Should I pay off my 50K of student loans as quickly as possible, or steadily? Why?

Question

I was an idiot in college. I basically just used student loans and got very few grants. I also spent way too much time in there. I now have two bachelor's degrees and a master's degree. About 7 years of my life wasted and about 50K dollars in student loans. Extremely stupid waste of money.

I am trying to pay off these student loans as quickly as possible. Here are some specifics:

• I currently earn about $65K per year before taxes.
• I live in a blue state so they tax the hell out of you up here. I take home about 69% of what I earn. So my real pay is about $46K per year. Which isn't a whole lot of money, I am finding out.
• I already pay about $650/month in student loans and $725/month in rent. I pay about $50/m for cable, $50/m for internet, $90/m for cell phone. I try to keep my food intake under $250/m but that is hard.
• Add a couple of other expenses per month and I am already over half my monthly salary. Which isn't too bad. I guess I need to figure where else I am bleeding, and step on the hose?

I guess if I could pay an extra thousand a month to these student loans in a round robin fashion, I could be able to pay them off rather quickly?

Would it be better for me to pay these off as quickly as possible, or to save that money and still pay them off steadily? What would be a good course of action, and why?

Answer 1

The definitive answer is: It Depends.

What are your goals?

First and foremost, you need to have at least 3 months expenses in cash or equivalent. (i.e. an investment that you can withdraw from quickly, and without penalty). The good news is that you don't have to come up with it instantly. Set a time frame - one year - for creating this safety net, and pay towards that goal. This is the single most important piece of financial advice you will receive.

Now determine what you need to do. For example, you may need a car. Compare interest rates on your student loan and the car loan. Put your cash towards whichever is higher.

If you don't need a car or other big ticket item, then you may consider sticking your surplus into the student loans. 50k at $1650 a month will be paid down in about 3 years, which might be a bit long to live the monastic lifestyle. I'd look at paying down the smallest loan first (assuming relatively similar rates), and freeing up that payment for yourself. So if you can pay off 1650 a month, and free up $100 of that in six months, then you can reward yourself with half that surplus, and apply the other half to the next loan. (This is different than some would suggest because you're talking about entering severe spartan mode, which is not sustainable.)

Remember that life happens. You'll meet someone. You'll have an accident, your brother will get sick and you'll give him some money to help out. You've got to be prepared for these events, and for these reasons, I don't recommend living that close to the edge. Remember, you're not in default, and you do have the option of continuing to pay the minimum for a long time.

Answer 2

Here's my take on it (and quite a few people might disagree) - student loans aren't bankruptable, so they'll stay with you forever. So if you want to reduce your risk over time and have a funded emergency fund and some cash put aside for, say, a car or another major expense, then I'd try to throw money at the student loan to get rid of it quickly.

Answer 3

Here's my thoughts on the subject:

1. Don't put yourself in so much stress paying your loans back that you'll force yourself into a worse debt situation. For example, if you don't have a "rainy day" stockpile for when your car breaks down, your laptop dies, or you need to go to the doctor with your high-deductible insurance plan and you end up going into debt with a credit card company and its double-digit percentage interest rates you've done considerably more harm than good.
2. That being said, its good to get those bad-boys paid off. If the market was doing well, that might not be true, there might be more productive uses for your money, but right now making interest payments go away is a pretty good % return on your money.

Answer 4

I recently paid-off $40k in student loan debt. One of the motivations for me to accelerate my payments was that over time, as my income increased, the amount of student loan interest I could write-off on taxes started to phase-out.

Answer 5

Two things you should consider about paying off student loans ahead of the 10 year amortization schedule:

1. What interest rate are you paying on your loans? What are you earning on your investments in a balanced mutual fund? When you pay off your student loans you are essentially guaranteed a return of the interest rate on your loan (future interest you would have had to pay). However if you are investing well and getting a good return on your investments you will get a greater return. Ex. Half of my student loans are at 6.8%, thr other half are at 2.5%. I make the minimum payments on the loans at 2.5% and invest my money in tax sheltered retirement accounts. The return on these funds has been 8% and that is on per-tax dollars so really closer to 11%. Now there is also downside risk when you invest in the market, but 2.5% guaranteed I will forgoe for 11% in low risk return. However my loans at 6.8% I repay in excess of the minimums because 6.8% guaranteed return is pretty good! So this decision is based on your confidence in your investments and your own risk tolerance.

2. Once you pay your bank on your student loans that money is gone, out of your control. If you need it in the future you may need to pay higher interest on an unsecured loan, or you may not be able to borrow it. When you want to make large purchases (a car, house) that money you per-paid on your loans isn't available to you as a down payment. Banks should want you to have some of your own "skin in the game" on these purchases and the lending standards keep getting tougher. You are better off if you have money saved in your name rather than against the balance on your loan. Yes you can't bankrupt these loans, but the money you repay on them doesn't go toward housing you or paying your bills on a rainy day.

I went through the same feeling when I completed my MBA with $50k in debt, you want to pay it off as soon as possible. But you need to step away and realize that it was an investment in your future and your future is long, you need time to make a financial foundation for it. And you will feel a lot more empowered when you have money saved and you can make the decision for how you want to deploy it to work for you. (Ex. I could pay down my student loans with the balance I have in the bank, but I am going to use it to invest in myself and open my own business).

Answer 6

• Have an emergency fund ($1k baby fund so you can start now and build it later or a regular sized fund of 3-6 months of expenses: so take out the cable bill b/c you won't need it or miss it while you're job hunting.)
• Go over what you spend. Make a list of needs vs wants. Total up your wants and then see what you go without, if not the everything on the list. Calculate what adding that total to your current student loan payment will do in terms of how fast it will payoff.

If you make paying off those loans a priority, you will find money where you can and also look for stuff to sell around your home and also look for as much extra work as you can stand.