Today we welcome back our normal Thursday contributor, Jen from The Happy Homeowner!
Every year, more than 20 million people attend college. With over 60% of those people taking out student loans to finance their education, it’s no surprise that, in the U.S. alone, there’s nearly one TRILLION dollars of outstanding student debt. With numbers like this, it’s hard to imagine why anyone wouldn’t want to dig themselves out sooner rather than later.
The Beauty of Consolidation
I happen to not be one of those people. But before there’s a reaction like in the movie scene where the music grinds to a stop and everyone does a collective double-take, I’ll explain why in one simple word: consolidation.
When I enrolled in college 14+ years ago (eek…dating myself??), student loans weren’t nearly in the crisis mode they’re headed for today. In fact, borrowing was fairly easy—and at low interest rates. I worked hard to ensure that I didn’t need to take too much debt on to finance my education by earning scholarships, but I still graduated with some balances tied to my name.
Within a year of graduating, a letter arrived in my mailbox. This (magic) letter was basically asking me if I wanted to consolidate of my loans (they were all federal Stafford loans). The kicker? If I acted in the next 30 days, I could lock in an interest rate of 1.625%….for the life of the loan! That’s one heck of a low interest rate student loan if I ever saw one.
Signing and returning that letter was the best financial decision I ever made in my early 20s…
Making My Money Work for Me
To this day, I’ve only ever paid the minimum payment plus $50 each month on the consolidated loan total. I’m in absolutely no rush because I’ve been able to earn more through interest on investments that I’d save on paying interest on the loans.
It’s for this reason that I’ll most likely never pay off the loans early. Why lop off a nice chunk of my savings that is in high-yield accounts and CDs to pay off loans that barely impact my budget?
Paying the High Interest First
Even with the awesome set up I have with my undergrad loans, I did scratch the itch to attend grad school…twice. The first time, I was quite savvy and worked the system to earn my Master’s from Harvard for a mere $500.
The second time, I foolishly took out loans for another Master’s degree. This time, oh how times had changed as my loans came along with a whopper of a 6.8% interest rate.
Knowing it would cut into my budget and savings goals if I didn’t get rid of the loans ASAP, I set out to clear as much as possible. In the end, I paid off every cent of the ~$24K in 2.5 years. Basically, I punched Sallie Mae in the face Ninja style as I sent every extra penny I could to those loans. By focusing on the high-interest grad debt, I ended up paying less in interest and freed up much more room in my budget once they were kicked.
For me, this system of paying according to interest rate has always worked best. While I truly hate the idea of debt, I can’t complain much when that wee bit of undergrad debt sits there without collecting much of anything in interest!
How have you managed your student loans?
** Lance’s Two Cents ** If I were Jen I’d be paying the minimum on her fixed rate sub 2% student loans forever. No extra payment at all! Well… unless having debt ate away at me on the inside.