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.
- 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!