I figured out the secret to paying off student loans! Are you ready? I can break it down into three easy steps:
- Save up enough money to pay off the loan
- Write a check for the pay-off amount of the loan
- Send that check to your student loan company
Okay, so it’s not really breaking news. It really is just that simple! Check out the letter I put in the mail last week!
Inside that envelope is a check for the amount of $3,363.15. It paid off one of my student loans, leaving me with just six more student loans at a combined debt of $10,878.51.
I Saved $403.25 Paying My Loan Early
According to my calculations, if I had made minimum payments on that loan for the next six years then I would have paid $403.25 in interest (assuming the 3.8% variable interest rate stayed flat) over that time period. I just spent $3,363.15 to save $403.25 for a 12% total return on my investment.
Sure, if I wanted to be a little more risky I could have taken that $3,363.15 and invested it. I’ve recommended that before, and there’s a very real chance you could make more money through the investment. It really just depends on your priorities.
If your priority is to increase your net worth as much as possible and assume any risk it takes to get there, then by all means invest your money.
But if your goals are to increase your cash flow by eliminating monthly payments, get a guaranteed return on your investment by avoiding future interest payments, and get rid of a loan that cannot be discharged via bankruptcy, then paying off student loans is the right way to go.
Don’t Pay Loans Too Early
You might be wondering why I paid off my loan in one big chunk instead of paying it off over time. I certainly would have saved more money on interest if I had made larger monthly payments.
But what if I paid so much that I didn’t have enough money to meet my monthly obligations? Then I would have had to borrow money to pay my day to day bills. Let’s pretend I put extra expenses on a credit card at 15%. That would mean I aggressively paid off a loan at 3.8%, but then needed a 15% loan to pay my bills. That’s not smart.
I know it’s exciting to pay off loans, but make sure you don’t do it too soon. That’s why I wait until I have enough money to pay a whole loan and not worry about whether or not I can make my rent payment.
Carnivals Last Week
Yakezie Carnival at Prairie Eco Thrifter
Carnival of Financial Camaraderie at My University Money
Totally Money at Family Money Values
Festival of Frugality at The Frugal Toad
Carnival of Wealth at Control Your Cash
Carnival of Financial Planning at Skilled Investor Blog
Carnival of Retirement at Retire By 40