I recently looked at our student loan repayment history on “My Great Lakes” and felt compelled to share this photo. Not a single dollar from the monthly minimum is doing anything to the principal amount (what we owe and what the interest amount is derived off of). Now you can see why we are so passionate about paying off student loans FAST… and it might be time for you to do the same with your debt.
The $390.45 payment in the first column is the minimum, followed by the $0.00 which went towards the principal. The third column is the amount that went towards the interest and the last column is how much we currently owe (this is one of 3 loans exceeding $50,000, read about the full story here).
Not a single payment since March has touched the principal amount, which oh by the way, in March also capitalized $2854.27.
Student Loan (Debt) Mindset
This might come across harsh but I think more people pretend like they are doing better then they really are when it comes to finances. Call it status, call it whatever, but not being honest with your finances is only hurting one person – YOU. And there are several reasons more people don’t take debt seriously.
- People are reluctant to pay off debt because it requires lifestyle adjustments. Eating out less, less travel, less social events just doesn’t seem so fun when you are in your 20’s. But LESS debt sounds great in the long run.
- There is a common misconception among current college students that student loans will just be “forgiven” (just check out this survey).
- Everyone has student loans so it is widely accepted that it is just OK to have them.
- Some people are doing just well enough where the burn to get rid of student loans, or any debt for that matter, is lacking.
However, if you don’t believe student loans, debt, or auto loans are problematic, it is really worth reassessing and seeing just how much interest you are paying every month. Imagine what you could do with that extra $390 every month? Maybe you can finally accelerate your savings or mortgage payments. But it is not possible when you have all these minimums to pay. Stop thinking minimum and start thinking maximum, because the student loan crisis is not going anywhere. In fact, it is only getting worse. The amount of student loan debt is now over 1.5 trillion. And I would not hang my hat on a bail out or public loan forgiveness.
2003 = Quarter Trillion; 2013 = 1 Trillion; 2017 = 1.5 Trillion
No Such Thing as Good Debt
A simple Google search of “Student Loan Payments” will net you 3.6 million results in .62 seconds (If only they could be repaid back that quickly). Considered “Good Debt,” because student loans sometimes have a low interest rate, it is widely accepted that a $400 payment is just the norm.
Most of the time “How to Pay Off Student Loans” articles consist of things like consider refinancing, or consider consolidating, or even the occasional don’t worry about student loans it is good debt. Ask any financially savvy person about good debt and unless you’re talking business, the idea of “good debt” and “credit scores” is a middle class myth. It is a myth because it revolves around the idea you will ALWAYS have debt. If you always plan on having debt then a credit score and a low payment is important.
But the real goal should be to not carry any debt.
Being Debt Free is important!
Debt free is not all about the money. The #1 cause of death in the United States is heart disease. What is a common question doctors ask their patients? How is your stress level. The reason why ? Stress is one of the leading causes of heart disease. And what do most people stress about? Money and Work
I am not directly correlating money issues to heart disease, but I think there is some connection between money, stress, and health. According to a study by the APA, 61% of Americans report money as being a signifcant source of stress.
What is the #1 reason for divorce in the United States? Financial strain. Over at Mustard Seed, he actually just wrote the same thing! Citibank found 57% of divorced couples believe that money caused the deterioration of marriages.
What do most people do with the majority of their adult life? Work 40+ hours a week.
Now think, what if you didn’t have any debt, you had 6-10 months saved in a savings account, and you could travel more? Would you be happier and less stressed? Would your marriage and long term future look brighter? I think being debt free is more than just the dollar bill but it is the peace of mind. Not to mention the little booger called interest can really get the best of you.
2016 Interest vs 2017 Interest on Student Loans
If you have read about our crazy student loan situation on Money Life Wax, you probably know we have paid a large chunk of student loan debt off. Here is why we are fanatical about doing it: Interest was killing us!!! And still is!
In 2016 we paid well over $45,000 towards my wife’s student loans, only to have a $17,000 in interest capitalization added to the principal amount owed in 2017. Interest capitalization is when unpaid interest (because we started on income based repayment) is added to the principal amount owed.
And that is why we have 17,000 reasons to pay off our student loans ASAP! We might seem fanatical or crazy about paying off student loans but I really don’t care. Paying the minimums and watching the principal amount increase each year did not sit well with me.
Had we not made large payments towards the student loans using the HELOC strategy, we would have paid even more in 2016. Interest is derived off of the principal balance, the larger the principal the larger amount of your monthly payment going towards interest. If we did not make quicker and bigger principal payments our minimums wouldn’t have even paid the monthly accrued interest.
Fast Forward to 2017
In 2017 we have gotten ahead on the principal amount and the interest has not been able to catch up. To date, we have paid off somewhere around $50,000 in student loans. The awesome news about this – there is only about $4900 in unpaid interest waiting to capitalize at the start of 2018. By 2019 we will be so far ahead with our payments there will be hardly any interest capitalization.
That is winning!!! Instead of owing $17,000 in interest we will owe closer to $5,000.
So what if we didn’t pay off our student loans and just lived like most people our age do – paying the minimums and not really caring – we would have seen the balance jump $17,000 more. I understand not everyone has 6 digits worth of student loans.
But take the same approach with student loans, consumer debt, or auto debt and you will save in the long run and you will feel so free not having to make monthly payments other than your living situation.
Imagine how much traveling or saving could occur if you did not have $900 worth of payments going out the door each month! Imagine not having to send your kids to daycare and being a stay at home parent because you have no debt to worry about. We can’t wait to have kids, but money makes it a challenge, I actually wrote about it here.
Goals for 2018
So what are your goals for 2018. My call to action is this:
Be more honest with your finances
Stop listening to bad advice about finances (my next post will be on this very subject so stay tuned)
Figure out where you are overspending and how much interest you pay every month
Then imagine if you had no payments outside living expenses, what would you do with it?