I know, I know. I’m supposed to be focused on saving. Listen, I told you who I am at the very top of this blog: “Climbing out of $130,000.00 of student loan debt, one obsessive post at a time.” It’s not my fault if you didn’t listen…er read. (Note: It took me many years to learn the life lesson that you need to listen to people when they tell you who they are and not who you imagine or want them to be).
So I haven’t changed my immediate goal. My immediate goal is still increasing my emergency fund to $5000.00 by the end of the year, which represents about three (3) months worth of fixed expenses, INCLUDING my minimum student loan payments. (Note: Some of my student loans, such as my university loans discussed below, can be very easily deferred due to hardship, which would allow this money to stretch a bit further). However, the process for saving is pretty simple. There is no real strategy required and on the first of the month (and on the biweekly pay cycle for my side gig), I just need to transfer money into my savings account. Pretty simple. Pretty boring.
So, my mental energy has instead turned to which student loan(s) should I pay off next? This turn in mental energy is helping me to stay motivated while saving and probably results from the fact that my income has increased since taking on the part-time job and will increase a bit again on October 1st. I will discuss these increases later this month in an income update when I will have a month’s worth of paychecks from the part-time gig and my October pay stub. Unless I move this increase to savings (like retirement savings…but that is another post) I could very well reach my $5000.00 goal early and could possibly return to debt repayment this year. I know!
I have decided that in 2021, I would like to pay off at least $20,000.00 in student loans. This would bring me to the mid 90s and probably allow me to qualify for a traditional refinance. So my question should actually be, which two student loans should I pay off next?
University Student Loans
I broke down my student loan debt pretty extensively in the aptly titled post, “The Breakdown.” But a Cliff notes version is: my university loans are held by my Alma mater (they are the lender and the servicer) and while they have terrible FIXED interest rates, the university is very generous with its deferment/hardship policies, which are periods in which no interest accrues. These loans are also forgiven in the instance of death or permanent disability.
So if you review my most recent debt update, you can see that these four loans have a mix of interest rates. Using this NerdWallet Weighted Average Interest Rate for Student Loan Consolidation calculator, I determined that collectively, my four university student loans represent the following:
Yuk. Generous repayment terms aside, that interest rate is atrocious and that monthly payment is nothing to sneeze at.
Private Student Loan 3
I hate this loan. It’s one of those loans that I have already paid back far more than the original balance, the interest rate is atrocious and the balance is gross.
| Private Student Loan 3 | -$11,628.07 | $153.82 | 6.670% |
Even in this environment of pretty low interest rates, the variable interest rate on this loan is still 6.670%. At peak times, this interest rate has been over 9%. Ugh. It is serviced by the same student loan servicer as Private Student Loan 4. I have exhausted the hardship/deferment/forbearance on this loan which means it sticks around in the event I lose my job or suffer other financial hardship.
Private Student Loan 4
This is the first private student loan I ever took out. It is serviced by the same servicer as Private Student Loan 3. It was prior to the 2008 recession and has a decent interest rate but a very significant minimum payment. In fact, outside of my rent payment, this is the largest payment I make each month. As of my student loan update on September 1st:
| Private Student Loan 4 | -$10,854.06 | $245.40 | 3.875% |
While this loan has a variable interest rate, the rate has never quite reached 6%. Using the Dave Ramsey method of paying off debts smallest to largest OR the avalanche method of paying of highest interest to lowest interest rate debts, this loan wouldn’t be on my radar. However, the minimum payment on this student loan represents a significant amount of cash-flow each month and if I were able to knock-it-out, it would really help me gain some traction on my debt repayment.
So, what should I actually do?
Ms. Afro Penny 
oh I love this game. I voted for private loan #3 — first because hatred is a good motivator, second because it has a high rate, and third because private loans are awful. I suppose I don’t care that much about minimum payments — you’re making progress no matter where you put that money — but I could also see the case for PSL #4. I’d hold off on the university loans, I think. The baby ones will be gone anyway soon enough just through making minimum payments and the bigger ones would be a good thing to tackle after you finish the private loans. However, at the end of the day, any repayment is good repayment so you kinda can’t lose?
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C! I genuinely appreciate the objectivity. I think Dave Ramsey is absolutely right about the fact that debt is emotional no matter how you look at it. This path seems a bit less clear now (paying off the student loan with the interest rate above 10% at the start of this journey was super obvious) which is why I decided to get some insight.
Your point about the smaller university student loans is well taken. I was looking at them collectively but you are correct, the smaller ones will disappear with minimum payments and even though their interest rates are high (8%) because some of the balances are so low, they don’t actually generate much interest each month.
“…any repayment is good repayment so you kinda can’t lose” You’re correct. But the point about private student loans is well taken. It really is the worst kind of debt. Worse than credit cards, I think.
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I think your hatred towards private student loan #3 makes that the best candidate for the next payoff. That, plus the fact that the interest rate is generally higher than #4, plus the fact that you’ll be stuck with it even if you lost your job or got sick, makes it worthy of hatred. Your university student loans seem “friendlier”, even if they have a high interest rate. And #4 is irritating but its time is coming – it can bide its time for now. 🙂
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I think that’s about it. I think looking at it with some objectivity, I think the order for next year will be PSL3 and PSL4 in that order.
And you’re absolutely correct. If student loans could be described as “friendly,” my university loans are as friendly as they come. In the entire time I’ve had them they’ve accrued less than $500.00 in interest on all of them (and most of that has been over the past two years with me finally paying them) because they were in deferment for so long and because the university doesn’t charge interest during deferments. I don’t want to abuse the generosity of the university but there might even be a world where it makes sense to pay off my worst federal student loan before paying these back. But that is a concern for another day…maybe a year from now 🙂
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