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Revisiting Paying Off Student Loans

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Student loans have been on my mind ever since I read about the latest legislation dropping Stafford rates earlier this month.

Here’s a brief recap of where my student loans are now. I consolidated my Stafford loans years ago, locking in a very comfortable rate of 3.25%, and the balance currently stands at a little over $22,000. The loan had been in deferment as I completed my MBA at Johns Hopkins, which has stopped the clock the last few years, but with my graduation the interest has started to accrue again. We earn too much to be eligible for the student loan interest tax deduction (certainly not a bad thing) and thus bear the full brunt of the 3.25% rate. Once again, I’m revisiting my student loan dilemma.

$22,000 in student loans at an effective tax rate of 3.25%. We also have a mortgage of around $220k at an effective tax rate of 4.3125% (the rate is 5.75% but it’s tax deductible, in the 25% tax bracket the effective rate is 4.3125%; we could consider only the deduction above the standard deduction for couples $10,900 but that begins to get overly complicated). Math says that if we were to pay down a debt, it would be my mortgage first because it’s at the higher tax rate. So I should never make more than the minimum payment on my student loan unless we have paid off the mortgage (which I envision is something that won’t happen for quite some time).

Proponents of Dave Ramsey’s Debt Snowball approach would say that you should pay off the student loan first because it’s the smaller amount (ahh, psychology). I personally don’t subscribe to that idea, I go by the Blueprint for Financial Prosperity Common Sense Payment Strategy (okay I just made that up, it’s how most people who understand interest rates and math would pay down their debt, I just added some color). While I anticipated this result, it’s always good to revisit things as situations change.

So, the student loan is here to stay for the foreseeable future.

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7 Responses to “Revisiting Paying Off Student Loans”

  1. Jenna says:

    I absolutely agree with paying down the higher interest debt first. It just doesn’t make financial sense to do it any other way.

    For those Dave Ramsey Fans, I do say, do what works for you! Paying down the debt period is more important than anyting else, but always pay down the debt with the higher interst rate first if you can, it wills ave thousands over the life of the loan!

  2. grumpy says:

    Dave Ramsey and Suze Orman would also suggest paying off student loans as soon as possible because student loans are no longer dischargeable in bankruptcy. (DR especially discourages bankruptcy but accepts it in rare instances).

  3. Jeanne-Erin says:

    You know, it’s silly, but i keep getting offended whenever you put down the debt snowball approach. I’m sure I’m not the only one using it to pay down my debt. Yes, it may not make as much sense financially, but it’s WORKING for me, and the other methods did not. When you say that it’s the opposite of common sense you are basically calling me dumb. I’m not.

    It makes me question my desire to read your posts, which is something you should be aware of.

  4. jim says:

    Jeanne-Erin: In this particular post, I said that “Math says” I should pay down the largest debt first. I never said paying the highest inrest rate was common sense (at least in this post) and I never said paying down the smaller debt first was dumb. I’ve said in the past that the snowball technique works because it’s relies on psychology, rather than math, to be effective and I believe you should do whatever works for you.

    I find that proponents of Dave Ramsey are passionate to a fault, as if the man is beyond reproach and everyone should hold their tongue about what they feel about his ideas. Common sense does say that you should pay down your highest interest rate first, but that doesn’t mean it’s right for everyone and I don’t believe someone who days his snowball approach is dumb.

    Lastly, while I am grateful anyone would read this site and thankful people do, if you aren’t interested in hearing my opinion, you shouldn’t be reading.

  5. Jeanne-Erin says:

    Forgive me, I hadn’t meant my comment in the way I now see it reads.

    I find your posts valuable, but wanted to inform you that you may lose readership (not me) who could benefit from what you are saying.

  6. jim says:

    I understand now what you mean. I’ve never said the snowball technique was dumb but you also have to admit, to call the other way “common sense” isn’t putting down that Dave Ramsey’s technique.

  7. matt says:

    Help!

    I owe $60,000. in school debt. I consolidated my loans however the payments are killing me! With my other debts I can/t seem to get ahead. What can I do to get this manageable


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