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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Student Loan Payment Countdown!

The 20th is the day that my wife’s student loan payments come due.  We have them automatically deducted from our checking account.

One of the payments is within striking distance of being paid off.  When we got married, it was the ‘larger’ of two loans, as it had the larger balance, the larger monthly payment, and the larger interest payment.  We aggressively worked to pay it down, applying ‘extra’ money that we came across at various points (including portions of our tax refunds, an inheritance, and my wife’s income while she was working) to bring the balance down.

In January 2009 it actually became the smaller of the two loans from an outstanding balance perspective, which was a great milestone.

We are now on track to have this paid off by the end of the year.  The December payment will bring the balance down to $0!

That will free up approximately $200 per month in payments.  We had originally planned on applying this balance towards the second student loan, which would allow that balance to be paid off around the end of 2012.

We are currently re-thinking this strategy.  Instead, we plan to just spend the money frivoulosly each month on electronics, video games, clothing and music downloads.

Cool, right?

Just kidding!

That’s totally not what we’re doing.

We are going to apply the $200 towards debt.  We may, however, apply that toward the mortgage instead.  The mortgage and the second student loan payment are the only two debts we’ll have.  The mortgage has a larger balance, a much larger interest rate, and while it won’t bring our payoff anywhere near 2012, it will eat the balance away a lot quicker than the student loan payment would.

In other words, it’s the instant gratification (well, as much instant as two years can be) or the more bang for your buck.  We still have a few months to make a decision on what to do with the ‘extra’ funds, but either way, we’re committed to applying the entire amount to debt once this particular loan goes away.

Any thoughts?

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