Kayla called Sunday afternoon while I was folding towels on the bed, and about five minutes in she asked, "Why don't you just pay off that student loan? You've got the money sitting right there." She's not wrong that it's sitting there. Tyler and I have been having the same argument with ourselves for about a month.
I owe $5,100 on my student loan from the pharmacy tech program. The rate is a fixed 3.5 percent and the payment is $112 a month. In February of last year the balance was $6,800, so it has come down $1,700 in 18 months just from paying the minimum.
Here's where those payments went. Eighteen payments of $112 is $2,016. Of that, $1,700 went to the balance and $316 went to interest, which works out to about $17.50 a month in interest. Every month that interest number gets a little smaller, which is the one nice thing about a fixed-rate loan you just keep paying.
If you're wondering how I'm still paying for a program I finished in 2015, the short version is that payments were paused for about three and a half years during the pandemic, and the balance just sat there. Now it's moving again.
The case for paying it off
It's a real debt and I'd like it gone. If we wrote one $5,100 check out of the house fund, I'd never see that $112 payment again, and we'd skip the rest of the interest. At $112 a month, it will take 49 more payments, the last one a little smaller, to pay off on its own. That puts the end around the fall of 2030. Altogether that's about $5,480, so the interest left to pay is roughly $380.
So the case in numbers is about $380 of interest over four years, and $112 a month freed up.
Why we're keeping the minimum for now
The rates are close, and right now they lean toward saving. The house fund is in a high-yield savings account paying 3.8 percent. The loan charges 3.5 percent. On $5,100, that's about $179 a year in loan interest and about $194 a year in savings interest. So for now, that money earns about $15 a year more sitting in the house fund than it would save going to the loan. Taxes on the savings interest eat most of that edge, and we get to deduct the loan interest, so call it a wash. But a wash isn't a reason to empty the house fund.
Cash is what buys a house. The down payment and closing costs have to be cash in an account. The loan officer we met in March told us closing costs around here run about 3 percent of the price. On a $150,000 house, that's $4,500 by itself. Paying off the loan would knock the house fund back by $5,100, and that's money we can't borrow back.
July reminded us why. When the truck needed a $1,380 repair last month, it came out of the emergency fund, and we're still rebuilding it. I'm not in a hurry to make our cash any thinner.
A lender barely notices $112. Lenders look at how much of your income goes to debt payments. Before taxes, we make about $6,850 a month together, not counting overtime or mowing. Even with a house payment of around $1,150 plus the $112, that's about 18 percent. The limits for the loans we're looking at are a lot higher than that.
The numbers that could change our minds
- If the savings rate drops below the loan's 3.5 percent, the math flips. It's already gone from about 4 percent last fall to 3.8, so I'm watching it.
- If a lender tells us that $112 payment is the difference between approved and not, we'd pay it off before closing.
- If we hit our $35,000 goal by the end of the year with money to spare, the extra goes to the loan.
- Once we're in a house and the emergency fund is full again, we'll keep the $112 going and add whatever else we can to it.
When I told Kayla all this, she said, "So you're keeping it over fifteen bucks." Not exactly. I'm keeping it because right now that $5,100 does more for us in the house fund than it would going to the loan. The day that changes, so does the plan. And this is just how two people with a spreadsheet looked at it. Somebody who does this for a living might see it differently, so ask one if you're in the same spot.
