Student loan debt is getting out of control in the US because of the high cost of college and the cost is only on the rise!
I graduated with a high-paying degree in chemical engineering with a total of $32,265 in student loan debt all held by the US Department of Education and its loan facilitators on the federal loan program. When I married into an additional $19,387 in student loan debt 2 years after graduation, our joined forces brought the total student loan debt that had to be repaid up to $51,652.
Being an investment in your future, student loan debt is seen as a good investment by many, but you really have to look at the opportunity cost of college to determine its worth.
Were the 5 years spent in college worth $32,265 or about 50% of one year’s salary upon graduation?
As an engineer, it was a good investment and it paid its dividends when I was able to crush my student loan debt in a grand total of 3 years post-graduation. However, the ultimate paydown was completed when I accepted the expat package and moved to China. Let’s see how crushed my student loans.
Overall Student Loan Debt Payoff
As you can see, I waited the allowed 6 months after graduation before I made my first payment.
Was this a smart move? Probably not, but we are not here to analyze the initial moves towards payoff.
I paid a little more than double the minimum payment for the time I lived in the US, which amounted to $750/month towards student loans. The total payoff time at that rate was 49 months on my loans which I did not think was bad at all.
Then, I fell in love and got married which added an additional $19,387 to the total that needed to be paid off. Mrs. Atypical was adamant that she would pay off the loans herself and that I did not need to pay them out of my salary.
I kind of laughed that off since my belief is that once married you should have your finances joint. You are a team. A team does not have one set of rules for one player and another for the other player. We will work together to crush this debt.
We started the payoff of her loans at slightly over the minimum payment, contributing $300 each month to them starting in December 2013.
Extreme Student Loan Debt Payoff
The extreme student loan debt payoff started in February 2015, the first month we lived in China. We started with an initial student loan debt balance of $30,109. Moving to China we received an extra month’s salary, plus I got a 13.6% raise to boot. This chunk of change went straight to the student loans.
In March, with the receipt of my new higher salary, I decided to completely pay off my student loans which had a balance of $11,562 remaining. It felt amazing to bring one student loan balance down to $0. $11,562 was way more than my salary, but we received a $6,000 bonus at the beginning of March that allowed us to pay off the student loan debt.
April was a real light month on payments to the student loans because no payment was actually due in April. When you pay more than the minimum payment, you can actually skip payments with some of the student loan facilitators. This allowed us to build back up some funds since we spent almost everything we had in March.
After starting with a bang in March and then slumping back in April, we decided to set a regular payment schedule of ~$3000 per month. $3000 per month would put us paying off all debt by December 2015. This seemed reasonable to do and it would also allow us to contribute more to the 401k. We followed the scheme of $3,000 monthly payments for all of 2 months before we reneged on it.
I just could not wait to get out from under the debt. It feels like a huge weight lifted off your shoulders even if you are easily able to cover payments every month.
Student Loan Debt vs Investing
It feels great to be out from under a mountain of student loan debt, but was it the right decision to pay it off so quickly?
We all know hindsight is 20/20 and with the huge bull stock market run we have seen in 2017, we could have had an extra $30,000 in the market instead of having paid down the debt. We missed an opportunity to have extra money working for us.
Paying off student loan debt vs investing and paying the minimum payment on your loans really is a tradeoff. In order to analyze it and make the best decision, you have to look at the interest rate on your loans and the historical return on investment (ROI) of the stock market.
With student loans, you are saving compounding interest on the loan, but the interest compounds on less and less money with each payment. With the stock market, you get compound growth over time with each month compounding on a higher and higher amount of money.
Historical ROI of the stock market is generally quoted as 7% and our student loan debt was consolidated at 6.8%. With automatic payments to the student loans, the government gave us a “not so generous” discounted interest rate of 6.55%. When comparing 7% vs 6.55% I equated them to be essentially equal. The mental relaxation of not having student loan debt won out over the 7% ROI of the stock market.
What Funds To Pay Off Student Loan Debt With
I very aggressively paid off the last 60% of my student loan debt with money supplied by the expat package. However, I also tapped into my emergency fund and savings account.
I built up an emergency fund of $10,000 over 20 months of working, saving $500 each month into it. I also had a $10,000 “vacation” fund. It seemed like a good idea to keep money around so we could easily afford vacations.
Boy was I wrong!
There is no need to keep $10,000 sitting idle just to pay for a vacation. The initial push to pay off the student loan debt was mostly with new money from my salary and extra month’s salary, but I also used a large portion of the vacation fund. Vacation may be expensive, but it does not require a huge fund sitting idle.
The final $10,126 student loan payment came from a combination of the vacation fund, emergency fund, and salary. There is a need for an emergency fund. What if something happens, right?
However, having paid off our student loan debt, our monthly required spending is now lower. Therefore we do not need such a large emergency fund. We still maintain an emergency fund of $5,000 after crushing the student loan debt. Paying off our student loan debt was a much better ROI than making 1% in a savings account.
My story of extreme student loan debt payoff does not need to be unique. You too can come up with creative ways to crush your student loans. Take an expat job and live the good life with tons of new-found money or buckle up and live the frugal life and pay it all off. I did both and was able to pay off 2 people’s student loans in 3 years. 60% of the payoff was done in the last 6 months of that time period.
Take a long hard look at your finances and decide whether you want to live with student loan debt looming overhead or you want to crush it and leave it behind. It’s your choice!
How did your student loan pay off go? Are you still working on your student loans? Let me know in the comments.
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