Why I’m No Longer Trying To Pay Off My Student Loans
Thinking about my student loans used to induce crippling bouts of up-all-night, hyper-respirating panic and questioning of my life choices.
I had done what a lot of my generation did: borrowed a a reasonable amount of money for college, graduated in a huge recession, and took out a less reasonable amount for graduate school (okay, then I did it again for graduate school, round two). After all, most Millennials were told that education — and not just any education, but the best education money can buy — was necessary to get ahead in life.
My greatest source of eventual disillusionment was the idea that the equation would just sort of balance itself in the end. That it was a simple input-output thing: The more you invest in education, the greater the financial return on your investment. I don’t think anyone anticipated just how much money lending corporations would skin off our financial backs in the process, or that wages would remain so stagnant.
Now there’s a whole generation of people for whom paying off debt isn’t even a tangible reality — despite their most sincere efforts to take a chunk out the number behind the negative sign on their “net worth” label.
There was a point in my life a few years ago when I was actually making enough money to take a solid whack at my student loan balance, and whack I did — to the tune of about $30K.
But after returning to grad school for three years, the balance had grown back to its previous amount due to compounding interest. I felt as though I had just tossed $30K into the wind — $30K that I could have spent on a house down payment, or on taking a year off to write a book.
And this was what induced the fever-pitch loan anxiety: How was it that I’d spent so much money to wind up back in the same place? How is it that so many of my generation are spending hundreds of dollars a month just to keep the interest from growing? What is this place? Is this real life?
Why to not pay off your student loans
A contributor to the anxiety among my generation is the idea that we need to prioritize paying off our debt before we can go one financial step further. The internet is lousy with articles about how to pay off your debt in X years with a second part-time gig and smart budgeting. But I fear this type of advice misunderstands the plight of my generation. We are deeply tired of gigging and there is nothing to budget.
This mentality also misses just how bad the debt situation is for many of us. Sure, if you’re 10 or 20 thousand dollars deep, just suck it up, eat your roommate’s leftovers for a year, and be done with it. But the number of graduates who owe more than $100K is on the rise.
And making a good-faith effort to completely pay off that level of debt can set you back financially. The hundreds of dollars per month that can get spent just on keeping the interest in check are hundreds of dollars that aren’t going into a Roth IRA, your kids’ (I hear some of you laugh, “Kids? What kids?”) education funds, or a savings account for a down payment on a house.
Thanks to the income-based repayment plans introduced in 2009 (sincere thanks, Obama!), you don’t have to try to pay it off completely. By now, many of you probably know that on an income-driven repayment plan (IDRP), you can pay as little as 10% of your income on your student loans and have the remainder forgiven in 20 years — an amount you’re then taxed on. Oh — and how do experts advise dealing with this forthcoming tax bill? By saving, of course! More gigging, more budgeting.
I don’t know about the rest of you, but that “taxed on” number was the one that really started to haunt my dreams. I’d spend 20 years making nice, manageable payments and then, just as I was set to retire — Boom — I’d get hit with a massive bill from the IRS.
But one crucial and liberating thing I learned was that investing the money I saved on my IDRP could balance that tax bill 20 years down the road.
Let me rip this right off like a band-aid: I currently owe about $116K in student loan debt. What follows are four possible payoff scenarios, using my own data, in which I’ll detail a financial plan for each, and perhaps illustrate just how absurd trying to pay off student loan debt can be.
Scenario 1: I gig and budget my way to total payoff
Under a standard repayment plan with a 20-year term, I’d have to pay $728 a month to pay my loans off entirely. I would pay $175K over the course of 20 years, and about $60K in interest alone.
Pros: I’m debt-free in 20 years!
Cons: I literally have nothing left. No savings, no house, and no college fund for my kid. Probably no clothes.
Scenario 2: I pay only enough to keep the interest in check and prevent the loan balance from increasing
In this case, I would make monthly payments of $429 on the interest alone. After 20 years, I’d still be left with the original balance of the loan, which would be forgiven, and on which, based on 2020 tax brackets, I’d owe an additional $28K in taxes.
Pros: In stepping down my goal from total payoff to only paying interest, I save about $300 a month. Since I know I need to come up with $28K at the end of my 20-year term, I stash a little over $50 a month into an IRA. According to this calculator, that should yield (based on average national IRA data) about $28K in 20 years.
Additionally, I’m able to put $250 a month into my kid’s college fund, which according to this calculator, should return her $17K to $18K a year for four years (she doesn’t know it yet, but she’s going to a public school).
Cons: I’m kind of okay with this, but I can’t get over the nagging feeling that I flushed $429 down the toilet every month for 20 years.
Scenario 3: I get on an IDRP and make manageable payments for 20 years
Based on my current income, I’ll pay, on average, $231 a month on an IDRP. At the end of 20 years, I will have paid about $55K. But due to monthly compounding interest, I will wind up needing $193K forgiven (let’s take a moment to recognize that’s $77K in debt I’ll accrue in interest alone), and for which I will receive a tax bill in the amount of roughly $62K. So, between the $55K in payments and the $62K in taxes, I’ll wind up paying $117K total, about the current balance of the loan.
Pros: In the end, I will have essentially dodged paying interest on my loan. That feels like a win. And I’ll have managed to save for other things:
The difference between my monthly payment on a standard repayment plan and an IDRP is $728 — $231 = $497, so I’ll split that amount between monthly deposits into a Roth IRA and and a college fund for my kid. I’ll put $120 a month into the IRA to give me about $62K at the end of 20 years and cover that tax bill. I’ll put $350 a month into the education fund, which gives her $24K to $26K a year for four years (at this point, if she wants to go to private school, it’s on her). I will drink the remaining $27.
Cons: I can’t in good faith complain about this one.
Scenario 4: This is the crazy doomsday one where I pay nothing on my loans. $0 a month for 20 years.
There have been points at which, based on my and my spouse’s income and student debt numbers and family size, my IDRP has computed a $0 per month payment (I’m self-employed, so I do have some control over my annual income). If I were to pay $0 for 20 years, I’d wind up with a head-spinning $282K forgiven and on which I’d owe $99K in taxes (this is the only scenario that actually reduces the amount I pay in student loan debt). Putting a mere $187 a month into an IRA will return about $99K at the end of 20 years.
Pros: I ultimately pay less than the current loan balance and win a trophy for gaming the system.
Cons: Not sure how much I saved for my kid’s college fund, because I didn’t make enough money all those 20 years to require a non-zero payment amount. I very likely am squatting somewhere, roasting a squirrel over a campfire.
To sum up
For me, Scenario #3 is probably the most ideal in terms of striking a balance between paying off debt and saving for other things.
To be clear, most people put more like $5K a year, for 30 years, into their IRAs and wind up with $500K at the end — but in these scenarios, I’m setting one up only to cover my IDRP tax bill because my husband and I have other sources of retirement income. He’ll be able to start collecting his pension in 20 years, and we’re hoping/betting on that Congress quickly becomes stacked with Millennials who ensure that Social Security stays funded.
Speaking of Congress becoming flooded with Millennial representatives, there’s a very good chance that we get some degree of student loan forgiveness in the next 20 years. There’s a good chance of that even if Biden wins the election in November — another reason I’m trying to pay as little on my loans as possible.
Also: Here are some tips on buying a house with high student loan debt.