey

In addition to my first comment, I am making just enough money right now to pay my everyday bills and squeak by. My baby is just 1 week old right now, so it might be a little while before my wife can get back to work. Also I am working 7 days a week right now because I also have a part time job. So if you have any advice to could help me out it would be appreciated. Thank you.


11 Ryan

Hi Corey,

It sounds like you are doing everything in your power to take care of your loans. I don’t know every detail of your situation, so I can only offer broad tips. My recommendation is to go through your budget and try to eliminate any unnecessary expenses. It may even take a substantial action such as downsizing your living accommodations, selling your car and buying a less expensive vehicle or using public transportation, trying to find a better paying full-time or part-time job, etc.

I know these are not easy items to accomplish, but it may take this type of dramatic action to gain ground. Finally, I recommend looking into changing the way you handle money. A very popular and effective money management plan is outlined in Dave Ramsey’s Baby Steps. This part of Dave Ramsey’s Financial Peace University, which is a 13 week course on how to better manage your money, get out of debt, and achieve financial freedom. I recommend it if you have the opportunity.


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