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I’ve been taking stock of my complete financial life: mortgage, credit cards, savings, and other debt.
At one point, I became obsessed with getting rid of my student loans. They’re an ugly stain, a black cloud always marring my ideal financial vision. Last year, I made a $7,000 payment just to start chipping away at the principal. I see now it was an emotional, not logical, decision.
Since then, I don’t feel like made much progress. And deep down, I want to save more in my IRA account. I was paying so aggressively that I wasn’t saving as much.
After running the numbers, I’ve decided to say screw the student loans. I’m gonna pay the bare minimum and invest everything else.
Past Harlan went to school. Future Harlan is gonna save his pennies. (Third person tense activatedddd!)
I’m tired of missing out on opportunities.
In This Post
- Why I’m forgetting about paying off my student loans
- By the numbers, I can earn 10s of $1,000s more
- I prolly won’t repay my loans in full, but it’s not a cure
- I can deduct student loan interest AND IRA contributions on taxes
- My investments have returned 11% (or more!) the past couple years
- Or I could save and buy another property
- Bottom line
Why I’m forgetting about paying off my student loans
First things first: my loans are all federal. That means I make payments to a government loan servicer, have protections against hardship, and most importantly… with my IBR plan, they’ll be forgiven after 25 years.
My loans originated in 2011, so they’ll be gone in 2036 – which is in…
17 years. I’ll be in my 50s by then – and I signed those promissory notes when I was 17. Isn’t that crazy?
I don’t have a fixed payment. Instead, I re-certify every year. And somewhere along the line, I decided I wanted them gone and even got a 0% APR credit card to pay them down. I currently owe ~$46,000 (the average is $30,100).
That pains me to write, but my retirement savings far exceed that.
It wasn’t a financial decision rooted in reality. I decided removing the mental burden of having them would be worth more than saving. After all, with a 6.75% interest rate, that’s a guaranteed savings as opposed to hypothetical returns.
And then, once they were gone, I’d put all my resources into padding out my nest egg. Until I slapped myself in the face and looked closer at the numbers.
Despite how I feel about having the student loans, I was forgetting one huge truism: the sooner I invest, the more I’ll earn with compound interest + time on my side. The 8th wonder of the world – duh. And all my returns were actually over 7%.
Plus, going back to feelings, it bummed me out to max out my 2018 IRA contributions before filing taxes in 2019. In other years, I maxed it out at the earliest moment – not the last.
I spent time thinking about it and looking at the numbers. Investing is the clear winner. Those student loans will just have to deal.
By the numbers, I can earn 10s of $1,000s more
I played around with online calculators and liked Student Loan Hero’s Student Loan Payoff vs. Invest Calculator the best.
For this equation, I set:
- Investment returns at 7%
- Loan interest at 6.75% (cuz it is)
- Extra payment at $500 per month (how much I’d need to max out an IRA at $6,000 / 12)
- Contribution timeframe at 17 years (at which point, my loans will be forgiven)
This is crazy to me. And now I feel salty for having “wasted” that $7,000 payment – should’ve thrown into into an index fund and called it a day.
Or saved it to put down toward more real estate. Or just kept it. That’s money I literally threw into the wind. And the sad thing is most of it went to interest and didn’t even touch the loan principal… 😫
I prolly won’t repay my loans in full, but it’s not a cure
With my IBR plan, the student loans will be forgiven in 2036. If I make the minimum payments, I’ll likely never pay the entire principal. Which, cool. Because why would I go through extra effort to repay them when they’ll get thrown out eventually?
It’s a waiting game. And while it sucks to wait 17 whole years, if I steel my mind for the long term like I have with my investments, I’ll end up ahead, right? Kinda.
The problem is the IRS treats any amount forgiven as taxable income that year. Assuming my payments cover the interest, and maybe a little principal, they’ll still be around $46,000 in 2036.
I don’t know what my tax bracket will be by then, but I could be on the hook for a big tax payment – which might also potentially require a payment plan, as well as eff up my taxes that year.
So forgiveness isn’t a magic bullet – I’ll have to plan for a year of wonky taxes. One big payment doesn’t beat the potential gains I’ll realize with a 17-year investment horizon. And it’s a hell of a lot cheaper than paying off the loan in full.
The IRS always wants their money. Death and taxes. C’est la vie.
I can deduct student loan interest AND IRA contributions on taxes
Talk about a one-two punch. Not only can I save for the future, but save every year on my taxes. (Other than in 2036, which just is what it is.)
Paying the minimum on the student loan (most of which goes to interest), and maxing out a traditional IRA can save me cash over the next 17 years. Pretty sweet.
My investments have returned 11% (or more!) the past couple years
I know, I know:
Past performance is no guarantee of future results.
But still, it’s pretty cool. Actually, none of my stock index funds has returned below 7%, pretty much ever.
This is where the “hypothetical” stuff comes into play. Barring a huge downturn, investing and earning compound interest is a better choice.
Or I could save and buy another property
I closed on my place in Dallas in December 2015 – and got an excellent deal. Homes were dirt cheap back then.
Right now, my mortgage is paid down to ~$148,000 and my place is worth ~$230,00. That’s a profit of over $80,000 (not accounting for repairs, transfers, and realtor fees, of course).
It’s increased in value by 26%, and Dallas is still exploding – I don’t see the value falling any time soon. This might be lightning in a bottle, but if I could find another place with that rate of return, it’d be germane to save cash for a down payment instead of plow it into student loans.
Or I could sell the place and pay the loans off in one fell swoop and profit anyway. Hey – there’s an idea.
It pisses me off that I got so on the war path with my student loans that I lost sight of other things I could’ve done with that valuable tool: money. It’s just a tool.
Instead of a guaranteed savings of 6.75% interest, I could’ve invested it, saved it, or bought another property. But I didn’t do that when time was on my side. I lost a year. Grrr. 🤬
Lesson learned. I only say this because I have a federal loan with an expiration/forgiveness date of 2036. So it’ll be taxed as income in, oh, 17 years.
Still, a one-time tax payment is much cheaper than paying back the entire principal.
Moving forward, I’m all about maxing out my IRA, and saving for another piece of property. I’m thinking Memphis – although I don’t know if I can recreate the appreciation of my Dallas place. That one took off like a rocket. 💥
I’m glad I took time to examine my overall financial picture. Without making it a priority, I might’ve never given it the care it deserves. I caught it and have a new, healthier plan.
Student loans plague a good portion of my generation, with the average balance at $30,100. Ah man, art school. Was it worth it?
No use thinking of the past. Now I have a plan for the future and that feels much better.
Have you sat down to have a ponder over your finances, including your credit cards, loans, and savings? Are you correcting course in any way?* If you liked this post, consider signing up to receive free blog posts in an RSS reader and you’ll never miss an update! And thanks for using my links to apply for new card offers!
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