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!

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