Math Vs The Mind – The Low Interest Debt Conundrum

Last week my final student loan payment of 2017 cleared, bringing the total amount paid this year to over $15,300. That’s not bad considering that SoFi only required me to pay $4697. Then again looking at that $15K in the context of a $110K take home income and approximately $42K loan balance at the beginning of the year, I am underwhelmed.
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Admittedly, last January I did plan to pay off most if not all of my loan by the end of this year. I could say that I would have accomplished my goal had it not been for getting laid off, but between me and you, it was more keeping up with my rising credit card bills than no longer having a job that prevented me from making a bigger dent in my student loan repayment.

Back in September I made peace with extending my loan payments for another year or so. While I would rather not be carrying a $28K debt burden into a new year with uncertain income (if any), I wasn’t in sack cloth and ashes about it either. However, lately I’ve been reading quite a few articles around the personal finance blogosphere about getting debt free and it’s making me rethink everything I once thought.

The Math

On my last day of work a colleague admonished, “Oh, don’t pay off your student loan. Keep that as long as possible. It’s so cheap.” He said this without knowing my total debt, interest rate or monthly payment. True he was right, but he couldn’t have known that for sure. Instead he operated off the assumption that even if my student loan rate was 6-7%, the money I’d use for additional payments above the minimum would generate greater returns in the market right now (my IRA and mutual fund are up 14.9% and 10.5%, respectively) than I’d be saving myself in interest payments. That’s not even factoring in the compounding growth those returns will bring me in the future.

Interest Only

When trying to think through the best use for finite resources it is logical to want each dollar to have maximum impact. The gift of low interest debt can ultimately turn into its curse because the math makes it easier to justify keeping it, and for many it opens the gates to taking on more.

I have several friends living with the trifecta of high income, good credit, and loads of low interest debt. Many cannot quite bring themselves to accelerate debt repayment because “it makes no sense” to rush through a zero interest car loan and 3.5% student loans and mortgages. And while on paper that may be true, adding large recurring bills to the cost of taxes, food, childcare, transportation, insurances, etc. vaporizes six figures very quickly.
help me I'm poor

Other Considerations

Often when evaluating the price of debt it is easy to overlook the opportunity cost. For example, when I purchased my bedroom furniture in 2015 I took advantage of a 24 month 0% financing special. Although I was able to keep over $3400 in my pockets at the time, over the next two years I gave up a portion of my monthly cashflow to service that debt. That final payoff hurt my heart.
crying on the couch
But my broken heart mended pretty fast when the money that I would have spent on a monthly payment was once again mine to do with as I pleased. True, paying off my furniture only returned a measly $50 to my operating budget, but it felt so good to have it.

In my case $50/month is not making or breaking any of my financial goals. However, I am required to spend roughly $21,000 annually for the pleasure of keeping my mortgage and student loan. Regardless of the fact that it accounts for under 20% of my take home pay and a large percentage is tax deductible, that’s still a whole lot of money with which I could be doing other things.

For many of my friends debt repayment eats upwards of 40% of their take home pay. Even if they are repaying mostly principal, the maintenance costs leave very little room for saving or the investing that has a higher ROI than paying off the debt.


Even when we do the math on paper, it rarely translates to reality. “My money is better off in the market,” means nothing if the dollars siphoned from debt repayment never wind up in the market. Real talk, outside of my 401K max and ESPP I made no additional investments this year.
bad dorothy
I can’t even say that I didn’t have available cash to invest. It just went to GrubHub instead.

I always intended to increase my loan payments to 4X-5X the monthly minimum and buy additional shares. However, month after month there was never an extra $250 to $500 leftover after I was done “doing me.” Life happens and it’s normal to want to live it. I sure as hell do. However, living life without guardrails served to derail the point of low interest debt, which is to free up cash for more lucrative purposes. In hindsight I should have automated in order to protect my intentions from my actions.

Why Not Do Both

There is an age old debate about whether it’s better to invest or pay down debt. It doesn’t have to be an either or proposition. I’ve tended to do both at the same damn time. Sure I could invest more if I reclaimed the $21,000 my debt requires, but I would also lose out on years of returns if I didn’t make smaller contributions now. Here are my five considerations when it comes to handling low interest debt (let’s say less than 5% APR).

  1. Total Debt Burden – Before Christmas I test drove a $70,000 Benz E class. Even with a $10K down payment and a 3% APR, the monthly note would have been over $1000/month. It’s important to remember that cheap debt still creates a bill and the bigger the debt, the higher that bill is.
  2. Cashflow – How much monthly cashflow is debt consuming? Paying for past purchases prevents spending on present and current ones. Only your budget can tell you how much is too much. One of the biggest reasons I chose to keep cash on hand rather than pay more on my student loan was because servicing the debt was a low burden that did not prevent me from directing money toward other expenditures that I valued more. However, if debt repayment is preventing other priorities from happening, then even if the interest rate is 0% it’s still costing more than you can afford.
  3. Tax Deductibility – I do not recommend keeping a $10,000 annual payment just to “save” $2800 come tax time. That math does not make sense. However, when it comes to prioritizing which low interest debt to tackle first, this can definitely be a consideration.
  4. Loss of Income – Monthly bills that were manageable with regular income can quickly become impossible without it. Before determining that your debt is too cheap to get rid of consider if you would be able to maintain minimum payments without income and for how long. If the answer is not even a little, not even close, not even at all then once again the cost on that debt just skyrocketed. A fully funded emergency fund has kept me from needing a job and there is enough in there to keep SoFi and Chase from calling me for months.
  5. Comfort – This one is probably the most important factor and there is no formula for measuring it. The math can say whatever it will, but if you’re uncomfortable carrying tens to hundreds of thousands in debt then don’t do it. Conversely, if having less cash stashed or missing out on the gift that is compounding interest gives you heart palpitations then keep a level of debt that you can easily handle.

It’s Up To You

The topic of debt elicits strong feelings. Some see it as a tool to free up cashflow to be able to make more money elsewhere, and others see it as an evil to be avoided by any means necessary. Personally, I view it in both ways. There was no way I would be a homeowner right now without debt. However, a large part of me would love to plow through the red in my balance sheet as quickly as possible.

It makes it even more complicated when the debt isn’t in the crisis zone and you’re doing pretty darn alright. At that point it comes down to your personal goals and whether being debt free will get you there faster. That’s when you have to put the pen to paper and do the math. Remember, it’s not just about comparing rates. Opportunity costs and contingency plans also have to be considered. Ultimately, it doesn’t matter what others think as long as your decisions allow you to sleep comfortably at night.

Are you currently living with the gift and the curse of low interest debt? How have you decided to manage it? Are you really investing the extra money? Is there any extra money to invest? Hit the comments and leave your thoughts. In the meantime, I’m going to head over to SoFi’s website and glare at my loan balance in the hopes it will get scared and go away.


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12 thoughts on “Math Vs The Mind – The Low Interest Debt Conundrum

    1. That is so awesome that you were able to pay off the loans. Even if the rate was low I’m sure freeing up that cash was like a whole new world.

      Thanks for stopping by and leaving a comment. I love your blog so I was geeked to see your name pop up.


  1. I like the reality check here, that even if you could be earning more in the market, will you actually invest more? Or just keep the low interest debt and spend the extra money? Most would be better off ditching the the debt!


  2. My cousin and I are making good* money. He has a good chunk of student loans and was chopping it up. In the end because of the reasons you’ve stated he decided to cut back his monthly payments. His interest is low, and he’s also on that repayment plan and to him in 10 years all will be forgiven. He’s investing and in the process of buying a beach house. His job takes him all over the place so half of the year he’ll be renting that. Which is cool, but for me I can’t do that.

    I thought of doing the same and looking at how much I made this year I thought to myself that I shouldn’t have any debt. But as you said life happens. During the past few months I’ve been throwing the sink at my debts. I’ve paid all of my credit cards and student loan is what’s remaining. Your number 4 scare the beejeebus out of me. Losing my income would be a pain in the but in maintaining my expenses.

    I’m following Dave Ramsey’s steps to get this done and over with. With my current pace I’m looking at June- July to be done. I hate owing people money more than anything I hate being asked to pay someone back. Yes I could be making a few bucks off of bitcoin but that cloud over me needs to get gone. Even though I’m trying to pay off things right now other family members still need my assistance. There is always that worry something big will happen and I will need every dime. I have about 10k laying for emergency and I’ve been debating whether or not to use that towards my student loan. (I guess I’m not following Ramsey to the T lol)

    Enjoy the writing and especially providing alternatives.

    Keep up the good work

    Liked by 1 person

    1. Can you split the difference? Maybe keep $5000 in the emergency fund and put the rest on debt? Or maybe enough to cover 1-2 months of living expenses? I def like more cushion than Dave recommends, but if you want the debt gone then getting rid of a layer of financial padding will get you there faster. Either way, you’re on the right path.

      Thanks for the constant support. I love seeing your comments here.


  3. Thought provoking topic. I admit that my student loan interest rate is super low and this year I’ve been adding more extra payments but fell off and saved more for short term goals and emergency in low interest savings account. What mutual fund do you recommend ?

    Liked by 1 person

    1. I’m not qualified or certified to give mutual fund recommendations. Mine is through Chase. I have heard good things about Vanguard funds in terms of low fees. VTSAX is a popular one in the personal finance space. It’s an index fund that seems to give consistent returns. Check out the blogs Mr. Money Mustache, Budgets Are Sexy, or Mad Fientist. They talk a lot about investments.


  4. I’ve found interest free credit cards to be a gift and a curse but, in the end, I’ve loved being able to pay off cards early understanding how many years and thousands I’ve saved in interest. But, yeah, life happens and that freed up money is now funding new and different expenses, thankfully, without any new debt. Investing is a whole other story. Call it unfamiliarity or skepticism, I haven’t invested in anything beyond what my employers have selected for me. I hope to change that in the near future.

    Liked by 1 person

    1. Sometimes you just need the breathing room to regroup. I pushed out the repayment period on some interest free financing and it definitely helped me sort through how I was going to pay for it.


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