I had a great undergraduate academic experience at the small liberal arts school I attended in Pennsylvania. I received a lot of grants that turned a tuition beyond my reach into a very reasonable sum and I only graduated with $5,000 in loans.
The loans I’m talking about are from a misguided decision to pursue an MBA. At the time I was working in state government and I wasn’t sure what to do next but I knew I wanted to move on. I was only a couple of years out of college so I decided more schooling was the answer. I was accepted by a program and I signed on the dotted line for loans that exceeded the cost of the classes themselves which were already steep at $1,000 per credit hour. I took my studies seriously for the first semester and then stopped attending class half way through the second semester. If I had kept on going I would have paid $100,000 for the degree. I honestly can hardly decipher the paper trail of how I was able to basically defer (or was it forbearance?) my tab for so long without ever defaulting. I was so angry about them that I didn’t want to face them. I had received no value for the expense.
This was a costly life lesson about easing into things, being more thoughtful and intentional and heck, maybe even trying something out to make sure that it’s the right move before jumping in! As I’ve grown older and matured, I can’t relate to that sense of being so adrift and unaccountable to my future self that I would make that decision.
My interest rate on my loan is under 4% and my remaining balance is $24,000 with a scheduled payoff date in 2021. I believe that if I paid this balance off today, or if I made it a life priority to aggressively pay it down quickly, it would be damaging to my personal finances. Here are the reasons why:
Paying off student loans are not tax deductible. If I only have enough to save or pay off my debt, I have to pick save. If I put our earnings into tax advantaged savings, I get to lower my taxable income and save big on paying taxes. Plus I get to earn an average 7% gain each year on my savings. I get to set up security for myself in the future.
Our savings account gives me a lot of peace of mind, on the other hand, I’ve come to a place of acceptance about my loans and I prefer to keep those payments on auto-pilot. A lot of experts would say that we could redirect part of our savings into paying off my loans so that we can avoid paying the interest and create a better cash flow for our monthly budget. There is so much more to what you see on paper however. The balance in our savings account provides me with the confidence to pursue our nontraditional livelihood. I feel good about taking chances and I’m not sweating our variable income because next weeks gig is not paying next months mortgage.
I have something more important to do with my money (and it’s not a fabulous lifestyle). I have a lot of ideas for my career and how we can add new revenue streams. To pursue some of these ideas will require start up costs. Investing in myself, a business and future revenue is a better use of my limited funds. Notice I am not buying a new car, furniture, jewelry or makeup. I am being intentional about my limited resources and choosing life over lifestyle. You’ll be hearing me say that a lot!
Saving and earning are habits you must start immediately. Learning how to pursue our goals and be growth and savings oriented can’t wait. It’s a habit and mindset that you have to cultivate as soon as possible. Even while you’re dealing with debt.
Be wary of financial dogma. It would be comforting if comparing numbers and using calculators could answer all of our questions. There is a time and place for those factors. The bottom line however is that only we know all of the details of our life and it is up to us to prioritize ourselves. It’s a self-esteem issue as much as it’s a mathematical practicality.
I need to stay focused on the areas of my life I want to see blossom. This is more of a spiritual point of view I suppose. I think that focusing on a mistake and identifying with it strongly is debilitating in general. I think it’s really important to be intentional with our thoughts, love ourselves, and stay focused on achievement in the areas of our life we want to grow.
All that being said, if I get a windfall of money or if my earnings increase dramatically, hell yeah I’m going to crush those loans. At that point I wouldn’t be trying to optimize limited resources, there would be no sacrifices to my life. The bottom line is that improving my life is all in my hands. The burden of choosing to prioritize debt repayment, improving my life, or buying stuff to have a certain lifestyle are real trade-offs that I’ve had to think hard about it.