Paid Off My Private Student Loans

I purged the variable-rate-debt snake from my household and paid off my private student loans on St. Paddy's Day. Yep, made one lump sum payment of $31,584.24 to pay it off. Now I have approximately $51.5k in federally subsidized student loans remaining. I'm less concerned about paying my federally subsidized student loan off because: (a) it has a fixed interest rate of 5.125% and (b) the monthly payment is only $360.08/month.

You may be wondering how I got the money to make a huge lump-sum payment. Back in December 2009, I came across a significant windfall of ~$33k. (Due to a confidentiality clause, I can't divulge the source or the reason for the windfall.) I spent some of the windfall on various things, but managed to hold onto $28.5k for over a year. I didn't know what I wanted to do with the money. Should I keep it as a potential down payment for my first home? Should I just stash it as my secondary emergency fund? Or should I pay off my student loans?

I finally worked up the courage to use the money to pay off my private student loans. Although the interest rates are really low right now (3.583% APR), I'm not sure how much longer it will stay low since it is a variable rate loan. Secondly, I've been accruing anemic interest on my savings accounts ranging between 0.5% - 1.59% APY. Thirdly, if you add my EF balance and my "earmarked" savings, I have approximately $24,000 remaining in the bank. I felt I had enough of a financial cushion to pull the trigger.

I was planning to snowball my entire student loans but I've changed my mind. As I've indicated above, the minimum monthly payment and the fixed interest rates on my remaining federal student loans are both relatively low. Although the balance is still relatively high, I feel less urgent to pay it off.

Instead, I'm going to focus on saving money for a down payment on my first home. Although I'm pretty confident that interest rates aren't going to skyrocket any time soon (in the next five years or so), I want to be able to have money to buy something before it does.

My DIY ROP Life Insurance Policy

As you know, I'm currently in the process of purchasing a $500,000 term life policy for the benefit of my sister, who has recently taken in my parents. I had my medical exam last Friday and Accuquote just confirmed that it received my application. I'm told the underwriting process takes about 4 to 6 weeks, so I should be getting my policy by my next birthday. (Gaaaaaah. I share the same birthday as Michael Vick?? Ugh.)

*Ahem* I digress.

Assuming that my health exam results are "excellent", my annual premium for a basic term life policy should be $595, or about $50/month. I was also quoted $1,250/year, or, $104.17/month for a Return of Premium ("ROP") policy.

ROP policies will allow term life insurance policyholders to recover all or part of their premiums paid over the life of the if they do not die during the stated term. Basically, with an ROP policy, I'll be paying an insurance company $104.17/month now, to get back $104.17/month 30 years later. (By my calculation, the yield on the additional ROP premiums would be about ~3.98% APY over 360 months.)

Any claim that the net cost under an ROP policy is zero, ignores opportunity costs or illiquidity. More importantly, the additional premiums are wasted if the policyholder does die during the term.

This site gives an objective explanation of the pros and cons of ROP policies. But ultimately, I think the most compelling argument against the ROP policy is:

"Why Shouldn't I Get ROP Term Life Insurance?

The main reason people don't get ROP term life insurance is that it costs more. It can cost up to three times as much as term life insurance.

Some financial advisors also suggest that if you can afford ROP life insurance, then you should consider getting regular term life insurance and investing the difference."

Although I'm convinced that the ROP policy is not worth it, I'm intrigued about getting a "refund" of my premiums. I wondered whether I can DIY my own ROP policy?

Confession: Although I have enough money to pay this year's premium, I just realized that I don't have enough room in my monthly budget to pay for subsequent years' premiums. In order to pay for my life insurance policy, I'll need to reduce my monthly student loan payments from $1,478/month to $1,373/month (for the "pretend" ROP policy), or, $1,428/month (for the basic term life policy).

My Plan: I immediately set aside $595 for my basic life insurance premium and an additional $660 for my hypothetical ROP premium for this year. I created a sub-account in my Smartypig account (2.01% APY) specifically to park my "pretend" ROP premium. I also adjusted my budget by reducing my SL payments to $1,373/month. I plan to save and/or invest the additional $55/month "pretend" ROP premiums.

I can already hear the trolls - - "The extra $55/month is better spent paying down your ginormous student loans!! You're such an idiot. No wonder you got yourself in such a horrendous financial hole." And quite frankly, I can't argue with the trolls, since they're right. My private SLs have an APR of 3.547% and are likely to go higher in the upcoming months. But I want to point out that I banked this year's "pretend" ROP premiums from my future spending earmarks, not from my emergency fund or future student loan payments. So I don't want to hear how paying down 3.547% APR is better than banking at 2.01% APY. I get it. I really do.

And I've decided to proceed with my DIY ROP plan because I'll still be able to pay off my private SLs in 2 years with or without the additional $55/month. (Even at the reduced $1,373/month payment, I'll be paying over 3 times the minimum monthly payments owed on my private SLs and over twice the minimum monthly payments on all of my SLs combined.) But the biggest reason why I'm doing this now is because I highly doubt I'll remember to start setting aside my "pretend" ROP premiums several years down the road when I payoff my SLs.

Although I parked this year's "pretend" ROP premiums into a savings account, I intend to dollar cost average my future monthly hypothetical premiums into my Fidelity non-deductible IRA account with commission-free ETFs. In essence, my gamble is whether my "pretend" ROP investments can match or beat 3.98% APR, or even 3.547% APR.

Only time will tell...

A New Milestone

Eleven years after graduating from law school, I've finally achieved a milestone that I've long given up hope on accomplishing - my student loan balance is finally under six-digits! Woo to the hoo!

Between 1995-1998, I originally took out :

• $25,500 in Federal Stafford Loans, $30,000 in Federal Unsubsidized Stafford Loans
  
• $47,325 in Private Student Loans
• $4,100 I borrowed through the Federal Perkins Loan program. (Paid off on 3/5/07.)
  

My original student loan amount in 1998: $106,925
My current combined student loan balance: $99,877.98

And keep in mind, I still haven't paid my monthly Stafford loans yet. At the end of the month, my student loan balance would be even lower.

Ohhhh... as the Seven Dwarfs sang, I (still) owe, I owe, so off to work for da Man I go...

Oh My Gosh... I (Finally) Caught Up To My Original Student Loan Balance!

As regular readers of this blog know, I've been bemoaning my irresponsible borrowing of student loans 13 years ago. Regular readers also know that I've been whining about how I've been out of school for 10 years, yet I owe more on my student loans now than when I graduated due to several forbearances I took. (My prior rants on this issue can be read here, here and here.)

For those unfamiliar with student loan forbearances, the process allowed me to postpone monthly payments due to hardships (or any other approved reasons), but it also allowed interest to continue to accrue, adding to the principal owed.

Up until now, I couldn't figure out what my exact original student loan balance was, because I kept such shoddy records. (You didn't expect me to be in the debt-hole I'm in by being organized, did ya?)

But today, I found the information I was looking for: I originally took out $25,500 in Federal Stafford Loans, $30,000 in Federal Unsubsidized Stafford Loans and $47,325 in Private Student Loans. [UPDATE: I forgot to add $4,100 I borrowed through the Federal Perkins Loan program. I completely forgot about this since I paid off the Perkins loan on 3/5/07. Hurray!]

My original student loan amount in 1998: $102,825 $106,925.
My current combined student loan balance: $102,726.85

I just discovered that for the first time in 10 years, I owe less [in my Federal and Private student loans] than when I graduated!

Note: This is how I really dance.

I know I shouldn't be elated about owing now what I did back in 1998, but I can't help but feel ecstatic. I no longer have the "sinking in quick sand" feeling. I feel like I'm FINALLY clawing my way out of this hole I've dug for myself 10-13 years ago.

Oh, happy day and what a great way to end 2008! This is the best Christmas gift I've ever given to myself!

Tap My 401K to Pay My Student Loans? Not a Chance

Someone posed the following questions to Donna Freedman at MSN Money’s Moneyblog. Although the writer wasn’t addressing me, I think the writer thought of these questions after reading about how much debt I have.

Hi Donna!
I have three questions that I thought you would be the best one to ask. Forgive me if any of them are dumb!

1) Does it not seem that it should be made legal (if it isn't), to roll one's 401k money over into student loans?

2) Is 100k the "usual" amount for an education these days? I realize that is a very broad question but it just seems that unless you're talking PHD, to end up with that much in student loans must mean living pretty high on the hog in the process. (!)
…
What say you oh money guru?!

P.S. I enjoy your articles immensely!

Initially, no, these questions aren’t dumb. And secondly, I too enjoy Donna’s articles tremendously.

Let me address question #2 first:
Is incurring $100k normal for education these days?

Answer: That depends whether you attend a state school or a private school. It would also depend what degree you’re working towards.

Using my life example:

I got my B.A. from a state school that is currently charging in-state residents $8,100 for tuition and $1,500 for textbooks for the 2008-2009 school year. (The fee for out-of-state students is $19,000.) Assuming 4 years and 4% inflation per year, a current student can expect to incur approximately $41,000 to obtain a Bachelor’s degree.

I got my post-graduate degree from a private school. According to my alma mater’s website, the annual tuition is now $37,890/year (not including student activity fees, parking, etc.) There is no estimate for textbooks but I’ll assume $1,500/year. Assuming it takes 3 years to get the degree and 4% inflation every year, a current student can expect to pay $122,959 to obtain this degree.

Keep in mind that the estimates above do not include room and board, transportation costs, etc. So, yes, it is possible to incur $100,000 for education without living “high on the hog” these days.

But…in my case my student loans are currently high as they are because I did live “high on the hog”. I would estimate that 20%-25% of my student loans were incurred to pay for living expenses in addition to tuition/textbooks. I could have worked while I was attending school to pay for my living expenses. But I chose not to since I wanted to “have fun” while attending graduate school.

Additionally, as I explained in this prior post, the combination of a low starting salary, a layoff and irresponsible spending forced me to seek several forbearances on my student loans. Although the forbearance option allowed me to postpone my monthly payments, it also meant that interest kept accruing and adding on to the principal I owed. As a result, 10 years later, I owe more on my student loans than when I graduated.

Now, returning to question #1:
Does it not seem that it should be made legal (if it isn't), to roll one's 401k money over into student loans?

Answer: A 401k participant may be able to take a “hardship withdrawal” to pay for post-secondary education for 12 months IF the participant's 401k plan allows for it. You typically need to show that you don’t have other resources to meet that need. Even if you can overcome this hurdle, the early withdrawals will be subject to applicable income taxes and a 10% early withdrawal penalty if you are younger than 59 ½.

I’m not sure if the writer was asking whether we should be able to use our 401k money to pay off student loans without penalty. My answer to that questions would be, “No.” I used to wish and pray for this type of “windfall” legislation, but not anymore.

First off, by participating in the 401k, I derived couple of tax benefits: 1.) it reduced my taxable income on the years I contributed and 2.) my returns in my 401k are tax deferred. (For the purpose of this discussion, let’s forget the fact that my 401k is losing money this year.) I’m assuming that the 10% early withdrawal penalty serves the dual purpose of discouraging me from tapping my 401k before retirement and to pay back taxes that I would have had to pay had I not participated in the 401k. Needless to say, removing this disincentive is a bad idea since it discourages saving and it robs the country of taxes that are rightfully owed.

Additionally, there are also plenty of good articles like this one that point out why people shouldn’t raid their 401ks to pay off debt, including double taxation and lost compound earnings.

But the real reason why I won’t tap my 401k even if there wasn’t a tax penalty is because I’m a true believer that when I've gotten myself into debt the old fashioned way, I need to take responsibility for it the old fashioned way by paying back the principal and interest little by little, bit by bit. The process is admittedly slow, tedious and painful. But the process has taught me the valuable lesson of how important it is to budget and live within my means.

Due to my recent commitment to tackle my debt, I’m proud to report I haven’t incurred new debt this entire year and I do not plan to either. Even my
criticized upcoming Vegas trip will be paid with cash I've earmarked as "mad money".

I realize, however, that although I won't be incurring new debt to take this trip, it's still not prudent since the money spent could be used to pay down debt or to bolster my emergency fund. Sigh. I may not always do the "right thing" financially but I am willing to pay the consequences.

Wish I Had a Time Machine

I’ve updated my debt balances and I have to admit, I’m getting really impatient with my progress. I know I’m making decent progress every month, and I know I’m better off now than I was even 3 months ago.

I’m also VERY grateful that I haven’t had any serious setbacks since I started my blog (knock on wood). But this plodding is making me antsy and I’m afraid that this dissatisfaction will make me fall off the proverbial horse.



In an attempt to make myself feel better, I think about how things were back in November 1998. I’d just graduated from law school in June and I’d taken the bar exam some time in August or September. I was still working as a clerk at a private law firm until I got my bar results.

After I passed the bar in late November, I was earning $45,000/year with no retirement benefits. (Yes, folks. Not ALL attorneys make bank straight out of law school.) The deferral period for my student loans were coming to an end and the repayment period was starting. I’m pretty sure I had less than $500 in my savings account at the time and I had no clue how I was going to repay my student loans. I’m also certain I had quite a bit of credit card debt since I lived on my credit cards while I was unemployed after graduation. Stupid, stupid, stupid.

Here’s a bit of depressing (or more accurately, pathetic) news: I graduated in 1998 with approximately $100,000 in student loans. Guess how much I currently owe 10 years later? $103,619.61!! This is due to negative amortization from forbearing on the loan when things got tight. (Keep in mind that at the time, "financially tight" meant I wanted a new Coach purse and my credit card was maxed out.)

Let me be a warning to you all: Do not request a forbearance unless you ABSOLUTELY have no other options. (I really feel like belting out Cher's "If I Can Turn Back Time" right about now...)

But flash forward to present. Although I have just as much debt as I did in 1998, I also have MUCH more in my retirement and liquid savings. I've also turned a new leaf and I have a plan for paying off my debt by 2014. I'm not incurring new debt in the interim and I'm also saving little by little.

But why, oh, why is this process so tedious and excruciating? [Whine...]

I wish I had a time machine where I could see how I'm doing in 2018. If all goes to plan, I'm hoping that:

• I'm debt free other than my mortgage
• My home is financed with a 15-year fixed mortgage
• I'll have $36,000 in liquid savings
• I'll own $3,500 in US Savings Bonds
• I'll have $457,000 in my 401k and Roth IRA
• I'll be making plans to downshift my career at age 59 1/2.

I hate putting down my long term goals in writing. After all, as Homer Simpson says:

(Thank you to Sallie's Niece, from whose blog I lifted this picture.)

I guess in 2018, I'll look back at this post as a time capsule. I wonder what I'll be thinking then?

Anyhow, it's election day. Hope you're all voting!

Mental Health Break - In Search For ANY Good News

I'm scared. I'm scared that I may be laid off during possibly the worst financial crisis in the world. I'm scared that if the current "burn rate" (i.e., selloff) in the stock market continues, my 401k will be worthless in 19 days.

I know I have time on my side so I shouldn't panic. I also know if I dwell on these things, I'm going to drive myself crazy. So, for the sake of my sanity, I've decided to take a break from looking at my 401k/investment account statements for a while.

But why is it that I have this masochistic desire to look at them anyways? I'm just as stupid as the horror movie character who hears a strange noise and goes searching for the source!

Warning: Scene from Return of The Living Dead. This clip has graphic scenes and strong language.

I'm also considering not watching CNBC anymore despite the fact that I'm addicted to it, especially Fast Money. Giving up CNBC is going to be tough, though, since I have a mad crush on Dylan Ratigan. (Blush.)

Finally, as part of my sanity-preservation effort, I've decided to look for some (any) good news. Here's my list:

1. The variable interest rate on my private student loans went down from 5.336% to 4.518%, reducing the monthly minimum payment from $504.91 to $488.85.
   
   Since I'm not strictly following Dave Ramsey's snowball method with respect to my credit card, I'll continue to pay my private student loans $505/month. The fact that I'll be paying more than the minimum on my dreadful student loans makes me happy.




2. This article points out that for the first time since January 1998, consumers paid off more debt than they took on. I certainly fall into that statistic. As the article points out, paying off debts means households will have healthier finances. (Not to be a Negative Nellie here, but is this reduction due to the fact that many people are no longer qualifying for loans?) Regardless, the fact that my savings is going up and my debt is going down makes me happy. Now only if my net worth will go up....




3. My Citibank Ultimate Savings Account's interest rate recently went up from 2.25% to 3.5%. Woo hoo!

If anyone else has some silver lining from this economy to share, I can really use some right now!

The Evils of Negative Amortization

Lately I've been addicted to reading other people's PF blogs like Sallie’s Niece or My Debt Blog. Like me, they are also struggling to pay down onerous student loans. It's a bit depressing that I'm 10 years older than these bloggers but I haven't made any more progress than they have in eliminating my debts.

Where did I go wrong? Ahhhh... I fell for the easy lure of student loan forbearances. After graduation, I sought (and received) many forbearances and the interest kept accruing.

I'm truly embarrassed to admit that I never understood the concept of "negative amortization" despite the fact that I graduated with an Econ degree. (I graduated from undergrad in 1994. Yes, readers, I'm a slow learner.)

Just to illustrate, I graduated from a second-rate law school in 1998. (All of my student loans are from my legal education.) My original balance on my private loans in 1998 was $47,325. What's my current balance? $49,136.14 as of 7/31/08!! Although it's been 10 years since I graduated, I'm $1,811.14 over the original balance due to negative amortization.

Since I kept shoddy records, I'm not sure how much I'm behind in my Federal Student Loans. But I'm sure it's also in the thousands.

Don't get me wrong. There were times when I REALLY needed the forbearance, like when I was laid off in 1999. But other times, I just wanted to free up money to play. The bottomline is, I should have used the forbearance option sparingly and only in emergencies. I didn't and as they say, I'm paying the piper and robbing myself of financial security. One of the many life lessons I had to learn the hard way. Sigh....