Why I’m Not Paying Off My Student Loans Yet

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. 

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  1. Good thing I don’t have any loans – all thanks to scholarships!

  2. Honestly, I think it probably depends on the size of the loan and the payment. For me, I had a payment of over $200/month. I wanted to get rid of that thing as soon as possible. I also hate debt, so that motivated me even more. Yet, if the payment was $50, I may not have been in such a big rush. Of course, that would probably mean the loan was smaller – so I may just get rid of it and be done.

    • Yeah, a payment over $200 would definitely cause me to work harder to pay them off. Right now, my payment is so low in the grand scheme of my financial situation that I don’t really mind it. That being said, I wouldn’t rule out the possibility of sending a lump sum payment in after I sell my condo just to have zero debt overall. It’s tempting but I keep myself grounded by remembering that crazy low interest rate!

  3. I’m definitely working on paying the ones with the highest interest rates first. I want them gone! Almost all of mine are at 6.8%.

  4. Anne @ Unique Gifter says:

    Wow, that is a great interest rate! Definitely worth keeping around!

    • I thought so! It really doesn’t bother me too much, but I of course might change my mind at some point. It will depend what my options are

  5. Exactly! Some of our loans we totally maxed out what we could take to help us live on because the interest rate was so very, very low. But that is not the case for all or most of our student loan debt– in which case, the low rate we have on a few of the loans, really is eaten up by the much higher rates on others. This, is where we didn’t manage them all that well. Now the real work begins. That was a great choice you made 14 years ago!

    • Thanks! Despite being burdened with credit card debt at the time, at least I made one choice the right way… 🙂

      I know what you mean about the competing interest rates–that’s what spurred me to get rid of my grad loans ASAP. Good luck to you!

  6. Wow, that’s an awesome rate Jen! I’d likely do the same exact thing. I hate having debt, but that rate really can’t be beat.

  7. Kyle @ Debt Free Diaries says:

    That rate is killer! I believe the loans I have average around 6.8% which is still lower than most credit cards, but much higher than I’d like to be paying. 1.625% is less than the estimated inflation rate so that’s a steal of a deal for you!

  8. I’m at the dreaded 6.8% on a few of the loans, and about 2% on the others. I’m throwing every extra penny I can at the loans, but am killing them from highest interest to lowest. If I were in your shoes, I probably wouldn’t pay it down either, especially if you have the same amount of money invested earning a TON more.

    • Good luck with paying yours down! Hopefully you’ll get to the point that the 2% ones are all that’s left and you can relax a bit and focus on other goals

  9. I just paid off the last of my $26,720 student loan yesterday. It had a 5.5% variable interest rate, so I definitely tried to pay them off as quickly as possible! It took me 17 months.

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