Sunday, December 11, 2011

Expense: student loans

The mortgage isn't my only massive pile of debt that I have to deal with. I have quite a bit of student loan debt from undergrad and a year of grad school. Let's dive right into the numbers:
  • Direct Loans (US Dept of Ed): $25,706.29
  • Sallie Mae: $5,922.31
  • TOTAL: $31,628.60
Listen, kids. Be extremely wary of student loans. I went to a "New Ivy" (whatever that's supposed to mean) that cost around $40k/year. I had a $15k/year scholarship. My parents paid the difference. But included in my financial aid package were Stafford loans, one per semester. I only ever took the government loans, which I think I had to in order to get any financial aid. My point is that I didn't think much of it at the time, and while it's not a huge crushing debt load it's pretty substantial and definitely something I have to deal with.

I studied engineering and economics in undergrad. Economics education has this brainwashing effect when it comes to money and financial decision making. I'm not going to rant too much about this today, but here's the anecdote you need to know:

Some time in your first or second year of macroeconomics, you come across Milton Friedman's Permanent Income Hypothesis (PIH). He was theorizing about the determinants of a person's spending in a given year, and decided that a rational actor would have some expectation about his future path of earnings, and then consume some "average" amount so that he would end his life having spent all his money (I'm paraphrasing here). It turns out that the PIH has approximately zero predictive power, which is to say it's complete malarkey, but they still teach it in undergraduate courses. Also Friedman was making things up to "show" why a temporary tax cut won't increase consumption because he had an ideological bone to pick — just sayin'.

Anyway. When they teach you about the PIH, they also explain how debt of all kinds can be "rational". When you're young, you don't have much human capital and your earnings are comparatively low. You expect your future earnings will be higher. You can borrow money now and pay it back with your future earnings. People seem to prefer steady levels of consumption rather than ups and downs (assumption alert!). Ipso facto young people should go into debt.

That's the gyst of it anyway. I was fully expecting to carry along my student loan debts as long as possible. It's cheap money, right? Maybe add a car loan to that while I'm at it. I may as well enjoy my future richness today.

No, that is stupid. I owe a lot to MMM for showing me the light, that my economics education had me worshiping false idols and making me a slave to creditors. Okay I've gotten ahead of myself, let's get back to the numbers.

Here's my monthly expenditures on student loans:
  • Direct Loans (US Dept of Ed): $192.85/mo
  • Sallie Mae: $69.88/mo
  • TOTAL: $262.73/mo
This is a substantial chunk of my expenses, not to mention a big negative number keeping my net worth down and preventing me from building up any investments. It doesn't make sense for me to put my money in the market until these are paid off. To generate $262.73/month from my 'stash I would need $78,819 invested if I'm using a 4% Safe Withdrawl Rate (SWR) or $105,092 with a 3% SWR. That is insane. I don't know how they're getting away with charging me 6% interest on student loans, but they are, and that's after I consolidated.

The student loans have to go. Luckily I'm pulling down around $1300/month in discretionary income, which is enough to vanquish my student loans in two years.

GOAL: Pay off all student loan debt in two years, by Dec 31, 2013

I'm hoping to do it sooner too. I'm expecting something of a holiday bonus come Christmastime, plus a sizable tax return come April, so between those two and my regular paychecks I want to pay off the smaller loan by next spring. That starts a little debt snowball and I can throw everything at the big loan.

I'm really itching to start investing. That's another incentive to double down on Mustachianism and really try to squeeze my expenses lower and lower. Every additional dollar I can save now means I'm pulling in the date when I'll be free of student loans, and that means I can invest the shit out of some shit. I can't wait.


  1. I'm a recent Mustachian Understudy and just wrapping up the final semester of the degree, hoping to be debt free by the spring as well. You can absolutely get this done. Keep tracking and keep posting. And apparently use Mint *chuckles*

  2. I had a very similar college debt. About $25,000 dollars for six years of college. I graduated when I was 26 and am 30 now. I'll be making my last loan payment in January. You can totally do this! Keep your eye on the prize and don't get detracted by unessential "needs" and "wants." You'll be done before you know it.

  3. Good work! That's awesome. I have every intention of sticking it to The Man by paying off these loans as early as possible. Eye on the prize.

  4. I have a little more than you ($51,000-ish). A month or so ago I put together a loan amortization schedule for my loan just for the hell of it. The fun part about that is, if you set the spreadsheet up right, you can see how much interest expense each extra payment is saving you. The not so fun part is that once you see how much interest you wind up paying, you'll pull out all your hair. But at least that way you'd save some money on that universal grooming device.

    So why am I not throwing money at that horribly un-mustachian pile of oweage? Two reasons:
    1) My wife is in grad school and I'm laser-focused on keeping her out of debt. By the way, if you make a payment within 120 days of loan disbursement you get to call it a refund and they nix your accrued interest.
    2) As the current sole breadwinner of our little family unit (us, one 15 month old cutie of a daughter and one yellow Labrador), I have a job in a volatile industry, so I spent the last several years piling up cash. It earns crap for interest, even at ING, but I sleep at night.