I Have Enough to Pay My Student Loans Off in a Lump Sum. Is That Dumb?

Plastic statues of a wedding couple stand on a pile of coins.
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Dear Penny,

I'm recently married. My husband and I combined our savings accounts, which puts us in a financially healthy place, except for the fact that he has a lot of student loan debt.

We have enough money saved to pay off his student loans in one shot. We were hoping to use this money as a down payment on a house, but the market is too high to buy.

We keep toying with the idea of paying off the student loan debt in one lump sum, but it feels too risky. We wouldn't have a down payment for a house when the market comes back down or backup funds for an emergency, but we could easily rebuild our savings in months without any debt.

We hope to have kids within the next year, which will add even more debt to the pile.

Is there a way to get the best of both worlds?

Thank you,

All Mixed Up and Don't Know What to Do

Dear All Mixed Up,

This is one of the better financial challenges to face, but it can definitely lead to analysis paralysis. You’re worried about making the wrong decision, so you’re sitting there staring at your joint savings account without a clue about your best next move.

I’d love to tell you to take a deep breath and make that one big payment to wipe out your husband’s student loans. But a small note in your letter gives me pause: It sounds like you don’t have a dedicated emergency fund.

An emergency fund is different from a general savings account. It’s a dedicated account for, ideally, three to six months of your typical expenses.

If you, your husband or both of you found yourselves out of work, you could turn to your emergency fund to stay afloat during your job search. On top of that safety net, you can use your emergency fund for unexpected expenses like medical bills or car repairs.

Bankrate’s 2018 Financial Security Index survey found that only 39 percent of U.S. households could cover an unexpected $1,000 expense with savings.

Even when you have protections like car or health insurance, deductibles and non-covered expenses can wear down your savings fast. And I’m sure I don’t have to tell you that you’ll want to have emergency funds set aside well before a baby comes on board.

If you want to get those student loans over and done with, acknowledge that the months to follow a large payment are ripe for Murphy’s law: Anything that can go wrong will go wrong.

But there’s a satisfying alternative to a lump-sum payment: Put away a healthy chunk of savings for your emergency fund; then, set aside an amount that will cover your husband’s minimum student loan payment for the next 12 months as an extra cushion.

Then, take what’s left to make a large payment toward the principal. It’ll knock out a decent portion of pesky interest, and the new, lower balance will keep you both motivated toward paying off those loans while prioritizing your other financial goals, too.

There may be no confetti or debt-free celebration, but this approach may be the safest combination for your new family.

The inbox is open. Submit a question or send your worries to [email protected], and I’ll see what I can do to help.

Disclaimer: Chosen questions and featured answers will appear in The Penny Hoarder’s “Dear Penny” column. I won’t be able to answer every single letter (I can only type so fast!). We reserve the right to edit and publish your questions. Don’t worry — your identity will remain anonymous. I don’t have a psychology, accounting, finance or legal degree, so my advice is for general informational purposes only. I do, however, promise to give you honest advice based on my own insights and real-life experiences.

Lisa Rowan is a senior writer at The Penny Hoarder.