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Hi Pete The Planner & Team,

I just finished my masters and it's time to start paying for all that education. I want to pay off my loans and be debt free as quick as possible. I owe just under 56K in total. I have several options to pay off my debt. My options can be summarized as follows:

1) a fixed high monthly payment - $600 a month (totaling $71K after 120 payments)

2) a fixed low monthly payment - $335 a month (totaling $100K after 300 payments)

3) an increasing payment amount that starts at $400 a month and grows to $899- (totaling $74K after 120 payments)

4) an increasing payment amount that starts at $244 a month and grows to $534- (totaling $109K after 300 payments)

I'm leaning towards option 4 and paying as much as possible each month. My thoughts are I can pay off my other debts and save money with option 4 without living paycheck to paycheck. I owe about 10K on my car and after it is paid for I want to move that $267 a month into my student loan payments and hopefully be done paying a car payment for several years. I also want to be able to put in a good amount into my savings and really start adding to my 401K now that I'm pushing 30. Option 4 to me seems like the plan to achieve all of my goals while still being able to live a little in the moment.

What would be your advice for selecting a payment method?

Appreciate the advice!

Hey Oscar!

Thank you for writing in with your question if for no other reason than giving people who haven’t been involved in the cost of higher education recently a great example of the decisions that former students like yourself are forced to make on a regular basis. Graduates walk across the platform, get their little piece of paper, toss their cap in the air, and everyone’s ready to party like it was their major. Then, a few months later, you get another little piece of paper. This one comes in the mail, and there is no cause for celebratory libations.

And now… the time has come to pay up. The lenders haven’t forgotten about you or somehow misplaced your electronic file. No. They want their money back. If you can’t pay it all back now, that’s cool. They’re all too happy to give you... options. Maybe you’d like to get this over with and you have the ability to repay the money over 10 years? Or, maybe you have other obligations and desires and want more time? How does 25 years sound? It’ll only cost you a bit more money in the long run. What’s that? The silhouetted guy with the crowbar? He’s there to give a general feel of the anxiety that many graduates experience when it comes to repayment time. Unless you got your student loans in the back room of a pool hall, you’ll probably never meet him. Probably...

Now that the stage is set, let’s look at your circumstances.

• Nearing 30 years old

• Masters degree (congrats!)

• Owe $56k

• Want to be debt free ASAP

• Leaning towards a 25-year payment plan

Ok, I intentionally put the last two bullets in that order. I had to re-read your question to understand your logic, but I think I get it. You want to take advantage of a lower payment up front in order to pay off your car, ramp up your 401(k) contribution, and “live a little in the moment”. While that all sounds well and good, here’s the reality of the matter: You really need to have these loans taken care of in the next ten years.

Maybe that’s your plan and it just didn’t come across that way in your question, but I’ve noticed something that happens incredibly consistently in my experience with people and paying back large sums of money. The longer term you choose for your repayment, the longer it takes you to pay off the loan. While that’s incredibly obvious, I mean something a bit deeper. In other words, even if you promise up and down that you’ll pay the money back early, life and “opportunities” get in the way, and you don’t. You end up paying closer to $100,000 for your $56,000 worth of loans (and taking closer to 25 years to do it), even though that wasn’t your intention.

Don’t get me wrong, I appreciate the fact that you want to pay off your car and then roll that amount into your student loan payments. I think that’s great! But I also think you need to make every attempt to eliminate these loans by the time you’re 40 (at the latest). The longer you wait, the more of your income the loan payment will consume. Sure, your income will most likely rise as well, but you don’t want to be worried about if you made your student loan payment before you roll out to your 50th birthday party. I know people in this exact situation and they’re miserable.

So, what does this mean for you? You’re likely going to have to make some hard choices. Should you save into your 401(k)? Absolutely. The more, the better. Should you pay off your car? Yep, that’s a good idea, too. And you already know where I stand regarding paying off your student loans (shorter is better). What do you adjust? You adjust whatever else you need to.

Why?

I want you to value your tomorrow at least as much as you do your present. That means you’ll need to sacrifice some things today for a tomorrow that’s even better than today. Yes, it will take discipline. But through your discipline and sacrifice, you’ll acquire financial freedom. It is worth it.

This is living in the moment.