Money Makeover

Student debt may not be the highest priority for couple

Gerrit and Courtney Blauvelt are juggling school, $47,000 in student loans, and living expenses. Gerrit and Courtney Blauvelt are juggling school, $47,000 in student loans, and living expenses. (Essdras M Suarez/Globe Staff)
By Lynn Asinof
Globe Correspondent / March 28, 2010

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Tuck money away for retirement, pay off debt, get rid of any balances on your credit cards, and build up an emergency fund that can cover six months of living expenses. Courtney and Gerrit Blauvelt — both 28 — certainly understood these basic rules of financial planning. But with $47,000 in school loans, a 10-year-old car, and more than a year until Courtney finishes her graduate degree in education, the Dorchester couple were struggling to figure out how they were supposed to apply those rules to their finances now.

So they applied for a Boston Globe Money Makeover, saying they needed help sorting out their fiscal priorities. “We’re determined to make the right choices for financial flexibility and stability in our future,’’ the couple wrote. “But what are the right decisions?’’

One key to finding the answer was adding the word “eventually’’ to their planning vocabulary, said Jeanne Gibson Sullivan, a fee-only financial planner with Back Bay Financial Group, Boston. “You are living within your means, you are saving money, and you are paying off your credit cards on time,’’ she said. “For 28-year-olds, that is very impressive.’’ Now, she said, they just need to recognize that it will take some time for them to build up their resources.

One of the first things that Sullivan recommended was abandoning the idea of aggressively paying down their student loans, even if that is what all the financial advice seems to recommend. “Yes, $47,000 is a lot, but it is not crushing debt,’’ she said. Sticking with the current loan schedule “will give you a bit of a cushion.’’ Right now, she said, the two would do better to allocate their limited income among other competing financial needs, which include funding their retirement savings, buying life insurance, and starting to build an emergency fund.

Ideally, an emergency fund would cover six months or more of living expenses, Sullivan said. But that would add up to more than $20,000 for the Blauvelts. “That makes no sense for you right now,’’ she said, suggesting that the couple build their fund gradually, putting aside a couple of hundred dollars each month as their cash flow allows.

Sullivan said the couple will certainly have more financial options once their income —now a combined $72,000 a year — starts to rise. Courtney, who currently works part time in a university development and alumni relations office, expects to get a full-time job as a guidance counselor when she graduates in 2011. Gerrit, too, should see salary growth as he gains experience at the student and educational travel company where he now works.

Then, too, there is the fact that the couple are largely paying Courtney’s graduate school tuition from their cash flow. Once the remaining $6,500 in school bills are paid, they will be able to divert that money to savings as well, allowing them to build their emergency fund, bolster their retirement savings, and start planning for a house, a new car, and, eventually, a family.

Sullivan’s recommendations brought a sigh from Courtney that sounded like relief. But when asked about her reaction, Courtney said it was really stress and frustration. “I was hoping you’d say we could knock these loans off in five years,’’ she said. “We hate debt.’’

Instead, Sullivan told the couple to look for ways to grow their resources. “You should be saving as much as possible in safe FDIC-secured accounts,’’ she said. In their retirement accounts, however, she wanted the two to take more risk, noting that much of their retirement savings is currently sitting in money market accounts where it is earning less than 1 percent interest.

“You are young,’’ she said, urging them to boost the potential for growth by adding more equity investments. “You are looking out more than 30 years.’’

The first step, she said, was to move the cash in Courtney’s 403(b) retirement account into a global equities fund, which would provide exposure to a mix of US and foreign equities. The move would not only increase the couple’s equity holdings — which were under 50 percent — but also give their portfolio some international flavor. Sullivan recommended that Courtney direct all new contributions to that fund as well.

Courtney’s Roth IRA — currently just over $2,300 — is too small to be invested in the popular life-cycle funds offered by companies like Vanguard and Fidelity, providing a diversified investment mix based on the number of years until the investor retires. Once Courtney builds up sufficient funds in that account, Sullivan recommended that she move from her current balanced fund to a life-cycle fund. That, she said, would provide an easy way to stay diversified until her portfolio gets significantly larger.

Because both Courtney and Gerrit are young and healthy, Sullivan suggested that they look into purchasing term life insurance now. “Is this the highest priority?’’ Sullivan asked. “No, but look how cheap it is if you buy it now.’’ Estimates provided by an insurance specialist show that a $250,000 20-year level-premium policy for Gerrit would cost roughly $160 a year, while a similar policy for Courtney would cost about $150.

One final question: The Blauvelts have the opportunity to take a low-cost trip to Peru, and they wanted to know if they could afford it. “We don’t want to miss out on life opportunities because we are worrying so much about the debt,’’ Courtney said

Citing the couple’s discipline and focus, Sullivan said she didn’t think the trip would derail their financial planning. “After all,’’ she said, “you have to live, too.’’

Goal: Trying to plot a course to a secure financial future while juggling school, loans, and living expenses.
With $47,000 of school loans and a tight budget, this Dorchester couple couldn’t figure out whether they were properly applying the rules of financial planning.
Recommendations from fee-only financial planner Jeanne Gibson Sullivan: ■Rather than aggressively paying down student loans, start building a financial cushion for emergencies and other unexpected expenses.
■Save whenever possible, putting any extra nonretirement funds into safe, interest-bearing accounts.
■Think long-term when it comes to retirement, boosting exposure to both equities and international investments.
■Buy insurance while young, taking advantage of low rates on 20- or 25-year level-premium term policies.