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I graduated with $ 19,000 in student loan debt, which seems like a drop in the bucket compared to other student balances that are approaching six digits and beyond. Yet a bill of $ 19,000 was enough to scare off any new graduate.
Taking out student loans was a necessity for me to go to college. My family could not otherwise have afforded me to attend a public school a few hours from my home. Initially, my goal was to get rid of this debt as quickly as possible; I would consistently make monthly payments above the minimum amount required in order to achieve this goal.
In fact, I had become so aggressive about freeing myself from any debt that a financial planner I spoke to actually told me that I didn’t need to run to pay off the balance though. quickly. Like she said, my interest rate was low so it was okay to prioritize other things.
At the time, however, I was extremely uncomfortable carrying debt and couldn’t wait until the day I made the last payment on my student loan and closed the account. His words didn’t carry much weight with me – I always thought I would feel more secure financially by paying off my debt quickly.
Over time, however, I went from wanting to pay off the rest of my balance in a year to deciding I was better suited for other goals. And while the low interest rate was a factor in my choice, I had other, more powerful insights that ultimately solidified my decision.
My federal loans have a low interest rate
Interest rates on federal student loans change every school year and have trended downward for the past decade, however, there have been a few years where interest rates have actually gone up. If you have taken out a grant student loans for the 2009-2010 school year, for example, you might have received a fixed interest rate of 5.60%. However, if you had taken out a federal subsidized student loan for the 2015-2016 school year, your interest rate could have been around 4.29%. The 2020-2021 school year actually saw the lowest fixed rate for subsidized federal student loans: 2.75%.
The interest rate on my federal loans is about 3.7%. And because I had already paid off a large chunk of my balance since graduating, my interest charges are pretty manageable. Therefore, I feel comfortable making monthly payments slightly above the minimum amount required instead of spending a lot more money on debt.
I have no other forms of debt
I was carrying credit card debt and have had a few instances where I almost maxed out my credit card, but have since reigned over my spending and paid off my balance. Now, if I make purchases with my credit card, I make sure to pay them off in full each month. Not having a credit card balance makes it easier to manage other aspects of my financial life, including my student loans.
My student loan debt is really the only major debt I carry. I don’t have a mortgage, car loan, or personal loan. Having less debt to account for allows me to take my time to pay off this low interest loan so that I can redirect the rest of my income elsewhere, such as into investments that could help me build wealth.
I became more comfortable with debt
Growing up, I knew debt was a real problem for my family. And as a college graduate, I wanted to get out of debt as quickly as possible. For many, having a monthly payment for a balance they owe seems like an emotional and financial anchor that they must continue to drag. Often times, high amounts of debt can actually hamper a person’s ability to devote money to other goals or expenses.
But not really having other forms of debt helped me make a slow transition to feeling more emotionally comfortable with paying off my student loans over a longer period of time. If I had had other loans to repay, I probably would have felt more overwhelmed by the multitude of payments I made each month. I would feel more inclined to get rid of it as quickly as possible.
I could get a better return on my money by investing it
I used to make monthly payments much higher than my minimum in an effort to get out of debt faster. But I realized that by spending extra money on my student loan debt rather than on investment opportunities, I was becoming debt free faster, but I was not building my assets any faster. And since I want to be the the first millionaire in my family, it was important for me to start investing more.
In fact, I had an experience where I made a pretty large student loan payment (well above my minimum required amount) and realized far too late that if I had invested that extra money instead. in an action that I had researched and was considering buying, I would have more than tripled the money over a year later (note that it is not common to triple your money in less than ‘a year).
I am a long term investment strategy, however, I know that each year makes a difference when trying to build your wealth. And since I had never before known how to save for retirement and build wealth or why it all matters, I felt I had to start catching up as soon as possible. I got off to a good start with my brokerage account and Roth IRA via loyalty (and I tracked my progress with the mint app) but I still have a long way to go. So I decided I didn’t mind paying off my student loan debt slowly if it meant I could grow my investments much faster.
I intend to invest my money while I pay off my student loan debt, however, I will not be making loan payments as aggressively as I used to.
The low interest rate on my loans and no other forms of debt made me feel emotionally and financially comfortable carrying my debt longer. Now, I will redirect the extra money I would have used to make larger payments towards my investment goals.
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