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Johnny and I graduated from college at the same time, and as we looked toward post-student life, the possibilities seemed endless. The year before we graduated our combined income was $14k. With our full-time schmancy-pants (not really) jobs we landed after graduation, we were set to make three or four times that as a couple. And boy oh boy were we stoked. But we also had $20k in school loans staring us in the face, interest and all. We were in a position where we could live frugally and beat down the Debt Monster quickly. But despite our decent cash flow and only $20k in loans, we still experienced bumps in the debt-payoff road. Others’ experiences with paying off loans will be different than our own… different cash flow, different loan amount, different expenses. But all debtors will experience their own bumps in the road. We recently got some awesome questions from an OFB reader that address this very topic.
I’m a new reader (subscriber!) and really love your blog. I would love to see a post about paying off student loans, particularly for loan totals that are high, in the 5- (or 6-) figure range. Specifically, what are your thoughts on paying it off over time (i.e., the standard 20-year repayment plan) as opposed to paying it off more quickly? Pros and cons? How might the decision change based on how tight your budget is? And I’d also be interested in how you suggest prioritizing student loan repayment vs. growing savings.
Sorry if you’ve already posted on this and I just missed it. And congrats on Baby Girl!
Disclaimer: As we do with every post, we’re going to speak from our own experience, which doesn’t necessarily mean it’s right. But it worked for us. So basically, don’t try this at home, kids. But if you do, wear a helmet.
Paying Off Over Time vs. Quickly
Johnny and I chose to pay down our loans aggressively for a few reasons. First, it was possible. Second, the amount of money we saved in interest by paying our loans off quickly made it worth it to us. And most importantly, we wanted to pay off the psychological burden that comes with having debt. That was the clincher for us.
That said, we have friends who have incurred six-figure student loan debt, and they’ve decided to pay it off slowly for a few reasons. First, they’re able to live a more comfortable lifestyle. Because of how much school loan debt they have, the minimum payment toward their loans is still $1000/month. So if they paid more, it would definitely constrict their lifestyle. They make a good amount of money now and are on track to continue making a very sizable income. So living a more comfortable lifestyle now is worth paying close to 3x the principal of their loans by the end of it. Totally their prerogative. Prerogative is a weird word.
Our final two cents: You never know what tomorrow holds. So though you may have a great job now, nothing is guaranteed. Sometimes I think the logic is, “Even if I can’t pay my loans for some reason, it’s not like they can take my education from me.” That’s true for now… until the government creates a Men in Black education-erasing brain gun. But more importantly, if you ever did have to file bankruptcy, school loans are one of the only forms of debt that are not forgiven. Yikes. Paying off your loans quickly while you’re able is definitely worth considering.
Paying Off On a Tight Budget
Johnny and I had decent incomes while we were paying off our school loans. And since our debt wasn’t massive, our tight budget was self-inflicted. The only way to make your budget less tight is by either spending less or making more money. For us, we mostly just cut back. But once you’ve exhausted both of those options, then it is what it is. You can only do your best and take it from there.
When we were established with a location and job where we thought we’d stay a while, we maximized our debt repayment. It wasn’t easy and it definitely made us stretch. We found the most budget savings by cutting back on rent (finding the cheapest place we could, without constantly walking through active crime scenes), eating out, and discretionary expenses (clothing, entertainment, pillows). But those sacrifices still serve as a nasty reminder why we’ll do whatever we can to avoid another encounter with the Debt Monster.
Our final two cents: Johnny and I still found (inexpensive) ways to have fun while we were in debt. Otherwise, the process would have been miserable and unsustainable.
Paying Off vs. Saving
Prior to graduation and paying off our debt, we made sure we had a one-month emergency fund in place. While we paid off our loans, we added to that emergency fund (or savings in general) every month. So not every single dime of unspent money went to our debt. For us the peace of mind of being able to add a little cushion to our savings each month was worth the little interest we incurred by paying a little bit less on our loans each month.
Our final two cents: Depending on what was going on in our lives, our ratio of loan repayment to savings would change. Right before we moved to NYC, we paid significantly less on our loans and saved more to prepare for the move and the need for cash (e.g., $1000 toward savings, $200 toward loans). So there may be times when you’ll have to be flexible in order to fit an unexpected change/hurdle in your life.
So that’s our take on paying off student loans. Whew! You can now check “read a novel” off today’s to-do list… if you need the shortened version, I said that paying off loans is good, but use some money to buy ice cream. The end.
What have been the greatest hurdles you’ve encountered while paying off your debt? What advice would you add?