Earlier this week, I announced my plan to pay down ALL of my student loan debt in the next year. My plan is to pay off $1,000 each month for 12 months, starting in December.
I had been on the fence about whether I should invest more, or pay off my student loans faster. My student loan debt has an interest rate of 6.5% - high enough that I can't be sure that stock market gains will be higher, but still low enough that buying stocks could eventually pay off a higher amount.
The other problem with paying off debt is losing the ability to use that money.
If I paid only $185 to my student loans each month (the minimum payment), I could save the rest of my $1,000 ($815) and use those savings in a few years as a down payment on a house. After 12 months, I would have saved over $9,000, and could easily put 3.5% down (FHA requirement) on a lower-cost home here. Having $10,000 in student loan debt wouldn't really hurt my chances of getting a mortgage, since it's considered a "good" debt, and because it's not high enough to really worry the bank. Check out this article from Thousandaire here for a really good explanation of why paying off student loans isn't automatically the best option.
I would keep paying $185/month for the next 9 years, but I'd have a house and being paying that off over time.
Paying off my loan now is for emotional reasons. If my loan is paid off by next year, then I feel like I can really *start* feeling financially savvy then. How can I say my finances are in good shape when I've still got this big debt hanging around? I also won't have to think about the loan when making decisions about how to allocate my money.
What I will do when I'm Debt-Free!
(This portion of the post is part of my entry to the $500 Enemy of Debt competition, sponsored by Life Insurance Finder the life insurance comparison experts. If I win the $500 prize, it will go straight to the student loan balance.)
- Start saving in earnest for a 20% down payment on a home. The savings will go much more quickly when there are no student loan payments eating away at my cash flow.
- Visit my high school friends on a regular basis (they're a $300 plane ticket away.)
- Plan out some international vacations over the next few years
- Move apartments! (Well, that may happen before I'm debt free . . .)
- Well, let's not get overboard here, since I will also need to focus on saving for retirement!
What will you do when you're debt free, or what did being debt-free allow you to do?
