Today, Jacob from Dollar Diligence shares how and why he went full speed ahead and paid off his student loans in less than a year and a half.
As a recent college graduate, I found myself overwhelmed by my student loan debt. I graduated with $25,000 in loans, which seemed like an insurmountable mountain to climb on my high school teacher’s salary. I was incredibly anxious and stressed about paying off these loans, and worried about how this much debt would impact my future.
In order to take this bull by the proverbial horns, I made a decision. I wouldn’t let this student loan debt rule my life — I would take a proactive approach to paying off my student loan debts.
How I Did It
I was already working full-time as a high school math teacher, and I decided to pick up freelance writing and photography jobs. I moved in with my aunt and uncle, who lived nearby. By doing so, I saved quite a bit on housing and living expenses. I trimmed my budget even further by avoiding going out to eat and to bars, and by just generally being frugal and living below my means: not spending a lot on clothes, electronics and other unnecessary expenses.
In addition, I made sure to be “diligent” with every dollar I spent (hence the name of my site). I tracked every dollar that came in and every dollar came out. This is essential if you really want to attack your debt.
I also was able to save a lot by refinancing my student loans, shortening the repayment terms and interest rates. You can learn more about the process here. I devoted all of my money towards paying off my student loans. And within 15 months, I had met my goal. I paid off my $25,000 in student loans, and started working towards my next financial goal of retiring by my mid-30’s.
What I Could Have Done Instead
When I made my plan to pay off my student loans early, I made this decision knowing that it was not necessarily the wisest financial decision. The interest rate for some of my student loans (particularly my federal student loans) was relatively low. This meant that I could likely have gotten a better return on the investment on my money in the stock market than in paying off my student loans. The $25,000 I put towards my student loans could have been invested in stocks — and perhaps I could have ended up with more wealth than I currently have today.
For example, if my return on investment was 7%, and I was paying around 2% in interest on federal student loans, then perhaps it would have made more sense for me to put extra money into investments and see a 5% gain rather than towards paying off this debt. That might have been wiser from a financial perspective than putting the same amount of cash towards my student loans.
There is also the question of the tax deduction. Student loan interest is tax deductible, so by paying off my student loans early, I am no longer able to deduct the amount that I pay in interest each year on my taxes. The student loan interest tax deduction allows you to reduce your taxable income by up to $2,500 per year if you meet the income qualifications, so by paying off my student loans early, I knew that I was giving up a substantial tax benefit.
Why I Did It
Yet despite these financial realities, I know that I made the best possible decision for me and for my life. I hated having student loan debt hanging over my head, and feeling constant dread about the sheer amount of my student loans. While it may have made more financial sense for me to put my money into the stock market instead of towards my student loans, on a personal level, it was far better for me to pay off my loans and get out of debt as soon as possible.
For me, having student loan debt was incredibly stressful, and it produced a tremendous amount of anxiety in my life, like many other borrowers. I spent a fair number of sleepless nights thinking about how I would be able to buy a house or a car with my student loan debt. I worried about being able to retire, or how I would ever manage to save up for things that I wanted to do, like take vacations, when I was always tied to these massive student loans. I was (quite literally) worrying myself sick about my student loans. While it may not have made a lot of financial sense to pay off my student loans early, it made perfect sense for me.
Of course, everyone’s situation is different. For many people, it may be better to continue paying relatively low interest student loans for 10, 20 or 25 years while they invest in the stock market, real estate or other investments. Still other people may choose to do what I did, and pay off your student loans as fast as possible. Evaluate your own circumstances to determine what the right course of action is for your life. For me, getting out of student loan debt was a priority — and something that I will never regret.
Jacob runs his own personal finance blog over at Dollar Diligence. Through meticulously watching his money and extreme frugality, he was able to pay down over $25k in student loan debt in just 15 months. You can learn more about his story and follow him here.