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Am I Stupid to Pay Off Our Student Loan?
First, I have to apologize – we are not allowed to use the word "stupid" in my house. It just slipped out – honest. 
Anyway, what I really meant to ask is "am I silly to pay off our remaining student loan?"
We have one student loan left
When we moved from the southwest back to the east coast, we had just completed paying off all of my student loans. That left us with (from highest to lowest balance) my wife’s student loans, a mortgage, and two car loans. As seen on my story page and the first checkpoint post , that was the point in time where I started to get really obsessed with paying off all of our loans and getting rid of everything except the mortgage.
Fast forward a few years to today and we currently have a mortgage (unfortunately a much larger one than before) and one, single, solitary student loan. Well, we also have this other thing that we would have to pay back if my wife stopped working in the next 18 months – we count that as debt because it restricts our freedom even though it doesn’t currently have a monthly payment.
We are at the cusp of being able to pay it off
The amount left on the loan is quite large though we do actually have enough cash to pay it off. All it would take is a simple transfer from our emigrantdirect.com savings account to our checking account and a billpay to the loan servicer…then wait a few days…poof – no more student loans…
But wait – it is at a very low interest rate
The reason I ask the question is that, thanks to Ben and his band of merry policy makers, the interest rate on the loan has been dropping like a rock over the past 9 months. The last time I checked, it stood at 3.25%. That’s a pretty low interest rate. We are currently earning 3.30% on our ETrade savings account. Of course, the amount earned on the ETrade account is still lower after you factor in the taxes that would be paid on the interest earnings.
The interest rate is so low, however, that I’m sure a number of people would say that I should put the money into the stock market to earn some real money with it. Of course, if I had done that at the beginning of the year, I’d only have about 75% of the money I have now. I realize that the market will go up again. In fact, we are actively putting money into the market each month through our 401k plans and my employee stock purchase plan. I am sure that the market will rise again and that I will be better off for buying low-cost mutual funds when the market was "on sale."
I have been obsessing about this point in time for years
All of that is not the point. The point is that we now have in our grasp something that has been a huge goal of ours for a long time. In fact, I honestly never thought we would get to the point that we would pay off the student loans. (similarly, right now I feel that we will never pay off the mortgage) So, I’m really close now but I am nervous to actually pull the trigger and part with that much money.
We would still have about a four month emergency fund
I guess the reason I am nervous is that if we paid off the loan we would not have enough cash to satisfy my wife’s contractual obligations if we decided she needed to stop working. It is not like the decision is imminent, but it would further restrict our freedom of action . We would still have an emergency fund of about four months of expenses, but to pay off the obligation would completely wipe that out as well.
I can not see myself doing anything else with that money
To be honest, with the cash sitting in the savings account to pay off the loan, I simply can not see myself doing anything else with that money. I can’t imagine tying it up in the stock market or anything else. So, it will probably just sit in the savings account until the loan is paid off. (So, why don’t I just pay it off?)
Am I hoarding?
My wife occasionally suggests to me that I am worrying too much about money and that I am hoarding it. It may be true that I am not relying on God for our provisions as much as I should. Since I have been a somewhat less-than-stellar steward of our financial blessings in the past, I guess I am concerned that I might make another irresponsible financial decision. The loan balance is a significant amount of money, so this would be a big one! My lovely wife pointed out this verse from her bible study last night:
"I am the LORD your God, who brought you up out of Egypt. Open wide your mouth and I will fill it." Psalm 81:10
You can probably tell which way I am leaning
Well, what is your take? If I was asking you for advice, what would you tell me to do? And though it sounds similar, here is a very different question: what would you do in my situation?
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9 Responses to “Am I Stupid to Pay Off Our Student Loan?”
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My take is this – you can never go wrong in paying off debt. With the money you no longer have to pay in payments every month there are a ton of things you can do with that money. Plus, it is so freeing to have your debts paid off!
Pete,
I am definitely leaning that way…and I might do it very soon. Thanks for the support!
John: My advice…pay it off…freedom is on the other side. To only have the mortgage to pay is huge. You can begin to save the money that you were putting toward the loan and it seems that as long as your wife is working you can continue to build that nest egg. If you decide not to do it, let me know…I’ll give you my bank account number so you can transfer the fund to me and I will pay off our car loan and student loan!
“He gives and takes away, my heart will truly say…blessed be the name of the Lord…blessed be Your name.”
Vote three for pay it off get the extra cash flow and don’t look back!
Borrow from none right. With the cash flow you will have savings built up pretty quickly again.
The Happy Rock’s last blog post…A Guideline For Your Budget And Spending Plan
I am with Pete on this one… I try to get rid of them as soon as possible!!
Hey John,
Here are my thoughts for paying it off:
1. It sounds like the $70G is sitting fairly idle (~3% in your E-Trade account), netting you out to almost break-even…on a fairly large sum of money.
2. You and your wife are in the high-earners bucket and that, combined with your aggressive savings focus can replace that sum fairly quickly.
3. The freedom you will both feel is liberating, and worth making the move. Speaking from experience…my wife and I paid off the last $30K+ from my student loans a couple of years ago and I haven’t missed the money since.
Reasons not to pay it off:
1. You already stated you temporarily lose your emergency fund…(which I personally am not a huge fan of…I mean how ‘liquid’ does that money need to be? I know a lot of experts advise a 3 month reserve in a ‘cash-type’ account, but I can get to any of my mutual fund investments within a week and that is good enough for me.
2. Your wife isn’t 100% comfortable with it.
3. You can’t buy out of your wife’s contract.
It seems the key to me is determining how serious your wife is about retiring in the next 18 months? You answer that question and your action, or inaction will present itself.
Good luck and we’ll pray for peace of mind through this process.
Thanks for all the comments, guys. After writing the post, reading your comments, and discussing it more, we’ve decided to start the process….
Thanks for the support!
I’m not saying that you should pay it off, but if you want to throw Bible verses around, consider this:
Proverbs 22:7 (King James Version)
7The rich ruleth over the poor, and the borrower is servant to the lender.
@Carl – that’s a great verse to throw around – thanks!