College was one of my happiest times. I was learning and growing at a rapid pace; immersed in the arts, literature, and pedagogy for 6 years. I left grad school with my pride, a sense of purpose, and a whopping student loan bill of about $68,000. This is my student loan debt story.
My student loan debt story begins with a lesson on capitalized interest
After leaving school, my student loan debt grew within a matter of minutes. In reality, it was after the grace period ended and I owed my first payment. My balance grew because I never paid any interest on my student loans while in school. All my unsubsidized student loans and grad plus loans were collecting interest over a period of 6 or less years. This interest was then added to my principal balance once my student loan payments began.
My plan to pay off my loans was to not pay them off at all
You read that right. I wasn’t going to pay one more dime that I was required towards my student loans. I had a teaching job lined up, and I believed this would be my permanent career. This position qualified me for the Public Service Loan Forgiveness program (PSLF). PSLF offers complete student loan forgiveness after 120 qualifying payments (about 10 years). PSLF is a program worth taking advantage of if you work in public service and plan to stay there.
I filled out my PSLF application and my loans were transferred to Fed Loan Servicing. Looking back, I *should* have done a direct consolidation loan from the very start. If I did this, I could have qualified for forgiveness. I did not know about this at the time. Once I found out I was already on my way to accumulating those 120 qualifying payments. If you do a direct consolidation loan, even though the loans remain federal, it resets the PSLF payment clock.
After my loans transferred, I made sure I was on an income-based repayment plan, a requirement for PSLF. The income-based repayment plan knocked my $700+ standard repayment down to $183.91 a month for my first year. This seemed like a pretty sweet deal.
I taught for about 5 years. Each year I completed an Employment Certification Form (ECF). This verified I was working at a qualified school. I also completed an Income-Driven Repayment (IDR) re-certification form. This form looked at my tax returns, so as my teaching income increased so did my payments.
By 2019, my payments were $307.87 per month.
The choice to give up PSLF
I left teaching in June of 2019. While many factors went into this decision, a major one was student loan debt. HisFI and I talked it over countless times. We broke out a spreadsheet and looked at the long-term impact of leaving.
I would be leaving teaching to freelance full-time. My side-hustle had grown and I knew I could easily make my teacher paycheck within a few months. But could we afford to pay off student loans? Or should I find a different public service job?
The numbers worked out, and we decided to pay off my student loans within 3-5 years while still investing in our retirements. The plan consisted that we would live primarily off HisFI’s income and most of my income would go towards debt. We also had some money coming in from a house sale and HisFI’s job severance that would help bring the total down.
To save, we decided to cut off international travel for 2020 and get serious about student loan debt pay off together. I know I could not have made this drastic decision without HisFI. It was our partnership and our solid footing in doing our finances together that acted as a catalyst for this decision.
The problem with IDR plans and leaving PSLF
I started with about $68,000 and this had grown to $78,000 by the time I left teaching. Capitalized interest wasn’t all to blame. My income-based repayments never touched the principal balance. They weren’t even covering all the interest each month.
This didn’t frighten me when I was on PSLF, but it did punch me in the gut when I no longer qualified for PSLF.
How did I start to pay off the student loan debt?
So there I was with about $78,000 of student loan debt. We estimated that we could pay off the student loans by 2025 while still investing and come out ahead. Below are some of the ways we are tackling my student loan debt.
1. Attack the Perkins loan
I had one federal Perkins loan. These loans are no longer distributed, but they were given to students with a high need. It was about a $5,000 student loan. The Perkins Loan Cancellation program for teachers allows you to cancel a portion of your loan for every year you work. After 5 full years of work, the entire loan will be forgiven.
I got almost all of my Perkin Loan canceled this way. I had been filling out this form each year along with my PSLF form. So this was already on its way to being taken care of.
2. Target high-interest loans first
I had several student loans from grad school that had 6.9% interest rates. Using the debt avalanche method, I targeted the loans with these high-interest rates with my extra payments first. The large chunk of money that came in from our house sale and HisFI’s severance went towards these loans.
3. I decided NOT to refinance
Until a month ago, the plan was to refinance my student loans as soon as we purchased a new home. (We moved to a new state and didn’t want refinancing to mess with underwriting) We weren’t sure how much of the severance money and house sale funds would actually be left to pay -off student loans once the move was complete.
It turns out it was enough to knock out the loans with abnormally high-interest rates. Now my average interest rate is 4.26%. I am targeting the loans with an interest rate of 5% (only two) and these should be gone soon.
Refinancing would have been the smart decision if I could not pay off the high-interest loans quickly. However, leaving my loans as federal student loans gives me flexibility in case of financial hardship. This seems especially important considering the economy and our current public health crisis with COVID.
My current student loan debt story
I currently owe about $36,000 of student loan debt. HisFI losing his job and finding a new one was a blessing in disguise. The severance and move made this possible. Our partnership (soon to be marriage) made this happen.