Wednesday, January 16, 2013

Resolutions 2013: Paying off my First Student Loan

To anyone drowning in their student loans, hello. Welcome to my world.

Sorry, Justin.

We've been doing a lot of math over here lately. My current temporary employment contract is almost up, and it's time to accept a permenant placement. (Or "a real job" according to the curmudgeony old man who failed to give us a house loan). The hospital where I'm working now wants to hire me but isn't able to pay as much as my contract company. None of this is a surprise. You do get paid significantly better for moving across the midwest, living out of boxes in someone's basement, paying a mortgage on your empty house in a different city, and working a high-need position with no job security or training. 

A few months ago, I organized all our debt in a spreadsheet and formed a general repayment plan to pay off the highest interest accounts first. Since then, we sold our first house and paid off the related accounts (that mortgage, appliances, random Lowe's charges from before moving).

That meant that the next highest interest rate on the list was one of my student loans. It's time! Oofta.

In Novemeber, we applied for the government's Income-Based Repayment plan. There are a few different versions of this plan, so look up specific information if you're looking into this. Every year you have to re-qualify by sending in your tax information as well updating your marital status, family size, and amount of loans. Basically, as long as your yearly income is less than your total original loan amount you qualify. Their math formula then computes a reduced payment that it thinks you can manage. After 25 years of this, the government forgives any remaining balance.

The payment amount the government calculated for us was great (about 10% of a standard 10 year repayment amount). However, there were a few reasons this plan was stressing me out.
  • First of all, there is no guarantee this program will be around in 25 years. Hello, fiscal cliff.
  • In 25 years, I could have children in college and still be paying off my own college loans. WHAT.
  • Our payments would be less than the interest accruing, so six figures of student loans at 7ish percent interest x 25 years ... is a very large amount to carry on our credit score. This could prove problematic whenever we buy our next house.
  • The real deal breaker: we would have to PAY TAXES on the amount forgiven.
I didn't bother to finish the math. The whole thing just seemed too risky. So while IBR definitely isn't a good long-term plan for us, it does give us flexibility to direct our monthly payments (beyond the reduced amounts) to whichever loan we like.

Here's to my first resolution of 2013: paying off my highest interest student loan this year! It's at 8.25% interest (after a rate reduction for using autopay) and weighs in at $27,125.21.

Why so ambitious? Oh, because that's only about 15% percent of my student loans and we can always start on Jon's when mine are done.

Wait Heather ... aren't you the only one working and your husband is a student and you just bought a house and you have an addiction to sparkly things? Well yes. Consider this a yearly forecast for lots of posts about budgeting :)


  1. Anonymous8:15 am

    Dad & I are proud of you and your financial goals with your loans. Let us know how close your goals are at the end of the year. -Mom H

  2. I like that you have balanced math with common sense (aka not trusting the government). Good luck with the budgeting!

  3. I had a good laugh at that Justin image. I think I'd like that lecturer. :) Jokes aside, it's great to have a plan and know how to do the math when it comes to paying off debts. I think it's also smart of you to discern what payment options are beneficial and which are risky, so you can also come up with backups just in case. As for your spending habits, I think it's a good idea to come up with a monthly budget, so you can keep track of all expenses and see where you can save money on. Good luck with paying off your loans, Heather!

  4. Some people do get pinned down by student loans. This happens once they fail to make a payment. It's a snowball effect and would, most probably, happen in the succeeding payment periods. Keep the monitoring sheet you have now and always allot a fixed portion of your income for the debts. It wouldn't be advisable to get the money from the budget's extra.


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