We’ve never really talked about student loans on this site, and that’s partly because only one of us had student loans and they were paid off in full before we moved in together, about a year before we got married and combined finances. But mostly it’s because the way I approached student loans (though it ended up working out OK) isn’t necessarily one that I would endorse for most.
So here’s my story. It’s not super pretty, but it is what it is. The numbers are to the best of my recollection (since this all feels like ancient history now), but are probably accurate to the nearest hundred.
The College Plan
In high school I wanted nothing more than to get away from the city where I grew up, but whatever higher education savings accounts there had been in my family were long since drained by the time I, the youngest, approached college. My parents were honest about that and said that while they’d pay for two flights per year and my course books, the rest was on me. This came as no surprise to me; I knew I was working my tail off in high school for a reason.
My top choice college offered me a full-ride* scholarship (tuition + room & board). But the reason for the asterisk (*) is that there was a catch. The donor funding my scholarship required that every scholarship student have “skin in the game”. Students (or their parents if they had parental support) had to pay at least what they were eligible to take out in subsidized loans. The idea being that if you were financially invested in your education you were less likely to blow it off. (Research supports this theory.)
So off to undergrad I went. Over 4 years, between getting the best on-campus jobs, and paid summer internships, I ended up taking out subsidized loans that averaged about $1.5K each during 4 different semesters. So I graduated undergrad with a loan balance of ~$6K, and I had about $10K saved up in the bank. Score!
Remember all those flights and books my parents were paying for? Well, those were actually all being put on a joint credit card in my name and my parents’ name. But my parents fell on hard times and when I graduated I assumed responsibility for the balance on this card.
Since I now had ~$5K in credit card debt and $10K in the bank, I paid those credit cards off in one swoop. Then having depleted about half of my savings at once, I held on to the $6K in student loans even though I probably could have wiped them out pretty quickly. After all, I was headed to…
Grad School – Land of Low Pay and Deferment
When I enrolled in grad school, my undergrad loans continued to be subsidized and deferred, which was great. I had a full scholarship with tuition and modest living allowance, so I didn’t HAVE to take on any additional debt. But…
The Arbitrage Opportunity Was Too Tempting
I was offered a $10K subsidized loan as part of my grad school financing package, and even though I technically didn’t need it, I took it. I took it and I put it in a money market savings account. At that point I thought there was a decent chance I’d be in grad school for 5 years (I was enrolled in a PhD program), so at 2% interest in a money market account (“Those were the days…”), I’d earn $1000+ and have the money safely waiting to pay back the principle at the end of 5 years of school. Plus if I ever needed big time emergency funds, I’d have it.
“Help! Stop! It’s eating my SOUL!”
These were the words I literally shouted in my sleep while having nightmares about school during my first year (True story, I was there-Mr. PoP). My dream self was pretty spot-on with her assessment of my relationship with grad school, so I figured out how to get a consolation masters after a year and started making plans for what to do next.
I Bought A Car… A Nice Car
I knew I would need a car where I was moving for my next job and that I would know no one within 100+ miles that I could rely on for help if I had car trouble. So I bought a nice car. Probably too nice a car – a used Mini Cooper I christened Emma. She was cute and a ton of fun. But she definitely depleted a chunk of the $10K I had specifically set aside for the $10K grad school loan repayment.
When I moved for my new job, I had my adorable new-to-me car, about $16K in student loans outstanding, and about $8K in the bank. I felt like Mary Tyler Moore throwing her hat up in the air in the opening credits of her namesake show, but with a cute car and a more glamorous destination – Florida.
Public Service Jobs & Loan Forgiveness Opportunities
Here’s where things really start to get interesting.
- First, I had a six month window where I knew my loans would continue to be in deferment. So by my calculations I didn’t need to make any payments until February since I graduated in August.
- Topping it off was the fact that my first job out of college was in public service, and came with various student loan forgiveness opportunities for working in areas with “high needs”. The loan forgiveness amounts were based on the total you owed at the end of each year working in public service, so there wasn’t much incentive to pay off the loans too quickly since you’d lose out on forgiveness funds.
Between these two facts I decided that I was best off to pay nothing until February, and then pay the minimums after that until I started getting some loan forgiveness. Worst case, if I stayed in that job for 5 years I would have had ALL of my loans forgiven. In my head, this was like my job buying me my cute car and then some. Could be worse, right?
The Poo Hit the Fan Six Months After Graduating
When February rolled around and I hadn’t received any e-statements from my student loan provider, I logged in to make my first payment and was SHOCKED when it said I was 90-days past due. I immediately called in to see why this was the case and was horrified when the loan provider said they used a date in May as the start of my 6 month deferral period rather than my August graduation. That compounded with the fact that they had been sending print statements to my parents’ house across the country instead of e-statements to me as I had requested led to “my communication problem” (as AES referred to the entire ordeal).
I immediately threw about $500 at the loans to get them current and then some, and tried to get the blemish off my credit record. Despite written statements from the school of my actual graduation date, I was never able to get this blemish removed and it’s still there. By my calculations my 7-years with a scarlet letter on my credit report should be up soon, so (in theory) it will drop off then.
But I was still eligible for loan forgiveness (and the bigger my loan balance, the more $ I was eligible for), so there wasn’t much incentive to pay them off all that quickly despite my newfound frustration with them. For the time being, I just paid the minimum payments.
After completing one year working at my public service job, I knew I needed to move on. I wasn’t going to be happy staying for 5 years, and it wasn’t financially worth it to stay for the sole purpose of loan forgiveness when I could jump ship and get an almost 50% raise by doing so. But, on the bright side, I did get a PARTIAL loan forgiveness. One of the tiered loan forgiveness programs kicked in after just one year, and so I received $900 in loan forgiveness funds right as I was leaving that job. Not $16K, but something.
It Gets Less Interesting After That
I didn’t really have any incentive to keep the loans around after that, so I started throwing random amounts of money at them to pay them off while maintaining a cash buffer that I felt comfortable with. After about 14 months of doing this, I had enough money and was getting ready to move in with Mr PoP, so enough security too (didn’t think he’d let me be homeless at that point), that I just paid off the balance – about $8.5K. The final payoff was about 2 years after leaving grad school, and 7 years after taking out the first loan as a freshman in college.
How Did My Arbitrage Work Out?
Well, I earned ~$250 in interest by having the cash in a savings account when I could have paid it off. Then I got about $900 in loan forgiveness funds. So I “earned” about $1,150 off of the loans. But I paid out about $1,500 in interest on the loans before paying them off.
And There’s That Credit Blemish
Remember that blemish on my credit report I couldn’t get rid of? Well, it cost us about 1/8th of a point on our first mortgage since we took it out in my name alone. By the time we refinanced as a couple (and with Mr PoP’s pristine credit score) after about 21 months, this cost us about $300 additional dollars in mortgage interest over the previous 21 months.
Arbitrage = $1,150 earned – $1,500 (SL interest) – $300 (mortgage interest)
Arbitrage = -$650
Step 3 Is Not Profit – Lessons Learned
Instead of profiting, I lost about $650 on the whole student loan endeavor. And I learned that when you’re in your early 20’s, walking away from a 5-year plan shouldn’t be all that surprising, so I shouldn’t count on seeing every 5-year plan through to its end.
Would I recommend student loan arbitrage or loan forgiveness programs to others?
No, probably not. It just doesn’t seem worth the risk. Although I wasn’t going hog-wild and being a complete spendypants with the student loan money, I probably wouldn’t have paid $14K in cash for a car fresh out of school had an extra $10K not been sitting in my bank accounts.
As for relying on loan forgiveness programs, the difference in pay in just my first year in the private sector was more than the entirety of my starting student loan balance. So it doesn’t seem to make sense to stay in a job that doesn’t make you happy just for loan forgiveness dollars if you can leave, earn more and pay the loans off yourself – particularly if doing so puts you in a job where you are happier.
And that’s my student loan story. It’s a bit weird since, for me, my student loan debt KINDOF felt a little like a security blanket at a time when I was really trying to make it on my own, and I know that’s definitely not the norm.
So like I said, it’s not really pretty, but hopefully someone can learn something from it.
Mr. PoP Notes – I still can’t believe that I was the one with the good credit score when we got married! The only time I payed the electric and internet bills was when they would cut me off every third month! Also, Mrs. PoP looked great in that Mini Cooper, but I had to talk her out of getting a Camry!
What’s your student loan story?