Answering Readers: Why Not Pay Off The Student Loan?

Last week I did a stroll down memory lane when it came to our debt and how it’s shrunk over the last four years.

A couple of readers (Bucksome and mbhunter) questioned why our current strategy is more focused on paying extra on the mortgage versus the outstanding student loan.

Great question!

Here goes:

  • Interest rate – The interest rate on the loan is fixed and is very affordable, somewhere just above 2%.  The first student loan was a variable interest rate, and though it dropped to around 4% by the time we’d paid it off, originally it was around 8%.  The current interest rate on the loan is well below that of the mortgage rate of 5.875%.
  • Payment amount – The monthly payment on the student loan is less than $100.  This is pretty easy to absorb into our monthly spending so it’s less of an incentive to knock off that payment than it would be if it were over that threshold.  The original loan we paid off in a hurry was $199, so that was nice to see go away.
  • Bang for the buck – I have a spreadsheet where I track the loan amortization, and I can fill in the extra payments we make along the way.  I can tell that applying extra on the mortgage takes quite a bit of interest off on the back end.
  • Long term goals – The student loan is a 15 year term loan.  It started in 2005, so even without any extra payments it would be finished in 2020.  One other goal I have, though (and it assumes we stay in our current house) is to have our mortgage paid off by the time our children start college. Since our oldest is two, that gives us about sixteen more years.  That would mean that we’d have to pay it off ten years early.

We still do pay extra on the student loan now and then.  A portion of our yearly tax refunds goes toward paying extra on our debt, and I’ll typically split it about 75-25 with the lower amount going toward the student loan.  Additionally, when I make any extra money from the blog, I’ll send some extra toward a debt.  My guess is that once the balance gets low enough to where paying it off is achievable, I’ll probably go ahead and do it.

Even then, though, the goal is to take that payment and just add it to the amount we pay extra on the mortgage every month, which is exactly what we did with the monthly payment amount of the original student loan that we paid off last year.

So, while I know it’s not the most concrete strategy, it works for us, and the way I look at it, as long as the balance keeps going down, we’re headed in the right direction!

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6 thoughts on “Answering Readers: Why Not Pay Off The Student Loan?

  1. That's a solid goal, paying down your mortgage by the time your kids reach college. I knew a fellow that had the same strategy. When his boy entered Oklahoma State he just used his mortgage payment for the tuition and dorm fees.

  2. Student loans are not all at those very low rates, some are unsubsidized and can be in the 7% range. Also, student loans can impact your ability to buy a home. The bank will include it as debt even if the rates are low. I recommend paying down your loans before you buy that first house and pay down the highest interest rate first.

  3. Have you thought of refinancing down to a 15 year loan on the house? I am sure you could get a much better rate than 5.875% (Actually, I just looked, and you can shave at least 2 percent off that mortgage rate you are paying now. What would the difference in payments be for you with a lower interest rate but fewer years vs what you are paying on your 30 year now?)

    Go with a 15 year mortgage and you will be set when the little one goes off to college!

  4. We are just now facing student loan repayment while simulaneously trying to save to buy a home. I understand your strategy and am envious of your low student loan interest rates. My husband's are 6.8%! We will most likely work on paying off the student loans while saving for a house.

  5. @Andrew – Sounds like a winning strategy. It's a long way down the road, but hopefully I can enjoy similar success down the line.

    @krantcents – Thanks. We already have the 'first house' (in fact it's my second!). As a general strategy, eliminating as much debt as possible is definitely worth doing before getting a mortgage.

    @Everyday Tips – The reason we don't go after a re-fi is simple: Equity. The housing downturn took out most of our 20% down payment. Any re-fi will either require us to bring tens of thousands to the table to get us back to the 20% mark or have us pay PMI, which would wipe out most or all of the savings due to the lower rate. Neither of these are very attractive options right now.

    @Moms Plans – The loans were my wifes and we somehow got on some plan that had low rates, though she got into them at the very last opportunity, which I think was back in 2005, before they went up to higher rates like what you're describing.

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