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Student Loans


This is a guest post from my brother Nik. He is currently an emergency room physician.

In our family we were always taught to avoid any debts.  I tried not to borrow anything that I knew I could not pay back (which I would do as soon as possible.)  I did not buy anything that I could not afford.  I never allowed any credit card balance to carry over from month to month to avoid interest charges.  But student loans are different.

For our family, education is the number one priority after survival.  Education allows you to advance in the world and to get a better job and career.  Student loans are an investment into this future and one of the few debts worth taking on.

When I went to college, I was lucky enough to obtain a scholarship which paid for most of my undergrad tuition.  Still there were plenty of other living expenses during college and I worked in a work study program and eventually as an RA (resident advisor) to pay as much of this as I could.  This, along with the money my parents contributed, allowed me to finish undergrad with no student debt.

Professional school, however, was a different matter.  For this part of my training, I did manage to get in to a fairly prestigious East coast private university.  The key word here being private which meant the cost including living expenses would be somewhere in the $40k/year range.  While I did manage to get some scholarships and worked during much of the next 4 years, there was no way I was getting out without having to take some student loans.  I borrowed from both the government (lower interest) and the university itself (higher interest) in order to cover all my expenses, though I did continue to live a fairly frugal lifestyle by living with roommates, cooking a lot, not buying any big ticket items, etc.  In the end, I finished all my schooling with about $80k worth of loans, which was pretty good, compared to the $200k+ that many I knew had.

After getting out of school, my friends and I made a modest salary (about $40k) for the next few years.  Many of them chose to defer paying off their loans until their salary increased but I started paying at least the minimum every month because I knew that if I did not they would just continue to accrue interest, especially the higher interests private loans from the university.  My friends also “upgraded” their lifestyles pretty quickly while I continued to live mostly like a student.  Now, six years after I finally started making money, I have finished paying off my higher interest loans and now only have my 3% government loans totaling about $35k.  I’ve continued to pay the minimum on those loans and have been putting any excess money into investments which I hope will make more than 3% interest every year.  It still bothers me that I have this large debt over my head, but I believe this is the best way to maximize my money working for me while still being responsible to those that lent me money when I needed it.

 Should you pay off your student loans early?

Basically, the answer is yes.  As far as I understand, there’s a minimum that you always have to pay or else there is penalty so you must always pay at least the minimum.  The harder question is whether you should pay extra to reduce the loans faster?  I think this question depends on what interest rate your loans are at.  If your interest rate is high at 10% from a private bank or something, then you should pay extra to get that down as quickly as possible unless you know of an investment that guarantees a 10% return (tell me, please!)

Once you only have low interest loans left, then perhaps you can consider investing instead of paying extra on the loans.  However, investment returns are not guaranteed and you can lose money instead so you have to make your own choices.  The rule of thumb for me is to pay off the highest interest loan first then move on to the lower ones though remember that you have to always pay the minimum for all the loans to avoid any penalty.

There are psychological reasons as well to pay down the debt early. Some people don’t like having any debt at all and that’s one reason why I send in an extra $500/month. I’m looking forward to the day when I can write that final check (electronic debit actually) and say I have no more student loans!

photo credit: flickr James Almond


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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he hated the corporate BS. He left his engineering career behind to become a stay-at-home dad/blogger at 38. At Retire by 40, Joe focuses on financial independence, early retirement, investing, saving, and passive income.

For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.

Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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{ 11 comments… add one }
  • RichUncle EL June 25, 2012, 7:08 am

    Hey what a coincidence. I graduated my bachelor’s with no student loan debt either. My master’s is a different story as I have about the same amount you have left to pay, 37K and I dread it everyday. I am still waiting to reap the rewards of the advance degree with a better paying job or bigger opportunities.

    • retirebyforty June 26, 2012, 7:39 am

      37k is a large amount. Good luck with paying it off. Thanks goodness I don’t have any student loans.

  • krantcents June 25, 2012, 9:29 am

    I like your plan! A 3% loan after tax is practically nothing. Investing now versus later is a good choice because of the time element. Nice job!

    • retirebyforty June 26, 2012, 7:40 am

      I agree. Where else can you get a 3% interest rate?

  • DaveL June 25, 2012, 10:56 am

    Great post! I recently graduated with a bachelor’s degree and need to start paying off the little bit of student loans I acquired over the 4 years. Im hoping to be able to pay off a little extra every month, however am planning to go back for an MBA within the next year. I will be happy once I see the benefits of the MBA.

    • retirebyforty June 26, 2012, 7:41 am

      Good luck with your MBA. It’s too bad young people have so much debt right out of school these days.

  • [email protected]&More June 25, 2012, 12:39 pm

    First off Congrats with graduating with so little debt and paying off as much as you have. I was lucky and had no student loans but my girlfriend was not as lucky. I agree to pay off high interest rates loans first and variable rates can jump quickly too. However if you have 3 percent fixed rates I would pay them off as slow as possible. In a few years I bet CD rates will be higher than that…

    • retirebyforty June 26, 2012, 7:41 am

      I’m looking forward to 5% CD!

  • Manette @ Barbara Friedberg Personal Finance June 25, 2012, 7:20 pm

    Congratulations for the mindset! I believe that you are on the right track. Pay off the debt with the highest interest first; otherwise, it will continue to earn interest and you will end up paying more debt. Living frugally and paying off your student loan is the best step towards financial freedom. Good luck!

  • JW @ AllThingsFinance June 26, 2012, 12:29 pm

    As you’ve said Nik, it all depends on your expected return vs the student loan interest rate. If you can earn more than 3%, then I would surely invest that money before make extra payments. Also, some people may be able to take advantage of the $2500 student loan interest write-off. That further reduces your effective interest rate.

  • SavvyFinancialLatina June 27, 2012, 8:41 pm

    Congrats! You are definitely making huge progress compared to our peers!

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