Debt Elimination

Why I’m Not Paying Off My Student Loan Debt Early

Not Paying Off My Student Loan Debt Early

I still owe about $7,000 in student loan debt. Once that loan is gone I’ll be 100% debt free. I can’t wait to become debt free!

Actually, I suppose I can wait become debt free because I’m not paying off my student loan debt early.  I wish I would have done a better job of minimizing my student loan before I needed to borrow money, but it’s too late for that.

Here’s why I’m not going to attack this debt like I’ve done with other debts in the past.

Reasons Why I’m Not Paying Off My Student Loan Debt Early

Not all debt is created equal.  Some debts should be avoided at all costs, some should be attacked aggressively, and others, like my student loan, shouldn’t be paid off early.

There are three reasons why I’ll let my student loan debt live for as long as I possibly can:

  1. The low interest rate
  2. Deferment options
  3. Forgiveness upon death

Here’s a bit more on my reasoning.

The Math Says Not To

The interest rate on my student loan is only 1.75%. By making just the minimum payments on this $7,000 loan it will take me about six years to pay off the debt, and will cost me about $400 in interest by letting the loan go to term. That brings the total cost of the loan to $7,400.

I’d rather NOT pay $400 in interest, so instead of continuing to make the monthly minimum payments ($113 per month) I could pull money from my IRA to pay the loan off today and save myself that $400 that I’d otherwise pay out in interest over the next six years.

If I then took the money that I was paying on my student loan and invested that same $113 per month into an IRA, according to the nifty calculators at my $113 monthly investment over a six year period, assuming a 7% annual growth rate, would grow to $9,700. Removing the $7,000 cost of the loan from that number I come out ahead $2,700 – sweet!

But what If I kept things as they are now? Sure I’d pay $400 in interest; however, by leaving my $7,000 invested, six years from now, assuming a 7% annual growth rate, I’d have about $10,500. Subtracting out the $7,400 cost of the loan (original debt + interest) and I’m still ahead financially by more than $3,000!

So I do nothing and make $3,000?  Yes please and thank you!

Based on the math, it makes more financial sense to continue making the monthly minimum payment on this loan. That’s because my cash is earning me more money than this loan is costing me.

Deferment is Like a Safety Net

What about peace of mind? Surely not having this liability on the books is worth something, right?

Right! Peace of mind is extremely valuable, but knowing that I could pay the loan off tomorrow brings its own sense of security. Also, if I were to lose my job tomorrow I have the option to put my student loan into deferment. Deferment means that I don’t have to make payments due to the hardship. Interest continues to accrue, but because the rate is so low I’m not concerned about that.

If I did find myself without a job, then reducing my cash outflow as much as possible is part of my financial emergency plan. I’d also much rather have $7,000 cash at my disposal if I ever do find myself without a paycheck.

Death Offers Benefits

Yikes – that sounds pretty gruesome. And for the official record, I hope to never need this option, but should I pass away tomorrow, not only would most of my possessions become trash, but my loan would be discharged, meaning my wife and kids wouldn’t have to pay another cent on this debt.

If I pay off the loan today and die tomorrow, my family won’t be getting that $7,000 back. But by making the minimum payments, any balance owned at the time of my death is forgiven and my family gets to keep the cash.

Sometimes paying off debt early isn't the right financial move to make. These are the reasons I'm not paying off my student loan debt early.

Chime in!
You’re either paying interest, or you’re making interest and right now my cash is making far more money than this student loan is costing me. For that reason, along with the death and deferment options I have no intention of paying off my remaining debt early. What do you think of that decision?

By Ty Roberts

Ty Roberts is the founder of Camp FIRE Finance, and a husband and father of four living in the Seattle area. He's a fan of the 4% rule, 80s movies and music, dad jokes and cast iron cooking.

4 replies on “Why I’m Not Paying Off My Student Loan Debt Early”

Did you refinance to get your student loan debt at 1.75%? I haven’t been able to find a solution to lower my interest rate where it is worth it. Any suggestions you have would be great.

Nope. That’s the rate I’ve had since graduating. This was originally a federal loan and because I’ve never missed, or been late with a payment, the rate has never changed.

I don’t know much about re-financing a student loan because I’ve never had to deal with it, but I’ve seen other bloggers say positive things about SoFi; they offer zero fees and very competitive rates on student loan re-fi’s. Good luck!

Thanks, Art. Originally my loans came through the Federal Student Aid program (from about 2000-2004; repayment began in ~2005). Upon graduation, my loan service provider sold my loans off and now I’ve got an “Unsubsidized Consolidated Fixed Rate” loan. The rate hasn’t changed the entire time.

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