Can’t Stop Won’t Stop – Why I Continue to Overpay My Student Loan While I Don’t Have Income

The email notification flashed across my phone, a reminder that my monthly student loan payment would be auto-debited from my account tomorrow. Mint.com shows that for the last three months my monthly cashflow has been in the red, as my spending outpaces my income. I’m not alarmed. That is as it should be since I became unemployed in mid November and the last of my paychecks from my former employer hit my account at the end of that month. Since then I have been living off of my emergency fund, stocked with more than six months of living expenses.

To ensure that my savings makes it to the six months for which it was intended, and maybe even stretch it several months beyond, I have made a concerted effort to decrease my monthly expenses. I upped the deductible on my 2005 Pontiac to reduce my monthly premium by 25%. I cancelled my gym membership, choosing instead to not bother working out at all run outside and use free workout videos on YouTube. I ditched cable, kept my heat at 65 through the winter, and got my BMW on to get around town. As I embark on the road of entrepreneurship with a business that is unlikely to pay me a salary for a long while, I’m in conservationist mode. Cash is king and keeping as much of it as possible is imperative. Yet every month since the severance check I have not only faithfully maintained my student loan payment, I’ve paid nearly 50% more than the minimum due.
why

I would likely qualify for forbearance because my monthly payment is more than 20% of my income at this time. Excluding housing my student loan overpayment is my largest monthly expense. So if money in the bank is more precious than unicorn tears, why am I not exercising the option to pause my payments until I am at least bringing in some income?

It’s Not That Bad

Although I abhor the fact that I still have tens of thousands of dollars in student loan debt, compared to many of my peers from grad school my burden is light. I graduated owing a fraction of what most of them did. Because of this, my monthly payments have never been oppressive. Once I refinanced and cut my interest rate in half the picture only got better. While it would always be nice to have it paid off and keep that cash, the outlay itself was never a hardship.

In fact prior to my layoff I was paying more than three times the monthly minimum. When I was saving for living expenses I factored this aggressive repayment amount into my goal. Cutting that amount in half is conserving more cash compared to the original earmarked reason why I saved it.

Racing the Clock

The interest rate on my loan is low, currently under 4%. When the  loan was disbursed the rate was under 3%. Ahhh, the bane of variable rates. Over the last year my APY has slowly increased and I know that that will continue. Staying current on my loan and continuing to knock out principal counteracts the rising interest with a lower balance to which to apply it.

Capitalization

Even if I put my loan payments into forbearance my lender won’t be putting the interest charges there too. While I won’t be penalized for not making a payment, all of the interest that loan accumulates during that time will be added up and tacked onto my loan as principal, ready to be subject to what is guaranteed to be a higher rate months later when I’m ready to resume a payment schedule. Even if I just paid the interest during that time period those payments would just steadily increase because the principal would remain untouched.
hard pass

Final Thoughts

Although it is no fun to see my emergency fund is dwindling, I feel as though the reason I even built up that much savings was to prepare for such a time as this. The money was saved with the intention of not only servicing the loan, but to continue to aggressively attack it. I have already cooled some of that aggression and even left myself additional wiggle room to pull it back more if I need to do so before income becomes a part of my life again.

When I graduated from business school I promised myself that my student loans would be paid off within five years. This June marks four years since I walked across that stage. With 15 months to go before my goal date, I’m not going to allow a few months of funemployment to deter me. Besides, if worse comes to worse I have every confidence that my current skill set can earn me enough to cover the monthly debit.
streetwalker

Anyone else still slogging through student loans? Did you give yourself a timeline to pay them off? Are you including student debt repayment in your emergency fund? What are you doing to get them paid off faster? Hit the comments and share your thoughts.

 

This post is part of the College Investor’s Student Debt Movement, an effort to inspire and encourage people to tackle their student loan debt. Join the movement and check out the College Investor’s site to get loads of resources and advice on paying off those pesky student loans. 

 


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11 thoughts on “Can’t Stop Won’t Stop – Why I Continue to Overpay My Student Loan While I Don’t Have Income

  1. Definitely worth it to maintain the payments. I deferred even when I could AFFORD the payments. It made no sense! But I was raised to delay/avoid paying bills as much as possible. So had to break that mindset so I could kick debt’s ass to to curb.

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    1. I was brought up the same way. If I don’t have to pay for it now that means I didn’t spend the money. Meanwhile I wouldn’t be looking for ways to figure out how to get the money. Thank goodness for financial literacy. Never too late to learn.

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  2. The temptation is real!
    I had to write myself a list over all the things I am supposed to save for first before I can get any more aggressive about my student loans. January when I got my annual repayment statement was the worst, and I must admit I succumbed and paid twice as much as usual.
    One day, one day I will kick it in the curb!
    But first, rock-solid emergency funds.

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    1. I don’t think you can go wrong either way. As long as you have some money in savings if you feel more comfortable getting rid of the student loan debt prior to having a fully loaded emergency fund, I say right on. One of the gurus of this game (Mr. Ramsey himself) would 100% endorse that strategy. I read your blog so I know that a full stocked emergency fund and a student loan balance of 0 are in your near future.

      Liked by 1 person

  3. I love your approach to this. I think intentionality is the key because it means you know exactly what you’re going into and what the trade off is rather than choosing blindly. It sounds like either continuing to pay off the loans or going into forebearance could have been smart options depending on the vantage point, and I’m glad you were able to discern what was right for you! You are killing it at looking out for Future You. =)
    My student loans are paid off, and I did have a goal–a couple of them actually–in how I did it. At the time, I was not yet aware of the world of personal finance and I was going off of the basics of not wanting to be in huge debt, so no, it didn’t occur to me to relate it to my emergency fund. I’m pretty impressed by your nuanced approach to your situation!
    Presently, I’m unsure of my own employment future and am pondering healthcare out-of-pocket maximums in relation to my emergency fund. It’s good to cover your bases with wherever your life is at!

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    1. Hi Mollie. Thanks so much for stopping by and leaving a comment. Don’t get me started on healthcare out of pocket maximums. I have 2 months of COBRA premium coverage courtesy of my former employer before I’m on my own. I’m looking at renting my condo and finding a cheaper place to live to free up cash to pay the premiums on my own. I’m also buckling down and getting serious about bringing in additional income. I’m realizing that even with a stockpile of cash, time goes by quickly and it won’t last forever.

      Please do come back again and share your thoughts. They are much appreciated.

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  4. Going through the motions right now. I’m working about 5-15 hours of overtime weekly. I’m able to throw one full check at it. It definitely makes a difference to have side jobs that can cover small expenses. If I keep up the rate I’m going right now I’ll be done by August latest. That will be a burden that’s lifted and giving me room to breathe.

    Keep up the good work. Like the post.

    Liked by 1 person

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