On March 2, 2018, I made my very last student loan payment. It felt so strange to turn off the automatic payments. I worried whether it would really be paid off. Almost every day, I went back and checked to ensure that no balance was due. Several weeks later I received a notification from my servicing company congratulating me on paying off the loan. Along with the congratulatory note, they asked me to complete a survey. The survey questions included what tips I had for new borrowers, how I celebrated the milestone, and the approach to repaying my loans.
Due to my ultra low interest rate, I was not in a hurry to pay off my student loans. There are many great stories about huge loan balances paid off impressively fast. Those who have done that inspire me. In some ways it makes me feel like my student loan story is less worthy of sharing, less dramatic. But it is still important to share. It took discipline and strategy.
When the balances dipped below $5,000, it was so tempting to simply pay off that debt and eliminate the $200 line item from our monthly budget. The timing also coincided with finishing grad school and gainful employment, but we stayed the course. In total, the interest was under $50 per year. I don’t remember the last time I paid enough in annual interest to deduct it from our taxes. Even using the latte factor theory, $50 per year is not much.
Maybe if I’d known how good it would feel to see that $0 balance and know that my education was free and clear, we would have paid it off sooner. In theory, that extra cash worked for us. While I was in grad school, it helped us make ends meet without taking out any extra loans. That alone saved 5-6% interest. By the time I finished school, we were able to buy a second home, which is now our only home. Although owning two homes wasn’t a financial plan I’d recommend, it allowed us to purchase The Vines HQ close to market bottom and two years later sell our first home at a price near peak market.
Some people like to say there’s no such thing as good debt. We tend to agree. But 0% interest loans and student loans at under 2% are pretty close to it. The idea of debt leveraging is also why we are resisting the urge to pay off our mortgage on The Vines HQ. It is a 15 year mortgage at 3% interest. If we continue to pay on schedule, it will be paid off five years after we reach financial independence. We’re still undecided whether we’ll pay it off before we leave full time employment. Part of that is because we’re undecided about how “leaving full time employment” even looks like. But that is the topic for another post.
As for new borrowers, I have some tips. My undergraduate loan total was around average. Thanks to that ultra low interest rate, I don’t think there was anything remarkable about how I repaid it. I did not qualify for an income based repayment plan and took longer than the original 10 year plan. We paid on my loan for the first several months of grad school, ultimately decided to to defer for the remaining two years or so. The loans were consolidated when I earned my undergraduate degree. I didn’t need to take out as much as I did. Some semesters I qualified for a tuition reimbursement through my then-employer. Instead of paying back that semester’s loan, I used that tuition reimbursement for fun. I’m sure this would have saved me at least $5,000 in principal. I worked my way through undergrad, which certainly helped keep my debt load in check because I never took out extra loans for living expenses. My most important tip for students or current loan borrowers is to keep those balances as low as possible. Every $100 or $10,000 really does matter. It also helps to consider your initial salary and whether you will attend a graduate or professional program. It becomes even more important to think about your undergraduate debt when you expect to add several more years of expensive education.
The next tips are for those entering repayment. Investigate consolidation options. Automate the process, especially if you get an interest rate deduction for doing so. As I’ve mentioned, I was able to consolidate at historically low rates, but I also got an extra 0.25% deduction for using automatic payment and another interest rate deduction of 0.5% after making 36 on-time payments. Automatic payments ensured that I would never miss a payment and take full advantage of every possible interest rate reduction. I know the rate I had is probably not available now, but consolidation is still worth investigating. If you have a job at graduation, don’t wait the full six month grace period to start repaying. Use some of that time to investigate your consolidation and repayment options, but once the research is done, get started! Choose the shortest repayment time frame that works with your payment amount. Run the numbers on an income based repayment plan to see if you qualify or if it makes sense for you. I met a lawyer who had over $100,000 worth of loans forgiven through income based repayment. If you are on the other end of the income spectrum and can comfortably make the payments required to pay off in 5 years, choose that option. Paying the balance sooner is almost always better.
Setting a higher payment amount helps prevent lifestyle inflation. That was the blessing and the curse of my low interest rate. There was little incentive to take on a higher payment and get rid of the balance sooner. As a result, our lifestyles inflated. It wasn’t all bad–I have no regrets about the trips we took (and continue to take). But the money spent on luxurious gifts for each other, furniture, clothing, and other stuff could certainly have gone to better uses.
And once that last payment is made, how did we celebrate? With champagne of course! We toasted the accomplishment. I shared the good news on social media and bragged about it to all of my friends. I proudly deleted the payment from our budget spreadsheet. It was such a mental milestone. Now our only remaining debts are an auto loan (gasp! Scheduled for payoff January 2019) and a home mortgage.