Operation Crush Student Debt!

I graduated law school with $125,000 in student loans … ouch!!!

Considering I worked full-time while attending school and received $64,000 in merit scholarships, this is a staggeringly dollar figure. Yet it reflects a conscious choice I made throughout school to prioritize investments over tuition payments. Our DINK family income could have paid for my tuition out of pocket, but doing so on our salaries at that time (before my big promotion) would not have not left me with enough discretionary income to max out our 401ks ($18,000/year each) and Roth IRAs ($5,500/year each).

A sizable chuck of my student loans ($30,000) was not actually used to pay tuition. When interest rates were at their all-time lows, took advantage by refinancing our primary residence into a 15-year mortgage at 2.75%. But we didn’t have the equity required at the time, so I took out a Grad Plus loan at 6.8% interest and used the proceeds to get us to the magical 20% loan-to-value ratio.

The interest rate on the loan was higher than I’d prefer, but significant savings on our mortgage offset this. Specifically the Grad Plus loan cost $2,040/year in interest, but our mortgage (on a much bigger amount) dropped from 4% to 2.75%, saving us $3,800/year, along with an extra $1,200/year because of having a smaller principal balance. One countervailing factor was that mortgage interest is tax deductible, while the student loan interest is not, because our income is too high to qualify. Another was the larger monthly payment required by a 15-year mortgage. In the end I believe this was a good financial move and we ended up with net-saving of $1,700 during the first year, which has only grown over time.

Regardless of where the money was spent, it doesn’t change the fact that I have $125,000 in student loans! (Ms. DINK had $35,000 in student loans from her Master’s Degree, but thankfully we paid those off years ago). In many parts of the country this is equivalent to a home mortgage!

I viewed going to law school as a calculated risk and an investment in myself. Fortunately this risk paid off for me. Due to my degree, I was promoted as work, resulting in a 60% raise in my base compensation. I also had the option to go into “big law”, which would have paid even more, but for personal reasons I decided my current career was preferable, despite being less lucrative.

Was law school worth it? From a strictly financial perspective, I think an argument could be made either way only because I’m not planning on working for another 20-30 years like a typical American. In the short run I may have been better off using the money and energy I invested in law school towards building my real estate empire.

But a financial return on investment wasn’t the only relevant consideration. Attending law school provided me with a sense of accomplishment that has real value. It empowers me, knowing I set a goal and over five years I worked my ass off to achieve it. Seriously, going to law school while working full-time career is no joke, but that’s a story for a future post.

The Plan: Operation Crush Student Debt includes two strategies.

First, I recently took out the maximum loan possible against my 401k and used the proceeds to pay off $50,000 of student loans. I know what you’re thinking – how could I borrow against my future!!! … but hear me out.

A 401k loan has two distinct advantages. It serves as a hedge against the current peak of the financial markets. Could stocks keep climbing in the near future? Of course, but 2018 is not 2008, and I’m OK with giving up some potential short term gains and mitigating my risk of a market turn down. A 401k loan also saves me $3,400/annually in interest ($50,000 at 6.8%). Although the 401k loan has interest associated with it as well, those interest payments are added to the balance of your account, so you are paying yourself!

401k loan payments can be spread out over one to five years. I choose the longest repayment period because it requires the smallest payments possible and there is no prepayment penalty should I want to pay it off early. This translates into maximum flexibility!

Second, I plan to minimize our family expenses and use all our expendable income to pay down our student loans. In an ideal month $4,000 would be available for this purpose. That said, unexpected expenses do come up (emergencies, travel, home repairs, etc.), so I expect the average monthly payments to be more realistically around $3,000/month, on average.

$3,000/month in student loan payments puts us on track to pay off our remaining student loans by the end of 2019!!! That is not that far off … I find having an end date in mind is incredibly motivating!

Let’s breakdown the math. Our $75,000 in outstanding student loans will accrue $6,750 in interest during the next two years. Operation Crush Student Debt will include 22 payments averaging $3,000 ($66,000). Additionally I plan to apply the following one time payments to the balance as well: my annual bonus ($6,000), 2018 tax return ($2,000?), some cash I already have set aside for this purpose ($3,200), and two “extra” paychecks I’ll receive in the future due to being paid biweekly ($5,400).

Side note: when you’re paid biweekly, in any given year two months will feature 3 paychecks instead of two, it’s like getting free money!!!

A plan is only as good as its execution. To keep us motivated, each month our family will go to a dinner and blow all the money we’ve saved on student loan interest during that month.

So for March, if all goes well and we pay off $3,000 as planned, we’ll be able to spend $15 at dinner in celebration of our accomplishment. The next month we’ll be able to spend $30, which represents the accrued budget, plus new savings from a new $3,000 payment, and so on, and so forth. I expect this to snowball quickly, and by the end of our journey we could be going out to some fancy dinners!

Would this money be better spent paying off additional debt? Of course … but psychology is a HUGE factor and staying motivated is tough. I believe this strategy will provide an ongoing positive reinforcement, while simultaneously forcing us to have a date night once a month, which is good for a marriage.

There will be two rules for these reward dinners. First, we can’t overspend. We must stay within our allowance for that month to ensure we appreciate it as our budget grows in subsequent months. Second, we must go to a restaurant we have never been to before. This will make each occasion be more special, interesting, and memorable in the long run, and again it will force us to make date night “fun”.

Well that is Operation Crush Student Debt in a nutshell. I plan to update DINKing Around Finance readers each month about our progress, including sharing some #foodporn along the way. I hope you will join me for this incredible journey!

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