Student Loan “Dilemma”

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Like most folks out there, I don’t like owing anyone money. I don’t like owing the bank money on my first mortgage, I didn’t like owing the bank money on my second mortgage, and I don’t like owing the lender money on my student loans. Here is my dilemma… back in September I wrote a relatively straightforward article titled “Don’t Save, Pay Off Debt!” in which I said that you should list the interest rates of your cash and of your debts in descending order. If you happen to have any cash in an account listed lower than a debt, you should pay off the debt with that cash unless it’s earmarked for a specific purpose (down payment, emergency fund).

Many of us who have student loans probably locked them in at rates way under the 5% you can get any online bank. Personally, I have about $24,000 in student loans at 3.25% (currently in deferral because I’m taking classes) which would put the debt underneath the cash I have in the 5%. Logic, and math, would indicate I should just pay the minimum payment on the student loans and keep the rest of it in my HSBC Direct account (even if you factor in that I have to pay taxes on the 5% interest). In fact, since my first home mortgage is at 5.75% (fixed) I should actually be paying that debt off first before I even consider paying the student loans because it’s at a higher interest rate. And on the first mortgage, I have exactly zero chance of paying off my mortgage (over $200k) anytime soon.

I want to pay off the student loan because it’s satisfying to write a debt off the “books” but I have to keep reminding myself it’s not the smart thing to do.

{ 15 comments, please add your thoughts now! }

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15 Responses to “Student Loan “Dilemma””

  1. CK says:

    Why can’t satisfying yourself be “smart”? Does paying the loan off win in the numbers game? No of course not, but it seems from what you say it would make you feel really good and the money difference isn’t that great. So why not make yourself feel good? Call it hedonistic saving/investing.

  2. DG says:

    What a timely post! I just received confirmation from my student loan lender that my debt had been paid in full. After beating myself up for a week or so because I didn’t qualify for loan consolidation by $150. I decided to at least check one debt off my list and use that monthly amount to pay extra on my mortgage. I know some money experts might disagree, but I feel good. That is what matters in the end!

  3. jim says:

    I see smart in this scenario as the financially correct decision and I as much as I’d like to pay off the debt, I can’t because it’s not the financially correct decision. This isn’t something that tears me up inside or anything, the emotional factor is that big of a deal (and I only think about it when student loan articles come up, which was pretty frequently last month).

    If it really does burn someone on the inside, then the qualitative factors outweigh the quantitative and they should pay it off.

  4. dimitri says:

    Hey Jim, there are a number of good reasons to not pay off your student loan. Here they are:
    1. There are tax advantages to student loan debt if you make less than a certain amount of money (I think it’s around $60ish thousand per year).
    2. Your rate is fixed at a “generational” low interest rate of 3.5% and it may go lower depending on how you have the loan consolidated. For example, I get a .25% discount on my interest rate if I pay with an automatic deduction from my bank account and I get another .25% discount after I make 48 consecutive payments with no lates.
    3. You’ve already been extended the money. You never know when credit might be hard to come by. In other words, the option to leverage has a positive value. (You control the leverage by moving the principal value into or out of a riskless asset). This is why I didn’t pay off my student loans in 04 even though the savings account rate was 3%. The 1% cost (after taxes) was worth the option to keep the cheap fixed rate debt around.

    As an aside, your money might be better off in US treasuries than emigrant direct. You can open up an account with the treasury department at US treasuries are not subject to state income tax. So if your federal marginal tax rate is 25% and your state tax is 5%, then a treasury yielding 5% is equivalent to emigrant direct rate of 5%*.75/.7 = 5.357%. The 3 month treasury is yielding 5.056% (5.417% equivalent). The 6 month treasury is yielding 5.313% (5.692% equivalent).

    (and yes, I’m the dimitri that lived across the hall from you freshman year)

  5. jim says:

    hey dimitri, you gotta email me, use that contact form if you can buddy

  6. Julie Ali says:

    We paid off our student loan as fast as we could (it was the first thing we did after we got released from university). The money we used to pay the student loan was then put to paying down the rental house mortgage. We retired that mortgage and now we are working on our personal home. While it makes sense to do a lot of things, I tend to believe it makes the most sense to do what you want to do and in the final analyis, if you do what you want to do, you will be happy.

    I encourage you to pay off the student loan. Then supersize your biweekly mortgage payments every year, put down a lump sum payment every six months and pay the house mortgage off in 10 years or less. We have about the same size mortgage as you and we will do what it takes to pay it down ASAP. Why work harder and longer than you need to in order to be a bank slave? It is better to work harder and longer for the first five years of the mortgage, coast a bit for the next five and live happily ever after for the mortgage free period.

  7. Hawkmoon Nine says:

    A few years ago, I had about $6000 in credit card debt and $6000 left on my car loan. I kept trying to pay off the CC first (higher interest rate), but what would happen was that I would pay some off and put some back on. I was paying it down, but rather slowly. I switched to paying as much as I could on my car loan figuring that the amount I owed wasn’t going to go up ever and I could clear at least one loan first.

    I ended up paying off my car loan in a year, and then putting that same amount plus the minimum I had been paying all towards the credit card. Knowing that I wasn’t paying my CC very much made me limit what I put on it. That debt was retired in less than 8 months. I think there are certain circumstances where paying the lower interest rate debt first makes sense.

  8. Matt says:

    I didn’t have much of a choice about paying off my student debt first…unlike my (minimal…on the order of $1000) credit card debt, the student loan collectors got court orders to force my employer to take it out of my paycheck. And when the 10%-of-net-per-garnishment limit was too low for them, they subdivided it among themselves a few times, so that instead of two garnishments I had 18.

    When I managed to find under-the-table consulting work to supplement my regular income, I sent the money in by money order in order to get them paid off faster. The middle-of-the-night phone calls had gotten to be too much. I was tired of living like a pauper on a job that at least nominally paid $35,000/yr. I knew that they couldn’t actually send me to prison like they kept threatening to do, since we don’t have debtor’s prisons in this country, and I wagered (correctly) that the line between organized crime and collection agencies still isn’t quite blurry enough for them to make good on the veiled threats against my friends and family that a few of them made…but it was still stressful to be harassed for years by people who acted that way, and I wanted them out of my life as quickly as possible.

    During this time period, my credit card debt swelled quite a bit, since a lot of months I was living almost entirely off of credit cards. But no bank that issued me a credit card ever did more than make a single reminder call if I was late with a payment. And now that I can sleep again, and have a better job, I’ve been able to pay off the credit cards, too.

    Did I make the numerically right decisions? Not according to your math. But interest isn’t the only cost of student loan debt, and the other costs were killing me. (Interest can be paid with mere money. Student loan debt was draining the energy out of me to the point where I repeatedly considered suicide.)

    Other than having gone to college in the first place (worst mistake of my life to date…and hopefully the worst I ever make), I still don’t think my decisions were wrong under the circumstances.

    • Ann says:

      Hi, Matt, just found this site. I appreciate your candid comments regarding your harrowing experience at the hands of student loan collectors. After graduation, I went through an extreme period of un-employment lasting about 3 years, was told I “lacked experience” (degree obviously didn’t count). I worked various temporary jobs. I finally “bought” a job through one of those fee (1 month’s salary) based agencies. During that time my (now consolidated) student loan balance continued to grow with “capitalized interest” until the balance today (yes, I’m still paying on it 20 years later) is twice the amount I borrowed initially. I have not missed a payment in the past 13 years, however, on my salary, I cannot make payments high enough to substantially reduce the balance. You see, even with the degree, the jobs I have gotten are still the entry-level type with minimal pay. I agree, going to college is not all its made out to be (thanks for bringing that out) and getting the student loan to do it made it even worst. If I had gone to work instead, I could have gotten that “experience” and the company probably would have even paid for college. So much for hindsight.

  9. jim says:

    Matt – All my loans were subsidized Stafford loans and I’ve never received any middle-of-the-night phone calls, if that were the case I’d definitely pay them off ASAP. That would be a qualitative benefit that significantly outweighed the numbers.

  10. Kate says:


    Just out of curiosity, how long did the student loans go unpaid before they finally garnished your wages? I’ve had 3 kids go through college on student loans, and none of them have ever talked to a collector – perhaps because they’ve all been paying the loans as agreed.

  11. Matt says:

    They started calling my mother’s house before my bus back to Michigan had arrived. It took me six months to find a job, and (being naive) I let the name of the company I was working for slip out during one of their calls to me. The next week, my boss came into my office with the first set of court papers.

    This was _after_ I’d learned the hard way never to pay them by check. (They took the routing and account numbers off my check, destroyed the $500 check I’d written and could cover, and issued a bank draft for $2500, which my bank honored and then billed me for. It was only a couple of years ago that I regained the ability to open a checking account…because ChexSystems records you as a check-bouncer even if you didn’t write the check that bounced.)

    • Steph says:

      Sounds like you should have taken them to court. Pretty much EVERYTHING they did to you is illegal!

  12. Amanda says:

    Jim – I totally sympathize with you. I have the same dilemma on a regular basis – I hate having the student loan debt hanging over my head, especially when you try to track your net worth on a regular basis and you want to see that number keep ascending! However, like you, I try to remind myself that it is a “good” debt, and to be logical about it…

  13. LAMoneyGuy says:

    I paid mine off. I only owed about $5,000 by the time I had gotten my financial life in order. I built up a small emergency fund, paid off the CCs, and started funnelling all of the money that had gone towards CCs to student loan. But money markets were paying like 0.85% at the time. We’re talking about when ING Direct’s 2% offer was a big deal!

    The emotional side of paying it off is awesome. I want to owe no one at any time. At the same time, I participated in a 0% BT to payoff my car loan. I don’t even consider it debt, because it is at 0%. But fact remains, I owe them that money.

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