Long-time readers of the blog will know that I originally planned to have our student loans paid off within two years of graduating fellowship, or August 2021. Over time this goal evolved for a couple of reasons: I was able to get my and my wife’s loans refinanced to exceptionally low rates (which only went lower, most recently 0.15% and 0.59%, respectively), and the onset of the COVID pandemic taught me that I valued emergency savings and free cash flow more than I had originally thought.
Therefore, the plan for some time has been to pay minimum monthly amounts and stretch both loans for the full 5-year term. With inflation at over 5% it seemed like a slam dunk to string them out for as long as possible.
But there have been some recent changes to my overall financial picture. I have received a 6-figure inheritance from my father, and I am anticipating a decent bonus in December (unlike last year when my salary was cut and bonuses were eliminated).
All this means that our loans are becoming a smaller and smaller percentage of our balance sheet, and the financial consequences of their management have correspondingly shrunk. It would be one thing if interest rate arbitrage could increase our net worth by 5% in 3 years, but what about 0.5%?
That’s the situation I found myself in as I once again manually updated my wife’s loan in Personal Capital because it wouldn’t sync with SoFi correctly. And I wondered to myself how much were we actually saving? Some quick calculations showed me that paying off the remaining $16,983 would save me a grand total of $167 in interest. But if that money were instead invested into the market with an expected annual growth of 8%, it could instead earn $4,411 in 3 years, for an actual savings of $4,244 total or $1,415 per year.
So the question became, how important was that amount to me versus the peace of mind and convenience of having that account closed forever? After 5 seconds of thought I decided it wasn’t all that important. And that student loan is no more.
Of note, my own student loan is a higher balance and a lower interest rate. Paying early would save me $204 in interest and cost me (theoretically) $24,381 in compound gains for a loss of $24,177 total or $8,059 per year. So I am not rushing to do this just yet.
This payment brings our total student loan burden down to 5-figures and reduces our minimum loan payments to about $3,000.
The point of all this is that raw math doesn’t have to drive every decision. Take stock of your priorities and make sure that your decisions and strategies line up with them.
Getting rid of a loan payment is awesome–congratulations on dropping one for your household!
I struggle with the question of interest arbitrage, especially when debts are relatively small. I ended up riding out my 0% car loan to the end, but the last few months were a struggle.