Which student loan(s) should I pay off next? (Vote!)

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$153.826.670%

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$245.403.875%

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?

I know, I know…the last revision of 2020 Financial Goals

So last night I wrote my ah-ha post. The ah-ha moment is still true and I’m not taking anything back. However, this morning, while still obsessing over my debt, I found this awesome, free, ad-free, no sign-up How soon could I pay off my debts? calculator. This was obviously the absolute worst thing for a debt obsessive person like me to find. However, in the era of COVID-19 and Saturdays spent at home, it could obviously have been a lot worse.

The calculator is no-muss, no fuss and is great for someone with a lot of individuals lines of debt because it allows you to enter up to 20 creditors. To calculate a repayment plan, it ask for: the creditor, the balance, the minimum payment, the actual payment, and the interest rate. Additionally, you can enter how much additional you plan to pay each month and any on-time payments you expect to make (like a bonus or tax refund). Again, the absolute best and worst thing for a debt obsessive person to find. After entering in this information it spits out what your repayment would look like using a roll-over method of repayment (also referred to as the “snowball”), and you can have it compute the results based on paying the debts in 1) lowest to highest balance, 2) highest to lowest interest rate, or 3) shortest to longest payoff period.

Other cool things: It also tells you how much you would have saved over the same period of time as your original payment plan if you invested the amount you would have paid (you can also adjust the interest rate and below I adjusted it to a very modest 2% savings rate). AND, while I have only included the tables below, it also produces a very awesome debt payoff calendar for each creditor so it shows you which month you will pay off each creditor.

Note: These payment plans assume a January 2021 start since I still plan to pay of PSL 1 and then save for a used car through the end of this year unless my income increases significantly. This means, the debt balance and repayment plan does not include PSL1 or my car lease/car payment but does include estimated minimum payments on my federal student loans which will resume in January 2021.

1) Lowest to Highest Balance

2) Highest to Lowest Interest Rate

3) Shortest to Longest Payoff Period

Unsurprisingly, the “Highest to Lowest” interest rate resulted in the greatest amount of savings in terms of both money and time saved. However, whereas with the “Lowest to Highest Balance” and “Shortest to Longest Payoff Period” eliminate creditors/loans in the very first month and then consistently every couple of months, it takes 11 months before the first debt is eliminated under the “Highest to Lowest” interest rate payoff plan. Ugh.

And just for fun, I calculated what my repayment plan would look like if I increased the extra payment each month up to $1500.00. For the sake of space here, I will only include the updated “Highest to Lowest Interest Rate” and “Lowest to Highest Balance” below.

1) Highest to Lowest Interest Rate

2) Lowest to Highest Balance

While the “Highest to Lowest Interest Rate” still results in the greatest amount of savings between the two methods, paying $1500.00 more each month still shaves off more than a year of repayment than if I am only paying an extra $1000.00 each month regardless of which method I choose…

I will admit to being torn. While I very much would like to stick to the most mathematically efficient way to pay off debt, I will admit that the “Lowest to Highest Balance” method does hold some appeal at this current moment when it has been almost a year since I had the psychological reinforcement of paying off a debt, and I still have three more months until I payoff the next one…

So…thoughts? Am I entirely nuts for finally for finally wanting to swallow the Ramsey kool-aid and go “Lowest to Highest Balance?”

$1200.00 COVID-19 Stimulus

It seems like everyone in the YouTube personal finance community is currently doing a video on what you should do with the stimulus check from the federal government for COVID-19. So, if I set aside my skepticism that most Americans will actually see this money anytime soon and my theoretical debate as to whether or not I should even been getting a stimulus check (I am presently employed and was not laid off by my employer…) then my thoughts on how I would WANT to spend it are as follows:

1) Pay off University Student Loan 4 (USL4), which had an April 1st balance of -$663.25, at 8.00%, and a monthly payment of $30.00.*

2) Put the remainder in savings.

Shocking, right? Ugh. During my down time I have been watching so many folks on the Dave Ramsey plan pay off small balances and I must acknowledge that I miss that rush. While there are few worlds where paying off debt is a bad thing, paying off USL4 is probably not the wisest choice and my desire is mostly psychological. I think I have been bummed out realizing that while I will pay off PSL1 this year, I will have a zero chance of paying off PSL2, and should the current state persist into the summer, I will have no opportunity to earn additional side income from summer school/activity work. There was one major opportunity in particular that is likely gone now, however, they haven’t announced anything official. So with it seriously unlikely that I pay of PSL2, and while USL4 is with a very good servicer, freeing up the $30.00/month would be good, and give me a psychological boost. Ugh.

Even if the above scenario is the dream, more than likely, the following is what I WILL end up doing:

1) Putting a $1000.00 towards PSL2.*

2) Putting the remainder into savings.

*NOTE: This assumes the money is received AFTER I finish paying off PSL1. Otherwise, the money obviously goes there.

This scenario is much more prudent given that a much larger percentage of my payments on PSL2 go to interest than do my payments on USL4 even though USL4 has a higher interest rate. However, I still think there is some argument to be made for freeing up the additional $30.00 a month in minimum payments that I am currently making on USL4 and applying it to PSL2 payments or to the payments on another loan, like PSL3 where I currently pay more in interest than I do on principal…

Thoughts?

Debt Psychology: The Balance Transfer Strategy and Private Student Loan 1

Interest sucks. And it sucks because its effects are both material and psychological. Each month it deftly diminishes the significance of your payments, siphoning hard earned dollars meant for the principal. And while you understand logically that this is how it works, that this was the bargain, it still sucks and you can’t help be anything but sad.

As I look down the long road of debt repayment, I have spent countless hours scouring the internet for debt repayment hacks to help me pay off my massive debt more efficiently. The most ubiquitous suggestion is to refinance. Unfortunately, despite having very good credit (FICO 791) I didn’t qualify for a refinance because my debt to income ratio (DTI) is too high. That sucked. It really sucked because I was not attempting to refinance the entire balance but just the non-university private loans (~$40,000.00); and, ultimately, the minimum payment for the refinanced loan would have been less than I currently pay on the individual loans. So I kept reading and kept looking for things I could do. Another strategy I came across was called the “self-refi” or “balance transfer strategy.”

While there are countless other blogs that will explain this method in greater (and better) detail, essentially, you accept a balance transfer offer that allows for a direct deposit into your checking account and then use that amount to pay off your student loan. (Note: Because student loans are not bankruptcy eligible but credit cards are, some credit card issuers will not allow you to use balance transfer funds to pay off student loans. Fortunately, some do).

There are two rationales for me using the balance transfer strategy: 1) Saving on interest and 2) the psychological benefit of seeing every dollar I save or hustle for go towards a principal payment reduction. I will return to these rationales in a bit, but first, the nitty gritty of my balance transfer.

First, I accepted a balance transfer offer from two of my creditors (Discover and Citi). While it would have been preferable to transfer the balance to one creditor, at present, I do not have a credit line large enough to accomplish this. So two creditors it is. Financially, there is no real impact to using two creditors, it’s just less convenient. Both creditors offered me a pretty standard balance transfer 0% for 12 months and a 3% transfer fee (this really is the pretty standard offer, although I have seen 15 months offered at account opening and USAA apparently occasionally floats a 0% balance transfer fee to some of their members).

Discover

Disc

I forgot to grab a screenshot for Citi but it looked quite similar…

Citi

Total Transfer Amount: $6500.00
Total Transfer Fee: $195.00
Remaining Credit: $605.00

So the total amount for the balance transfer requested was $9,850.00. I will use this to payoff Private Student Loan 1, which currently has a balance of -$9,812.49 at 9.74%; I was worried about how long I would have to wait until I could pay it off, but the August statement posted this morning so as soon as I receive the funds from Citi I will pay it off. This process has happened pretty quickly. I pulled the trigger and made the balance transfer request on Saturday and as of today, Monday morning, Discover has already deposited the money into my checking account.

Now, before I return to the rationales, let me address some of the concerns any reasonable person reading this post might have…

Objection 1: An accelerated, adjusted repayment schedule might result in no savings using the balance transfer strategy.

This is true. Assuming I paid off Private Loan 1 in December, which was my midyear revised goal, I would actually lose money on interest. According to the Student Loan Amortization Calculator I used, if I paid off the loan in December, I would lose $56.00 in interest, which is the difference between the interest I would have owed the student loan lender ($239.00) and the balance transfer fee I paid Citi and Discover ($295.50).

Date Interest Principal Balance
Aug, 2019 $79 $1,920 $7,838
Sep, 2019 $64 $1,936 $5,902
Oct, 2019 $48 $1,951 $3,951
Nov, 2019 $32 $1,967 $1,983
Dec, 2019 $16 $1,983 $0
2019 $239 $9,758 $0

But I am a very reasonable woman, and despite my intent to hustle my tush off over the next few months, I figured it was probably unlikely that I would get this done by December. So I calculated what the interest would be if I paid the loan off in March 2020. The difference this time, of $64.50, is interest saved doing the balance transfer over continuing to pay the student loan lender.

Date Interest Principal Balance
Aug, 2019 $79 $1,186 $8,572
Sep, 2019 $70 $1,195 $7,377
Oct, 2019 $60 $1,205 $6,172
Nov, 2019 $50 $1,215 $4,958
Dec, 2019 $40 $1,224 $3,733
2019 $299 $6,025 $3,733
Jan, 2020 $30 $1,234 $2,499
Feb, 2020 $20 $1,244 $1,255
Mar, 2020 $10 $1,255 $0
2020 $61 $3,733 $0

And, just as a thought exercise, if I were to extend repayment over the full period of the balance transfer, I would save $226.50 in interest.

Date Interest Principal Balance
Aug, 2019 $79 $777 $8,980
Sep, 2019 $73 $784 $8,197
Oct, 2019 $67 $790 $7,406
Nov, 2019 $60 $797 $6,610
Dec, 2019 $54 $803 $5,807
2019 $332 $3,951 $5,807
Jan, 2020 $47 $810 $4,997
Feb, 2020 $41 $816 $4,181
Mar, 2020 $34 $823 $3,358
Apr, 2020 $27 $829 $2,529
May, 2020 $21 $836 $1,693
Jun, 2020 $14 $843 $850
Jul, 2020 $7 $850 $0
2020 $190 $5,807 $0

It should also be noted that the interest savings assume that I pay the same amount each month. If I paid less (or more) the interest would also fluctuate accordingly. The balance transfer fee is not subject to such fluctuations so whether I pay it slowly over the full term or more quickly, the amount of the transfer fee stays the same.

Objection 2: Student Loan interest is tax deductible whereas credit card interest is not.

Also true. However, the amount I pay in student loan interest always exceeds the tax credit. This might be of greater concern in the future as my student loan balances decrease, however, as my DTI improves, I would like to apply for a traditional refinance.

Objection 3: If you don’t pay the amount off during the balance transfer period, the balance will be subject to a much higher rate of interest than the original student loan.

Also true. But don’t worry. I got this. I kid, I kid. While I do like the idea of a hard deadline and a bit of pressure to pay this off, I would like to payoff far more than just this loan by next year at this time. Additionally, the amount that I would need to pay each month to have this loan paid off by the end of the balance transfer period is rather reasonable ($857.00) and at the very least, I expect to be able to pay that each month, especially now that I am a bit more settled and can begin to hustle.

Objection 4: FICO doesn’t weight installment debt and credit card debt the same. Your FICO score is going to take a hit.

Absolutely true. The transition of this debt from installment debt to credit card debt is pretty big. My credit utilization is going to go way, way up (it’s currently 0-1% depending on when the statement cuts) and I expect my score to drop, at least temporarily, by between 50 and 100 points (the swing could be that large because I am still relatively young with a relatively shorter credit history). I would never have embarked on this strategy if I knew that I would need credit in the near future. As I do not, and the hit will be temporary, this was not a huge consideration for me.

Now, those initial objections at lease cursorily addressed, let us return to my rationales for the balance transfer…

1) Saving on interest. – This was addressed extensively above. As long as I pay off the amount after December 2019, I will likely save a tiny bit on interest.

2) The psychological benefit of seeing every dollar I save or hustle for go towards a principal payment reduction. – As you might have expected, the largest benefit to this strategy for me is psychological. I can’t speak about the experience of anyone else, but when I am targeting a debt, as I am targeting Private Student Loan 1, I log into the dashboard and look at the debt frequently. It is disheartening to see the balance gain interest every day and to not actually see the fruit of my sacrifice. (Skip buying a new pair of shoes so that you can make an extra $30 student loan payment, watch the loan gain that amount in little over a week in interest). With the balance transfer, every dollar I save or earn will chip away at the amount I owe. While I know that it would be better to be motivated by the interest that accrues each day, I’m not there yet. And as my journey will be a long one, anything I can do to keep myself happy and focused is worth its weight in student loan debt.

Thoughts?

The 401K…er…403B

So, one of the many decisions you need to make when you change employers is deciding if and how much to contribute to retirement savings plans. While there are many different investment vehicles, in higher education, the most common is the 403(b). At some colleges and universities, there are compulsory contributions. In fact, my former employer had such a requirement. It could be waived your first year of employment, and even a second year if you were under the age of 35, however, after 35, first year of employment or not, you were compelled to contribute. My new employer does not have compulsory contributions, however, I do plan to contribute. The why…

For most of my adult life I did not work for companies/institutions with retirement savings plans (I lived and worked abroad, ran a small business, did gig work, was a student, etc.). And it was only with my immediate former employer, University A, that I began contributing. Initially, I was planning to take Dave Ramsey’s advice and not save for retirement until my debt was paid off. However, while University A, a mid-sized public university on the west coast, had a relatively standard match (6%), their 403(b) was relatively unique in that you were immediately vested. (Many employers require you to work for them for a period of time, often a year or more, before you are vested and can take not only your own contributions but employer contributions to your 403(b) with you if you leave their employment). So I contributed. I worked at University A for a little more than an academic year and my 403(b) account with them is just a little more than $3600.00. Not a lot. More than I had.

My new employer, University B, is a midsize private university that is relatively well funded and their match is pretty good. Without getting into too many details, a 2% contribution from me would result in an 8% match from the university for a 10% total contribution to my 403(b). They have a two three year period until you are vested but even given my uncertainty as to exactly what I want to do in the future, I more than expect I will be here that long.

I know that some folks will not agree with this decision and I will admit as someone who intended to do the Dave Ramsey Baby Steps, I was not initially planning to contribute. However, as I said in my Why I’m Not Doing the Ramsey Plan (i.e. The Baby Steps), unlike most of Dave’s followers who will be out of debt in just a couple of years, it will take me at least twice that long and time is something you don’t get back.

Why I’m not doing the Ramsey Plan (i.e. The Baby Steps)

Let me begin by saying that I really like Dave Ramsey. I think his no nonsense approach to getting out of debt is really helpful, and forces you to be accountable for how you got to where you are, and the choices and actions you will need to take to get out of debt. Whenever I finally get comfortable enough with someone to talk about my debt, the first thing they ask me is, “Are you doing the baby steps?” For the record, I’m not. Not really. Let me explain.

Emergency Fund

I do have a $1,000.00 emergency fund. While Dave recommends that you not have any more money in savings while you try to climb out of debt, as I was getting ready to make a cross country move, that was just not possible and I created a small separate savings called “transition funds.” Once my move “settles” and I have paid rental deposits, car registration changes, have my first couple of paychecks, etc. I will throw any remaining transition funds to my debt.

Smallest Balance to Largest Balance

Dave will be the first person to tell you that his method is not the most mathematically efficient. That his method is designed to address the emotional reasons that people have difficulty paying off debt. I think that is the right attitude. My emotional trigger is just a bit different. While some people might get frustrated by paying on a large balance and not seeing it go down and give up, I get really frustrated, and my shame is magnified, every time I make a payment and see how much money goes to interest. It is so discouraging. For that reason, I am attacking my loans based on how much interest goes out each month. While I am open to reassessing this if I feel like I need a “quick win,” I think this will work best for me for the moment or at least until I can get my balances low enough to qualify for a desirable refinance.

Beans and Rice

While $685.00 for an apartment including all utilities is pretty cheap, I could have gone even cheaper if I was willing to live with someone. I think I could easily have saved an additional $100.00 per month which is $1,200.00 per year. So why didn’t I do that? Because I won’t be out of debt in 2-3 years. If I am really lucky, I will be out of debt in 5-6ish years and there is no way I would be able to stick out intense debt repayment, and all of the sacrifices I will need to make, if I am miserable or unhappy with my living situation. Now, I’m not saying my happiness justifies me doing other extravagant things, but if $100.00 per month means I am not miserable, and that I actually cook at home because the kitchen is clean, and I’m not worrying about sharing my space with others, then I believe I will be able to stick to the plan for longer and be more successful.

I think Dave Ramsey is great and he and his team have done a wonderful job inspiring millions of people to climb out of debt. I think his plan is also great. It’s just not the right plan for me. For now.

The plan, Part 1.

-$133,259.74. How does one even go about repaying such an amount? Well, I don’t know how one would do it, but I can tell you my current plan. Input welcome.

Including this month, there are 77 months between me and my 40th birthday. According to an online debt reduction calculator, if I only paid my current minimum payments, it would not be possible to become debt free in this time frame. In fact, I would need double the amount of time (see below).

Principal: $133,259.74
# of Payments: 144
Interest Rate: 6.55%
Payment: $1,344.48

To be fair to this online tool, there are a couple of of things greatly affecting this projected repayment term: 1) While the total is for the total amount remaining, the interest rate is only an average of the non-zero interest rates, 2) the minimum payment does not include minimum payment amounts for my federal student loans but does include minimum payments on my personal student loan and car lease and, 3) it does not include any additional non-minimum payments.

Yea, so huge caveats. But it’s something. The calculator says that to payoff my loan in the time frame I want, 77 months (although sooner would be great), I would need to pay and additional $800.00 each month.

Principal: $133,259.74
# of Payments: 77
Interest Rate: 6.55%
Payment: $2,144.48

It is surprising, but that payment amount doesn’t scare me anywhere near as much as it should. Maybe it’s because I have become desensitized to the amount I owe? Or maybe it’s because $2,144.48 seems like a lifeline as I sit at financial rock bottom.

So the plan…if you read my debt breakdown post, then you will remember that my loans are broken up into roughly five (mental) groups: private loans, university loans, federal loans, a personal loan, and a car lease loan. Given these categories, my plan for repayment is as follows:

Private loans – These will be paid off first, interest rate descending, since the balances are not too dissimilar (if they were, and I had a really high balance with a low interest rate, I might  move that loan up as a payoff priority, as I would be paying more in interest on that loan every month even though it had a lower rate).

University loans – Even though three of these have a higher interest rate than some of my private loans, the repayment terms are much more generous and the ability to defer these should I encounter financial hardship is a benefit I am currently prioritizing while my repayment amount is so high.

Federal loans – As you will remember, there is a mix of interest rates here, with subsidized and unsubsidized loans. Unlike the private and university loans, this group is ordered in terms of total interest per month, so I am prioritizing the payoff of larger loans with lower interest rates over very small loans with marginally higher interest rates.

Personal and Car Lease loans – As these loans do not accrue additional interest, I will make no additional payments here. These loans will be paid off based on their minimum payments and will be paid off in December 2019 and December 2020 respectively.

So there is the loose plan as to how I will prioritize my debt repayment. Anyone who is paying off debt knows a plan isn’t a plan without a budget, so part 2 of the plan will include a budget and how I plan to earn the income necessary to pay off my debt in 77 months (or less).