As you know, because I tell you all the time, I get a ton of mail! Today, I reached into my virtual mailbag and pulled out two reader questions, neither of them having easy answers. But hopefully this will make you think of your own situation in light of these questions and my responses.
Dear Mary: I borrowed more money on my student loan than I need to pay for school. Should I use this extra money to pay off an 11.49% interest credit card balance? I am currently in graduate school, so I don’t have to start paying my student loan back until December. I believe the interest on it is around 3%.
Another option is to pay the extra money back to the lender. Any help is greatly appreciated. Thanks. — Lisa
Dear Lisa: I am at a real disadvantage because I have so little information. But before I give you my general advice, let me give you a word of caution: You have no idea how difficult it is going to be to repay the student debt you have amassed, so get ready.
I hope this is the end of your borrowing and that you will soon find a well-paying job in your field of study. When you do, paying off that debt must be your top priority.
My advice is to repay the money to the lender at the earliest opportunity, making sure that it reduces your principal balance — not applied to accruing interest.
As for your credit card debt, this is a problem, too. However, my advice is based on the severity of the consequences in the event something happens in the future and you are unable to repay your debts. Not paying credit card debt is less severe than not paying student debt.
That being said, let me assure you that if you are diligent to stop adding to your debts and willing to live very frugally once you begin earning an income, I am confident you’ll be debt-free in record time. Good luck!
Dear Mary: My husband and I recently signed up for a cancer insurance policy and I’m wondering if we made the right decision. I’m 42 and he’s 45. We can cancel at any time, but I would love to hear your thoughts. Can you please tell me the pros and cons of a cancer insurance policy? Thanks! —Susan
Cancer insurance is called “specified disease insurance.” These kinds of policies vary widely, so you need to read yours carefully — don’t depend on a salesman’s explanation — and understand exactly what it covers.
For example, does it become secondary to your primary health insurance, paying out only after all of your other resources are exhausted?
Or does it pay a per-day rate regardless if you are admitted to the hospital or have other coverages?
Is it expense-based (covering a percentage of qualified charges) or lump-sum based (pays a specific amount and that’s it)?
While cancer is a horrible disease that we hear about a lot, the chances of you getting it are quite low. According to the National Association of Insurance Commissioners, cancer treatment accounts for 10% of all U.S. health expenses. That means there is a 90% chance you will never need this coverage.
Disease-specific insurance is a luxury item you should only consider if you have the essentials in place:
Do you have adequate health insurance that covers all health issues?
Do you have disability insurance? Statistically speaking, at your ages, you and your husband have a much greater chance of being disabled than getting cancer.
Do you have an emergency fund with enough money in it to pay your bills for six months in the event of unemployment?
Are your unsecured debts paid in full (credit-card bills, student loans and other non-collateralized loans)?
If you answered “yes” to all of the above — and can easily afford disease-specific insurance — cancer insurance may be a luxury item you wish to own. Before you make your final decision, you should do some math I did. This is what I discovered:
Let’s say your monthly premium is $50 for this insurance, and you decide to save that amount instead of buying insurance and have it automatically deposited every month into a mutual fund account that averages 10% growth (not unusual these days) until you are ages 72 and 75. You will have $114,958 in the bank — nearly $97,000 of that amount coming from growth.
Remember, insurance is a gamble. The company is betting that you won’t file a claim and they’ll get to keep your premiums. When it comes to cancer insurance, they have a 90% chance of winning.
The NAIC offers a free “Shopper’s Guide to Cancer Insurance” on their website that discusses this in greater depth. I hope that helps. It was great to hear from both of you.
Mary invites you to visit her at EverydayCheapskate.com, where this column is archived complete with links and resources for all recommended products and services. Mary invites questions and comments at https://www.everydaycheapskate.com/contact/, ”Ask Mary.” Tips can be submitted at tips.everydaycheapskate.com/. This column will answer questions of general interest, but letters cannot be answered individually. Mary Hunt is the founder of EverydayCheapskate.com, a frugal living blog, and the author of the book “Debt-Proof Living.”