Why Now is a Great Time to Pay Down Student Loans

A view from St. Mary’s peak in the Bitterroot Valley.

If you have Federal student loans, you’ve been enjoying the temporary 0% interest and the option to not make payments at least until the end of September. Due to a controversial mandate from President Trump, there is a good chance that those benefits will be further extended through the end of 2020. This would be great news for those of us carrying Federal student loan debt.

The temptation during this time is to forgo making the payments you’d typically have to make and instead use it for something else. For us, we did hit the pause button on making loan payments for a few months. We took that time and extra cash to pay off our 0% interest credit card that our new house purchases landed on. Thankfully all our credit cards are paid in full now, and I also just sold the Chevy Spark EV this past week. That leaves us looking at our solitary consumer debt: the grad student loans.

Now that our other debts are out of the way, it would be easy to skate along and not worry about the student loans until 2021. But there are serious advantages to taking them seriously here in the last third of 2020.

Interest is the biggest thing to pay attention to. I will use our current, real numbers to paint this picture. Here are the terms for our outstanding loan debt:

Loan 1: $20,971.88 @ 5.75%

Loan 2: $8,361.93 @ 6.75%

Loan 3: $21,631.93 @ 6.35%

Under normal circumstances, this amounts to us owing $262.00 in interest alone each month. It is a significant chunk of change, and it is nice to not have to pay that now. But we can better our situation in a significant way if we continue to take action with interest paused.

If we made a $500 payment towards loans with interest, only about 47% (or $238) would go toward paying down principle, or the actual money we owe. The other $262 would get eaten up by that nasty interest. Not a good deal.

Without interest in play right now, however, your payment dollars go MUCH farther now than they usually do. A $500 payment right now goes all to principle. It lowers the total amount you owe by that full $500, not the smaller $238 if interest was involved. Making payments now can significantly lower your principle, skirting interest payments for the next few months. This is a huge advantage!

With things being relatively uncertain economically and with job security on the rocks, I will note here that keeping some kind of emergency fund in place right now is as important now as it ever has been. If you can save up at least a month’s worth of expenses (3-6 months’ worth would be ideal), you will be in a more secure position to make moves like these all-principle payments we’ve been discussing. Losing a job or having income cut right now are real threats, so it is important to make sure you have good financial footing before continuing to make progress on debt repayment.

If you have questions about your specific situation and would like a second opinion or just some friendly, free advice, drop me a line through the Contact Me page. Stay safe, my friends!

Settling Back In

With my Dad being sick and recently passing, I’ve spent a lot of time back in my hometown of Churchill, MT recently. Here is a crop field right next to where I did a lot of my growing up.

When I started this blog, I was pretty on fire to cast debt to the side and move on with life. Jos and I lived a modest life during our two years in Oregon, and with our more frugal lifestyle and my solid job (as well as some pizza delivery on the side, you’ll recall), the debt seemed to melt off pretty quick.

Life happens though, as they say, and late last year we made a few steps financially – some forward, and some backward. We saved a down payment for our house and put 5% down to get into it. We are seven months into home ownership and we couldn’t be happier. That said, the whole process ended up being much more expensive than we had anticipated. Our down payment wiped us out financially, so the things we “needed” to get for the new house ended up on a 0% intro APR credit card. Our credit card debt had been zero going into buying the home – but in just a few short months at the beginning of 2020 we were back to over $8,000 in credit card debt. Ouch!

Well, we were finally able to get in front of that debt and get it paid off without accruing any interest on any of it. I’d call that a win, except for the fact that I had sworn off credit cards long before that, and there we were using them again. But I never claim to be an expert on this blog. My writing will hopefully always document the mistakes alongside the wins. The other thing that set us back for the past year was a dumb mistake that was all my own, and that was buying my first electric car, the 2016 Chevrolet Spark EV.

The Spark was a mixed bag for us. It was incredibly economical when we drove it, not using a drop of gas. We loved how it didn’t need oil changes or any other maintenance other than tires and windshield washer fluid. It was quick and fun to drive, very nimble. It basically was a trial run, in my mind, for us to eventually get a long rang electric car. I felt I needed to convince Jos that having an electric car was a good idea before we put a bunch of money towards one.

We had the car for a year. Here are some stats about it for you numbers folks:

Purchase Price: $8,800 + $450 in dealer fees

Terms: $9,250 borrowed for 60 months @ 4.49%

Monthly Payment: $174/month + $80/month for insurance

Miles driven: ~5,000 in one year

Sell Price: $7,000

I had a heck of a time selling the Spark. Electric cars are already not popular here in Montana, and short-range electrics even less so. And for good reason. I found out quickly that the Spark’s strengths were short drives around time for groceries and social outings downtown. It was great for that, but trips outside of town were not possible due to the limited range and lack of charging stations in our geographic area. As you can see, we didn’t put nearly enough miles on the car to justify the cost.

I posted the car for sale on May 2nd, and just closed the deal on it yesterday. It took three months to sell the car, which is pretty rough!

I had some interest and low-ball offers on the car over that time, but nothing that I was interested in parting with the car for. I looked into either trading in or selling the car to Carvana for $7,800, but I quickly learned that I would need to trailer the car myself down to Denver, CO, which is a 13 hour drive for me. Hardly worth it with needing to rent a car trailer and the gas, not to mention all the time, and likely expenses like lodging and food along the way.

I did some more research and found Vroom, another online car dealer that buys used cars. I found that they DO pickup used cars, which was a huge plus. I plugged in my numbers for the car and it spit back an offer of $6,000. I was disappointed with the lower offer, and once again was not willing to part with the car for that.

Much to my surprise, a few days later, I got a follow up email from Vroom saying that my appraisal value had gone up! The new offer was $7,000. This I could do. I sat down and collected all the documentation needed, and filled out some information online to get the sale process rolling. They were very responsive and the process has been easy so far. My paperwork is submitted, and I made a $595 payment to cover the remaining balance of my car loan in addition to the $7,000 sale price. All in all, a very good experience so far, and awesome that they will schedule and pickup the car here at my house.

I am glad to be done with that car experience. I learned a lot. Having a car loan is stressful: making payments, budgeting for it, having to pay higher insurance rates on a newer vehicle. It didn’t help our debt pay down progress, and in fact it really hindered it in significant ways. If we hadn’t gotten the car, we could have used the nearly $255 per month in car payment money and insurance to go towards the student loans. But I am a sucker for cars, and I justified it. I am hoping I will be able to be content at least for the next year so we can finish paying off these remaining student loans.

I must say that I feel a bit foolish writing posts like this. But I didn’t set out to be an expert, just to learn by doing, and analyzing my mistakes along the way. I am looking forward to having a more lean budget again, and making progress toward becoming debt free except for our mortgage.