I'm 22 and just started my first job as a teacher. I have inherited ten thousand dollars. My student loans from college will be about fourteen thousand. My question is: what do i do with this money? Which would be more beneficial for me to do: pay off a large amount of my student loans right away or put the ten thousand away in a CD to save for the future, i.e. wedding, house?

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Topic: Cash & Debt Management, Consumer Issues

Q: I'm 22 and just started my first job as a teacher. I have inherited ten thousand dollars. My student loans from college will be about fourteen thousand. My question is: what do i do with this money? Which would be more beneficial for me to do: pay off a large amount of my student loans right away or put the ten thousand away in a CD to save for the future, i.e. wedding, house?

A: While it is generally a good idea to reduce your debt to lessen your expenses, on July 1 the interest rates on Stafford loans fell to 4.06% from 5.99%. The rate on Parent Loans for Undergraduate Students (PLUS) dropped to 4.86% from 6.79%. These rates are the lowest ever and hold until June 30, 2003. A one-time consolidation of loans may be available to you. This locks in the low rate for the life of the new loan. It also stretches out the repayment period. It is IRREVERSIBLE. So, read the FAQ at www.ed.gov/directloan before calling your lender and consolidating. Since we do not know the details of your student loans other than the amount , we cannot give specific advice.

Ask Our Experts (AOE) would suggest that you keep some portion of the money liquid for emergencies. As a minimum, you might want to keep at least one to two months net wages in a liquid savings account.

You could also use $3000 to set up a ROTH IRA for 2002 as a beginning retirement plan. You would be able to add money in future years, as you are able. The difference between liquid savings and a Roth IRA contribution, if any, could be deposited in a CD for future intended expenses such as a wedding or partial house down payment.

This would allow you to have deductible student loan interest for your income taxes, as well as not deplete your emergency fund i.e. the funds you inherited. Plus, it would give you a head start on saving for your future with tax-free earnings on the ROTH IRA.

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