My wife and I are halfway through paying off student loans. When the federal student loan payments were paused due to the pandemic, we made a different decision than most. Instead of using the money that was going towards the federal loans for something else, we added it as an extra payment towards the private student loans. We also made a couple lump sum payments along the way. This decision to pay the private loans off early saved us several thousand dollars from interest that didn’t accrue. And as of July 2022, those loans are now 100% gone. We wanted to pay them off before the federal loan payments came back, so we made one final lump payment. August has been a nice breather month from student loan payments. The government will decide on when payments will start again and if there will be any broad student loan forgiveness this month. But I won’t wait for them to act before I do. My wife and I are faced with the classic dilemma: do we focus on investing or on aggressively paying off debt?
Invest or Crush Debt?
While we paid off our private loans, we still invested a good amount. We’ve maxed out our Roth IRA’s ever since we started our careers. I contribute more than what my employer matches to my TSP and Marisa contributes what her school matches to her 403b. If we continue paying our current monthly amount to the federal loans, it will take roughly 5 years to pay them off. But I’m not interested in taking student loans into our 30’s. And paying for student loans gets in the way of other goals, like buying a house. To pay them off faster, the money has to come from somewhere else. I understand the math and why investing now is more powerful than investing 10 years from now. But being out of debt and having that extra cash flow is alluring. So I decided to weigh the pros and cons of paying off the federal loans early at the expense of investing in our Roth’s.
The Three Options
I came up with three monthly payment options. The first is what we’ve been paying: $500/month. The second is $1000/month, which is what we pay now plus what we put monthly towards one Roth. The third is $1500/month, which is what we pay now plus both Roths. I care about how long it takes to pay off the loans because I don’t want to be paying off the loans while also paying a mortgage. The faster we pay off these loans, the faster we don’t have the psychological burden of the debt. While those two reasons are important to me, I don’t want our path to financial independence to be significantly lengthened either. I want to balance quickly paying off the debt while not seriously affecting our path to FI.
My Conclusion
If we go with option 1, it will take close to 5 years to pay off the loans. Even though we’ll put more into investments, 5 years is too many. Paying off the loans with option 2 would take almost 2 and a half years. And option 3 would take a year and 8 months. The second two options are both more appealing than the first. I especially love the thought of having no student loans in less than two years. But I’m also taking a look at the longer timeline. If option 3 extends our path to financial independence by a bunch of years, it’s not worth it.
To compare how each affects our path to financial independence, I plugged all the numbers into a compound interest calculator. I’ve plotted the three options together. On the x axis, I have time in years and on the y axis I have investments as a percentage of our FI number. For option 1, I inputted how much we’re investing now and plotted out when we’ll reach FI. I did the same for 2 and 3, taking into account the lesser amount that’s invested while the loans are being paid off. Paying off the loans early and more aggressively doesn’t have a big long term impact on reaching financial independence. The difference on the chart is one year, but it wouldn’t even be a whole year. I rounded up. And these plots don’t count that we’ll probably start investing the entirety of the student loan payment when we’re finished.
What If My Situation was Different?
We have a couple factors that I suspect are working in our favor. The first is that we are already 5% along the way to FI. So even though we’re reducing new investments, this foundation that we built is still working for us. Also, we’re still investing. The amount we’re putting in has declined by ~45%, but investing anything is better than investing nothing at all. To expand the scope of the case study, I decided to run it again twice. In the first scenario, I set the starting amount to 0. When I did this, it increased the time to FI by four years over the baseline option 1. And in the second I kept the same starting amount but now the investing amount is $0 in option 3 until the student loans are paid off. Here, the time to FI increased by 2 years over option 1. Having the investments that we have now makes a 5 year difference. And investing nothing while paying off loans would only set us back by a couple years.
What to Do With Student Loans and Investing
Going through this exercise showed me that it’s okay to cut down on investing for a little bit in order to pay off debt. I wouldn’t delay investing completely for 5 years, but if you delaying for a couple of years it will turn out okay. Saving up a good investment foundation makes it easier for us to divert some investment money towards the debt. It’s certainly better than starting from 0. Both investing and paying off the student debt is a priority for me. It doesn’t make sense to stretch out the debt repayment longer. It also wouldn’t be good to stop investing altogether to take care of it. Taking option 3 is a healthy middle between the two. It’s an aggressive plan to pay down the loans while still contributing to our tax advantaged retirement accounts. It helps us rest easy at night knowing that we’re making progress on both priorities, which is what personal finance is all about.
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