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The www.FedPrimeRate.com Personal Finance Blog and Magazine

Thursday, July 24, 2008

Was Paying Off My Student Loan Debt A Bad Idea?

Back in January 2008, I decided to payoff my student loan balance and be done with it. At the time, I wasn't too worried about draining my savings account, since business was good, and I felt that my business was more or less recession proof. I was paying 8% interest, and there was no way for me to consolidate to get a lower interest rate, because I had already consolidated with William D. Ford. (FYI: you can only consolidate student loan debt once, unless you go back to school and get more student loans.)

Here's what prompted me to payoff my student loan debt:


federal student loan statement


The above is a clip from the 2007 tax statement sent to me by the folks at William D. Ford. As you can see, since I consolidated, the amount I paid toward the principal was about the same as the amount I paid in interest. That just boiled my blood, and made me a little bit sick to my stomach. I'd been paying interest my whole life, and I was tired of it. This student loan debt was the only debt on which I was paying interest. I had an opportunity to rid my life of interest payments, so I took it.

Now, I'm beginning to wonder if paying off my student loan debt was a good idea. Yes, I know, you're asking yourself, "how the heck can paying off a huge debt be a bad idea?" It can be, if, like me, you are now working with a depleted savings account. I have learned -- the hard way -- that my business is not recession proof. In fact, I have learned that it is in fact very sensitive to economic conditions. This is the first time the economy has taken a hard spill since I began expanding my business back in 2003.

I had paid off my car note a few months previous to paying off William D. Ford, which did not help at all. At the time, I was very confident in my ability to maintain a steady and strong income. I got cocky, and now I'm paying the price.

Here's are the other directions I considered:

  • Keep paying ~$110 per month with 8% interest. Balance would be reduced to $0 in about 500 years.
  • Increase my monthly payment to reduce the time it will take to bring the balance to $0, and reduce the total amount I would have to repay. Of course, with this option, I still would have been burdened with an 8% interest rate.
  • Transfer the debt to a 0% credit card. A decent option, but with 2 significant negatives 1) Once the interest-free period ends, there is no way to guarantee that I'd be able to find another favorable 0% credit card deal to which I could transfer my balance. 2) Balance transfer fees. 18 months ago, finding a 0% credit card that doesn't charge a balance transfer fee was easy. With the onset of the economic slowdown and the global credit crunch, feeless deals have all but disappeared.

So, yeah, I'm hurtin' right now, but I'm still very glad that the debt is gone. I cannot put into words how satisfying it was to call William D. Ford to check my balance, and hear this.

So, how am I going to manage?

First, I'm going to petition the family court to have my child support payments reduced. My monthly payment is nearly $700 for one child, which is way too high considering my current income. The mother of my child and I recently canceled plans to send our daughter to an expensive, private school. The fees were just too high (~$8,500 per year.) That's too much for a child going into Kindergarten. Even if my current income was the same as it was one year ago, when I was making almost as much as a U.S. Senator, I'm 90% certain that I would have decided against sending her to that expensive school. Fact is, she's doing great in the subsidized private school she's attending now. She also goes to Kumon twice per week, which I can recommend to any parent who can afford the $200 per month (she is way ahead of her peers in math and reading, thanks in no small part to Kumon.)

Second, I'm going to cash out my whole life insurance policy and get a term life policy. Suze Orman has finally convinced me that whole life insurance is not the best way to go.

Third, I'm going to cutback on my food shopping. Thankfully, I stocked up on meat during the good times. I now have a deep freezer full of high quality meat that could last a year or so -- literally!
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If you can payoff your student loans, I say do it. Just don't payoff your car note within the same time frame! Comments welcome.

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