Finance: The Third Year of Paying Down $575,000 in Student Loans, An Update

Every May, I post an update on how we are doing with our path to financial independence, which largely depends on our student loan repayment plan. If you haven’t already heard the story,  I graduated at the age of 26 years old (turned 27 a few weeks after graduation) with more than half a million dollars in debt. A weight that was too heavy to bear, I decided to shun the common notion of waiting 25-30 years for loan forgiveness and instead to get rid of the debt as fast as I can.

Three years of aggressively tackling my loans is coming to an end, and what a journey it has been! You can read about my first two years here and here. As every year before, I will summarize what we have accomplished financially since last May, and how we plan to move forward and snowball our way down to being $0 in debt.

A Summary of Accomplishments for Year 3

This past year, there have been numerous accomplishments that I am very proud to share. It has been a year of experimentation and discovery for us both. But also, a year of triumphs over a few financial hurdles. Here is what we’ve done.

  • I opened a bakery and managed my own small business with one employee for an entire year. One of my life goals was to pursue my hobbies and possibly make them into mini-side-hustles. Other jobs that I had last year on top of dentistry was this blog space and dog-sitting via ROVER. After a year of baking for local restaurants, coffee shops, and markets, I closed my bakery two weeks before the COVID-19 pandemic took place.
  • My husband wanted to switch careers. He has been interested in coding for some time and he decided to take a coding boot camp in order to be able to do systems analytics for large data sets. We enrolled him in a program which started January 2020 and paid for the schooling in FULL (it cost $8k) without reducing the amount we put towards student loans. We took the money from our “emergency fund” and built it back up over the course of 3 months. In February of 2020, when the company he was working at was doing lay offs, he requested to be considered for it due to a nice severance package for two months which ended on April 7, 2020.
  • COVID-19 epidemic happened which ended up helping us financially. My husband, whose severance ended in April, then applied for EDD and instead of getting very little money during this period of professional transition, he gets paid $4200 a month from the government.
  • As a dentist during COVID-19, I was in a precarious position. I split my time between two dental offices and was working 6 days a week prior to March 15. However, the government decided that dental treatment should be limited strictly to emergencies, thus causing one of my offices to shut down for the time-being. Luckily, the other office located 3 blocks from my house stayed open and I was able to work 3-4 days a week due to a particular patient pool. A 3-mile radius around our office houses over 330,000 residents who are mostly within a lower social-economic status. They usually do not have time to worry about preventative dental care and go to the dental office only when something hurts. Thus, emergencies ran amok. Additionally, 80% of the patients I see have Medical. Therefore, Medical covered all root canals and extractions at 100%, and everyone who came in with a medical emergency pretty much had a free pass at getting the treatment started on that day. Since most other dental offices were closed, patients from 30 miles away were driving to see us, too. If it were any other dental office, I would have been sitting at home like all my other colleagues but due to sheer luck, this actually kept us afloat.
  • COVID-19 helped us even further by reducing the interest rate on student loans to 0% until the end of September. This is a dream for all graduates paying off student debt, especially if they are paying it off aggressively. With the uncertainty that came in March, we paused student loan repayment and kept all our incomes liquid. However, now that we realize that the stipend from EDD for Mike and my work situation puts us at a stable financial position, we have enough set aside for student loans to bring us in the $300,000s ($375k to be exact)! Which is CRAZY! That means that in three years, we were able to go from $575k to $375k at a 6.8% interest rate. So now, we are tossing and turning the option of partially withholding some of that loan repayment money and putting it into buying a second property that we can use as a rental unit – thus increasing passive income. We are still up in the air about whether to experiment with real estate or focus on paying down loans. Perhaps we get both?
  • This past weekend, we finished off my husband’s car payment, a loan that lasted five years. My husband has owned three cars and three motorcycles. Five years ago, he was convinced by the dealer that he should take out a car loan to improve his credit. His other motor vehicles were always bought in full and in cash. The dealer recommended a car loan to improve his chances of being able to get a house mortgage in the future. Since Mike has no history of accruing debt, opening his first credit card AFTER graduating from college, he technically had “bad credit”. Mike signed up for a car loan and while I agree it improved his credit tremendously, I also get weak in the knees thinking about all the money we lost on interest. It’s a screwy system. But now it’s all over, which adds that monthly $585 car payment towards liquid assets which we can put into our loans or a rental unit.
  • Speaking of mortgages, we are finishing up our home refinance, which if successful would reduce our monthly payments by $500 a month. Add this to the savings from the finished car payments, and that’s an extra $1k to put towards snowballing our path to FI.
  • Lastly, we made a few adjustments including switching our car insurance and our homeowner’s insurance to a different company so that we can shave off an extra $100 per month. Now that Mike is at home working on his course, we have saved money on dining out since someone is always home making meals. Also, without the bakery, I have less stress and can focus on improving our finances and other aspects of our personal life.

How to Continue Snowballing

There are many ways in which we are snowballing the loan repayment so that we gain momentum and speed as time progresses. An example of this is the car being fully paid off, which then adds an additional monthly $585 towards our repayment plan. We had created many ideas along the way on how to make our repayment system better. Here are a few ways.

  • The Repaye program pays 50% of interest for the first three years of the program. By switching to REPAYE within the first year of repayment, we have saved thousands of dollars on interest. The final year of REPAYE is this coming year. We hope to reach mid to low $300k by the time it ends.
  • After the 50% perk of REPAYE ends, we hope to be at a low enough dollar amount to refinance the entire student debt. If we can refinance at 3% instead of the 6.8%, that would speed up our progress tremendously. Also, as the principal amount decreases, more of our repayments go towards the principal itself.
  • We are debating about purchasing a second property as a rental unit. If we do, we are searching for one that would at least cover the mortgage and it would be swell if we could find one that can actually rake in a bit more than the mortgage per month. This builds equity under our name and sets us up for passive income in the future in case we pursue early retirement. As we get closer to the end of the student loans, we always have the option of selling it (assuming it accrues value) towards the end of repayment to get a chunk of liquid assets and put it into the loans. Of course, the latter option is less financially savvy.
  • Currently, with me working and Mike unemployed, we can still afford our monthly $6.5k student loan payment and our living expenses. My hope is that Mike will get a job after the coding program that he enjoys and we can funnel 100% of the additional income into loans.
  • Currently, we are renting the bottom floor of our loft to my brother’s girlfriend for a very cheap rate to help her out. My brother is currently in Arizona starting his second year of dental school in the Fall. There has been discussion about them moving in together in a year or so. Of course, we would love for her to stay with us forever and ever but if she does choose to move to Arizona, we can definitely rent the bottom space closer to market value. Since our live-work-loft is commercially zoned and faces a downtown area, we can rent the bottom space to either a business or a resident. Our options are widened by the fact that it can act as an office space or a storefront.

When we first started our student loan repayment journey, we thought it’d be great to pay it back in less than 10 years. The first plan we made put us at 9.8 years. We made such good headway the first year but it wasn’t until Travis Hornsby from Student Loan Planner tipped us off on switching our repayment plans in order to save more money that our trajectory put as at paying back the debt in 7 years. With COVID-19’s help, I did the calculations at the current rate, I can repay it in 3.5 more years. But assuming Mike gets a job soon after his coding camp ends in June, I think we can actually finish this in only 2.5 more years.

And to think that people almost convinced us not to do it. They said life would be very difficult for us personally and financially. Yet we are the only couple we know who are calling the shots at work, creating our own schedules, switching professions if we wanted to, pursuing hobbies as options to replace work, traveling the world freely, and living a relatively stress-free life. Choosing the harder path, the road less traveled, really set us up for a different life.

Which is to say that sometimes, it pays off to follow your gut. Reach for your dreams. Look at more than just numbers. Surround yourself with like-minded people, cut out societal expectations, go rogue and run like vagabonds toward the nearest exit signs. Be afraid and do it anyway. Live life to the fullest, you’ll have no regrets.

Here’s to Year #4! Cheers!

Tips for New Grads with Large Student Debt

  • Get a consultation with Travis Hornsby of Student Loan Planner. I know it costs money and it feels difficult to pay more money when your goals are to save and pay back debt. But you don’t know what you don’t know and Travis is well-versed in student loan repayment options. Even when we were already aggressively tackling our student debt and working with an amazing financial planner whose wife was a dentist herself, Travis still taught us a few things we didn’t know. He saved us about $10,000 by simply placing us in a different repayment plan!
  • Run the numbers. This may be hard without someone’s help, but you’ve really got to run every possible repayment scenario to see which one saves you the most money. Of course, in the end, you may choose the one that affords you the lifestyle you want. In our case, we chose the one that does both. By choosing to aggressively pay back debt, we are saving more than $100,000 than if we just waited for forgiveness 25-30 years later. We also are freeing ourselves us 15-25 years sooner than our peers, which is a huge psychological benefit. Notice that I said we chose the one that saves us the most money. Travis will argue that we didn’t choose the one that would make us the most money. Which is true considering you can invest over 25 years of working. But I guarantee you we chose what was right for us.
  • Figure out your priorities in life. The best thing our financial planner did when we started talking about our finances was to spend a few sessions in the beginning asking us the hard questions to try to figure out what exactly we wanted. It was like marriage counseling for money. The top few items we had were to spend time with family, travel the world, and have the freedom to pursue our interests and hobbies. Freedom and independence dominated the conversation, and it was because of this that we decided aggressive repayment was the way to go.
  • Master a budget. You have to start somewhere. Mastering the budget is where you have to start. You can always increase your income, but if you never learn to curb your spending then there is no point. I made this course FREE on my blog to help as many people out. We use YNAB to manage our budget.
  • Surround yourself with a community of like-minded people. There is that saying that you are as good as the 5 people you surround yourself with. I choose to surround myself with finance resources. My favorite finance podcast is ChooseFI, but there is also Afford Anything and FIRE drill. My favorite book is Your Money or Your Life  by Vicki Robinson but other goodies are The Simple Path to Wealth and Goodbye Things. And then, of course, there are blogs, including Mr. Money Mustache, Mad Fientist, JL Collins, and The Frugalwoods.

Finance: Why We Chose Standard Repayment Over Loan Forgiveness

We started our loan repayment journey under the IBR program, as advised by so many professionals. But I always knew in my heart that this was not the best path for me. Apart from the fact that IBR resulted in more money paid towards my loans overall, there was the issue of it extending twenty five years into our distant future. I am one who values freedom above many other things. When I was young, I hated when people told me to do things that did not line up with my values. My most hated explanations were “Just because” or “Because I said so”. Talk about lack of motivation. I despised myself when I was forced to do something, because authoritative figures claimed to have the upper hand. I remember thinking to myself, when I get older, I will have control over my own life. Today, I have that same fire feeding a resolve in me to stay free, from things financial or otherwise. I want freedom to do certain types of work. I want freedom from a tight work schedule. I want autonomy in my decisions. I want the freedom to travel whenever I want to. I want to have free time. All of this also requires to be financially free. Having graduated dental school at 26 years old, the IBR program would mean that we would have this burden hanging over our heads until we were past 50 years old. Psychologically, the burden was too much to bear. It was the psychology of the thing that really pushed me towards frugality, financial independence, and hopefully in the near(er) future, freedom.

When I graduated dental school and I finally started working, Mike and I were facing numerous large payments related to moving in together, creating a home for ourselves, getting married, and going on a honeymoon. And while I would not take back any of the decisions we made, we weren’t exactly saving much at the time. The great part is, we weren’t going into debt either. Whereas some people may take out loans for things such as weddings and honeymoons and moving, we definitely stayed within our means and I am proud of that fact.

But once the dust settled and we found peace in our space and identified our roles in everyday life, we stopped having something to spend money on, and we started to see that we were not bad savers after all. In fact, we were saving at such a quick pace, that we would have saved up for a down payment for a house in two months’ time! We started to talk about buying a home for ourselves, when our financial planner asked us a simple question. Do you realize that at this rate, you can pay down your student debt the standard way in less than ten years?

At first, I was aghast. I had spent months trying to convince USC financial advisers, and Mike, and even my financial planner, that there had to be a way to do this. Mike deemed my conclusions as too optimistic, and slightly delusional. He always said, the numbers just don’t work. But in my head, they did work. The numbers don’t lie.

I then went on to bombard our CFP with a million questions. Excited, I could not wait to tell Mike when he got home that night. I remember being so stoked. Initially, he did not believe me. It wasn’t until our financial planner created a spreadsheet that demonstrated our capability to conquer the loan in 9 years, that Mike started to change his view. We were going to be free from these chains fifteen years earlier than we thought!

But with it comes a cost. We will have to give up buying a house, for now. We have to continue a fairly frugal lifestyle, and have concrete intentionality with our money. We have to be able to psychologically see a majority of our paycheck going towards paying down the loans every month. We have to give up the social status symbols that our friends will be collecting under their belts. In exchange, we will have fifteen additional years of freedom. What say you?

I say Hell Yeah! Mike and I are simple people anyway, as can be seen in the rate at which we were saving. We could rationalize not buying a house, not buying a new car, and not getting the latest gadgets. I could not rationalize being tied down by my career choice until I’m past fifty. We decided that yes, we will choose standard repayment over loan forgiveness!

One caveat. We are still enlisted under the IBR program. Why? Under the standard repayment plan, we have to make minimum payments of $6500/month to be able to pay the debt in 9 years. Under IBR, the payments are closer to $400/month. If one of us loses a job, $6500/month is impossible on only one of our incomes. Especially so if I was the one to lose a job. Switching a hundred percent to standard repayment will make us vulnerable to the whims of whatever life may throw at us. The failure of Mike’s start-up company, the selling of the practice I work at, if we decide to have children, disability for either one of us, these are all things that can greatly impact our finances and if we commit to a standard repayment, it can heavily mess with our ability to pay the loans. And trust me, you do not want to default on student loans. However, under IBR, we are able to pay more than the $400/month without penalty, so we stick with IBR in case of a future emergency, but continue to make the larger payments.

Unfortunately, this does not allow us to refinance our loans. Once the loans are refinanced, we become ineligible for IBR. So although the IBR interest rate is a whopping 6.7%, our financial planner convinced us that the IBR buffer for not-so-awesome life moments is well worth the extra interest rate. Once the loans get paid down to a more manageable sum, then we can refinance, since a smaller loan will be much more manageable.

So therein lies our decision tree, our little story.