My mom often said
“An ordinary man learns from his own mistakes. A wise man learns from the mistakes of others. But a fool never learns.”
There are plenty of great reasons to pay off debt. Maybe you don’t want to pay interest. Or perhaps you just want peace of mind. For many people, educational debt is the only way to pay for college or post-graduate work. I was one of those people. I received a generous financial aid package for my undergraduate degree: $20,000/year in scholarship/grant from the school, as well as Federal Subsidized Loans and some Work Study aid. I didn’t have quite enough during my Freshman year to pay for the required on-campus student housing and meal plan, which meant I took out $3,000 in an educational loan from a bank. I paid that $3,000 off during my school career.
I graduated with roughly $20,000 in Federal Subsidized student loans. I proceeded to pay on them diligently every month. I got a job, got married, completed a graduate degree, took a new job, got pregnant, bought a house, got pregnant again, got pregnant again, and then got laid off. We had some other financial difficulties, and all our savings for our house renovation were gone in a few months. I got a new job. But the uncertainty of that year lingered with me and my spouse.
Although we were back to saving, I wanted to pay off the remaining student debt, about $8,000 dollars. I badgered my husband about it every couple months. He would always argue that the interest rate was so low, it didn’t make sense. We were going to take out a loan to partially finance our house renovation. Further, we had a lot of cash sitting in our checking account as we saved toward our house renovation. I didn’t like paying interest on debt, when we had enough cash to pay it off. Finally, my husband agreed to pay off my student loan. I logged into my account, and paid it off one evening, and we toasted to paying it off with a decent bottle of red.
One year later, I regretted paying off my student loans.
You see, borrowers of subsidized loans enjoy a very low interest rate. My rate was around 2.3%. Our condo mortgage was 5.87%. Our primary residence mortgage was 3.8%. And we were starting to think about financing for our house renovation, which would likely end up as a variable rate around 4.5%. The rule for paying off debt is always to pay off higher interest debt before lower interest debt.
I paid off my student loans for emotional, not practical, reasons. While I respect why I felt a need to pay off that debt – I was still recovering from a tough financial year emotionally and psychologically – I realize later that the positive emotional experience of paying off some debt altogether, didn’t benefit us in the same way putting that money toward the condo mortgage, or our soon-to-be home renovation. There is a place for respecting emotions, but there was no urgency to pay off those loans, other than what I created in my own mind.
Debt is tool. I could have used it better. Live and learn. The good news is that it is never a bad thing to pay off debt, even if it wasn’t the most strategic debt to address at the time.
Be wise and learn from my mistake: Check your interest rates. Pay it off according to the rule of highest interest first. Always.