IBR

Renae was asked a question this week.

Hey Renae. I just had a question. Are you guys still working to pay off your loans?

I did the IBR plan and it seems that was the way to go, but it’s giving me HIGH anxiety.

I was just wondering why you guys came to the decision to pay it instead of investing somewhere else or saving etc etc…

If you get some time, I’d appreciate it so much

Since I’m not excellent at acronyms, I had to do some research before being able to answer.

IBR” stands for Income Based Repayment.  You can click on the Link  so you can learn all about all the acronyms such as: IBR, PAYE, PSLF.

So, to the person that asked the question.  I’m going to teach you a little something.  A lot of questions are answered within the question.  You, yourself, just answered you own question.

You mentioned that you had “HIGH anxiety.”  That right there is your trigger.  That’s the reason you want to get rid of this blood sucking, dollar eating monster.

Imagine that the student loan is your nemesis.  But this nemesis wants you to believe that it is your friend.  If you believe that they have your best interest at heart then you will go along with their suggestions.

But they don’t.  What they have in mind is to be able to pull just enough money from you that you don’t fight.  That you won’t add up the numbers.  That you won’t realize that you are getting taken to the cleaners, financially.

If you live your life looking at how much money you have going out a month, you won’t recognize how much money you are paying in interest.  This isn’t with just student loans, this is with every single loan a person takes out.

 

You mentioned why not investing or saving.  To me that is pretty simple.  Let’s say you have $100,000 in student loans.  You have interest you are paying on that loan.  Let’s say it is 6.5%.  Let’s use an Amortization schedule.  I’ll run it out as if the loan is ten years long.  At the one year mark, you have a principle balance of $92,658.07.  But your payment was $1,135.48 per month.  Multiply that payment by twelve months.  You paid $13,625.76 but your principle balance only went down $7,341.93.

$13,625.75 paid but your principle balance only went down. $7,341.93

So where did the difference between those two numbers go?  Interest.

$6,283.83 went to interest.

Now imagine how long it takes you to make that much money.  And imagine that you did that work for absolutely nothing.  Does that sound like fun to you? NO

 

Now we need to look at the net result of not paying additional principle payments to the loans and rather putting the money in savings.  Since savings accounts don’t pay you much interest at all, you will almost make no money at all by leaving cash in those accounts.  Let’s say the bank will offer you a 1% interest on your saved money.  Since you are paying 6.5% interest on your student loan balance, you are essentially losing 5.5% on every amount of dollar put in savings instead of paying down the loans.  That 1% is a guarantee, just the same as the 6.5% on the loans.

Now the investing part comes in this conversation.  When investing, your value will go up and down.  You may have mutual funds in stocks.  They may climb or fall in value since you purchased.  There is no guarantee here.  But same as earlier, the student loans will absolutely, guarantee, that you will be paying 6.5% interest on the balance.  So every dollar you lost in your investments, hits even harder because you are having to pay the interest on the balance of the debt.

 

The purpose of the blog is to help you get your introspective view.  Your view on debt is “HIGH anxiety.”  Which I applaud.  I’m so glad you feel that way.  Not because I’m weird, but rather that I know that anxiety will bring you to action.  The action to kick this debt in the teeth.  Knock it out.  Get rid of it.

Listen, the only way that you will come out to win financially using debt is if everything worked out, perfectly.  I’ve been around long enough to know almost nothing works out the way you lay it out.  It’s either better or worse.

I’m always amazed at how fast a month goes by.  Reason I bring this up is that every single month a payment is due.  The quicker you can get yourself away from having to pay a payment every single month is to get rid of the debt.  By doing so, you get to choose if you “have” to work.  Let say a family member gets sick, if you have a car payment, house payment, credit cards, student loans and a few other random debts, you won’t have the “luxury” of taking care of the needs of that loved one.  So don’t let your rationalization win an argument.  You can rationalize yourself into all sorts of bad ideas because you figured a loop hole.  I want you to have the peace of choice.

 

Thanks for the great question.  I know it is one that a lot of us struggle with.  Be diligent.  Keep us updated with your quest.

 

 

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