Student loans are quite the hot topic lately. The Federal Reserve Bank reports that the total outstanding balance on student loans was $966 billion, at the end of 2013. That number is only growing larger. The biggest reason is that for many people these loans are not causing them undue grief. So instead of hurrying to pay them off, they make just the minimum payments. In fact, that is what I do.
My Loans
While I call them my loans, they in truth belong to my wife. I managed to graduate without any debt; not due to hard work on my behalf, but rather foresight on behalf of my parents to start saving early. When my wife finished school she had somewhere around $25,000 of student debt. After we were married, her debt became my debt, and we set it up so the minimum amount comes out of our checking account each month. Of the $168 that is withdrawn each month, about $125 goes toward principle. The primary reason is that our interest rate is locked at 2.25%. The consumer price index, or commonly called “inflation” clocks in at around 3% per year on average.
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Our Debt Repayment Strategy
When determining how long we have to repay our loans, we decided that we will continue to make just the minimum payments for as long as it takes. Our reasoning takes many items into consideration.
Inflation – Inflation averages more than what we pay on the loans. Essentially we are “earning” money by dragging the loans out as long as possible.
Investments – Our investments average much more than 2.25% considering most of them are invested very aggressively. Even when figuring in down years, the average is still well above what we pay out.
Loan Forgiveness – This is the primary reason behind letting our loans ride. Since my wife is now working as a teacher in the public sector, we will be eligible to have the loans forgiven after she hits 10 years of service.
There are many working parts to figuring out student loans. But because we are locked into such a low interest rate, and we will be eligible for loan forgiveness, there is no reason to hurry up and repay the loan. When we are finally eligible for loan forgiveness (in about 7 more years) there will be around $8,000 still owed on the loan. Waiting until the loan is forgiven, instead of paying extra, will cost us right around $2,200 in interest charges. I will gladly pay $2,200 over 7 years in order to save $8,000.
Also Read: 5 Ways to Tackle Student Loan Debt With a Low Pay Job
Wrapping It Up
Not all loans are created equal. My younger brother has much more debt than we do, and he is unable to get his interest rate below 7%. Since it is so high, and he has no hopes of loan forgiveness (not working in the medical field or public sector) he opted for an aggressive 10 year repayment plan.
What situation are you in? Do you have student loans? What is your repayment strategy?
I probably would have done the same thing if I were in your situation. We paid off my student loans asap because the interest rate on mine were high, and I knew they wouldn’t be forgiven.
I owe a little under $5,000 on my grad school loan, and am in no hurry to pay it off. The interest rate is 1.75%, so it’s by far our lowest-rate debt.
We are doing the same thing with $100k of student loan debt. Except we are on the 25 year repayment plan. Our interest rates are 0.75%, so like you mention, inflation eats away at the balance (in real terms) automatically each year.
Some have criticized our usage of the income based repayment plan and debt forgiveness option. It’s a valid choice for many people, and often overlooked as a financial tool to minimize payments and stretch them out over time to allow inflation to do it’s work.