11.16.09
Why Paying Off Student Loan Debt Makes No Sense and Why I Did It
There was a time I swore I’d never pay off student loan debt a second sooner than required. Why would I do something dumb like that? There were so many benefits to keeping it around until 2020.
By paying off my student loan, I’d avoid 2.625% of interest on the outstanding balance each year. That’s nothing. I know people who pay over 5.00% on their government loans. And don’t get me started on people with private student loan debt. I was miles ahead of them on the interest rate front. It felt real good knowing I had the foresight to graduate from college when interest rates were at historical lows.
I’d come out ahead just by banking the money I could’ve used to pay down debt. Not long ago, ING Direct was paying 4.50% – 4.75% on savings accounts. Since I didn’t have more than $100,000 (former FDIC insurance limits) on deposit, the risk of losing my money was nonexistent.
Then, get this. After four years of on time payments, Sallie Mae reduced my interest rate a full percentage point. Who would race to pay off a debt that only cost 1.625% in tax deductible interest? And on an installment loan too? Please. It’s one thing to pay off a line of credit. But once you pay off your student loan, it’s paid. You can’t go back to the lender and ask for credit in the event of an emergency.
Did I mention that 1.625% was fixed? As long as I paid my bill on time, I’d never have to worry about the interest rate increasing.
With student loans (at least the government kind), you have more options when it comes to repayment. If you lose your job, you can postpone payments by placing your loans in deferment or forebearance. So even if I stumbled on temporary hard times, I could avoid making the payments without hurting my credit.
Yeah. Paying off student loan debt made absolutely no sense.
So why’d I do it?
Because freedom tastes good.
I don’t expect you to agree or disagree with me. Everyday another person makes the decision to extend the life of a student loan as long as possible. (I have no statistical evidence to support that statement.) What I’d like to know is the choice you made. If you have student loan debt, do you plan on paying it off early? Why?
I’m choosing to pay off my loans early because I have too many! I don’t want that monthly payment for the next 30 years, would have more financial freedom without the burden of such a high payment each month, and my loans aren’t exactly dirt cheap interest like yours
)
Great post – I know how you feel! But I have to say, those are some really good terms there…… I'm taking the middle road and just paying off one of the smaller loans – just for the psychological value of knowing I have one of them paid off and that if I did fall on hard times, there'd be that much less I'd still have to pay in monthly payments. The value of psychological freedom should not be underestimated. At the same time, having those student loans there is also a great "stick" to keep you motivated and moving forward.
Freedom does taste good
Sweet, sweet freedom…
My loans were at 8%, so I had no choice but to attack them like a polar bear close to starvation.
@MoneyEnergy – Thanks for stopping by. I couldn't pass on the opportunity to gloat about those terms.
Who knows? After you pay off one student loan, you might get the urge to knock out the rest of them.
@Jason @ My Money Minute – 30 years?! That's a mortgage. I've been out of debt since December of last year. It's very freeing to know that the money you make is yours to keep. I wish you much success in getting out of debt.
@FabulouslyBroke – Nice. I'm sure you saved a ton by getting rid of them. I don't think many people can craft a logical argument for holding on to 8% student loans they can afford to pay off. Especially in this environment. Even "high-yield" savings accounts are paying around 1.5%. Pathetic.
Actually, both my wife & I went to law school. We like to say we have three mortgage payments, but only one house!
We’re attacking them though. Hopefully they’ll be gone in 6 or 7 years rather than 30.
My interest rate wasn’t as low as yours, but I paid mine off because I woke up one day and realized that it had been hanging around for forever and a day. Just a few months and a little bit of focus later and it was gone! I didn’t realize how much it was mentally weighing on me either until the weight was gone.
It certainly *does* make sense to pay off any loan in the current economic climate. 1.6% ROI would be incredible by today's standards – most money market accounts are paying considerably lower than that nowadays (CDs are a notch higher, but you lose the liquidity).
And, yes, freedom from debt has a certain emotional gratification that I wouldn't dispute.
I did the same thing for the same reason. My loans were older, though. So my interest rates were more like 5-9%. But it just felt good having that extra few hundred dollars in my monthly budget…to do other things with…like pay off credit cards and such.
I agree with @Jackie, debt feels like a weight. Freedom feels light and wonderful.
Debt-Free Land is a wonderful place. Been there twice. Hope to get there again next year.
Believe me, someone who has had student loan debt for many years, you did the right thing. I can't wait to get the thing paid off asap (it's third in line of my debt snowball).
@Jackie – It seems like once you get started paying down debt, money comes from everywhere. I actually think it's money you had all along, but you just weren't using it optimally.
@Jason – You're right. I sold a small amount of individual stock back in April 2008 to put towards a car loan I had at 6.5%. Considering how that stock is performing now, getting rid of it was a really good decision. Ten years from now I may regret selling it, but I seriously doubt it.
@Venus – Aah. Debt-Free Land. I want to live here forever. Wishing you well in your return.
I used to calculate the amount of money freed up by paying off debt at least once a week. Because I'm out of debt, I can reasonably save about 1/2 my net income. I may not always choose to do so, but I like having the option.
@Bucksome Boomer – Are you a Dave Ramsey listener?! Listened to that guy almost every weekday during the journey out of debt. Are you going to call in and scream "I'm debt free!!!"
Yes, like Enemy of Debt I plan to scream "I'm debt free!" some day. I became a Dave Ramsey fan via his Financial Peace University course through my church.
I also have my govt loan @ 1.625% with 12 years to go. Other than a small 2nd mortgage which will be paid off next year, we have a 20yr fixed mortgage. I would love to have the student loan paid off, but I have a hard time justifying spending the cash other than for psychological reasons.