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Pay Off Your Debts
Authored by: math on Tuesday, December 21 2004 @ 07:03 AM EST
I too have a SO in school, and bad debt is nigh for us. (Some pre-investment while we still both had salaries helped get us used to the idea of poverty -- in fact we maxed out her RRSP loans that banks are just too eager to give with almost no approval, and we bit the bullet and paid it off in 10 months. Of course, all that money can be used via an RRSP program for education, unfortunately however, only $10K/year and only $20K total - fairly useless for any 3 or 4 years professional level program, which she happens to be in.)

In fact, would we have done better just saving the money directly? Of course the return on the RRSP was less than the loan interest paid. So it was a loss of money, perhaps a couple hundred $. However, it was a hard and fast (and binding) way to tie us to our plan, where willpower and management of money sometimes doesnt work. I spose in the end we pay for money management, either through tricking ourselves this way, or having some actual person behind a desk sit there and figure out all our problems and tell us what to do (without binding us to do it in any material way) - for a fee. (Perhaps what we did was cheaper in the end, in fact.)

However, having a wife/SO in school leads us to another problem - cash flow. I've figured out that a credit card debt Im carrying is not worth paying off immediately as I expect a $1 I have now is worth some $2 or perhaps even $2.50 5-6 years from now when she's opened a practice (god forbid anything stopping her from completing her studies, but also not triggering debt insurance). Of course my own debts dont have insurance for untoward events that may remove her from the equation (again, god forbid), so that's an unmitigated risk at this point.

However, though it's sizeable, it's less than 10% of the cost of sending her to school for 4 years. So in this equation it's not really a factor. The difference in paying it down now while she's in school and paying the relatively low interest payments is about equal to 2.5 to 3.5% of the total cost of sending her to school. Definitely not worth worrying about, considering that recouping that money later when she's practicing will be done in short order. Of course, paying it off as I can, and then using it for cashflow is the best way to go. If I happen to get ahead on payments, I pay less interest. If I get behind, Im back at my max where I started (which isnt really that high, overall). (A personal credit line is best here, but my credit is ashambles due to a previous company I was personally involved with, and is highly unlikely. Getting family involved is one way to help this situation out, but the wrapping up of the business is still occuring and my finances are necessarily entangled. And so I wait.)

I am wondering what ways we can cheaply hedge our bets somewhat on this school investment - if she doesnt complete her studies, how can we insure against this?

In fact, we will lose possible summer income, as she intends to not work this summer but catch up on her upcoming studies to make the year less hectic. (The personal toll of the program was quite large on her so far even after 1 term, but she managed it. However, preparing for the term would definitely increase quality of life during and increase chances of completion.)

Perhaps Ive just answered my own question - the cost of her preparing for summer instead of taking a summer job will be net $x salary - but that will be a leveraged investment as it will increase the chances of her completing the program (or so we like to think). I can't think of other purely monetary methods of hedging this risk, however. No bank/insurance company would insure this situation. How could this be constructed? Is it worth pursuing? Perhaps it is merely an interesting thought excercise.

Comments?

--Math
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