A Student Loan Quandary

In My Humble Opinion
1

I am not, strictly speaking, asking for financial advice, but I want to explain my situation and I’m hoping people here can give me different aspects of this situation to consider. I am also talking with a (former) financial adviser.

For those who are not aware, people in the United States with student loans have been kind of screwed for a while, thanks to massive uncertainty caused by the Biden administration’s attempt to cancel student loans, resulting in court challenges, etc. I was previously in the REPAYE program which is a sort of income-based repayment thing for not-so-poor people that was supposed to receive full loan forgiveness in 2033, however Biden moved everyone in REPAYE onto his newfangled SAVE plan which was immediately challenged and my loans have been in forbearance, interest free, for quite a while now, as the courts figure out what to do. This is all graduate school debt. For the bulk of our relationship, my husband has been firmly in the camp of, ''let the loans be in negative amortization while we invest the extra and earn a better rate of return" and I’ve been in the camp of “oh my god I hate debt so, so much.” Neither of us really got our way? We’ve whittled it down some over the last, oh, 18 years, but not as much as I wanted to.

For Christmas we received an unexpected windfall (a lot, but not enough to pay off all of our remaining loans.) After thinking about it for a couple months, we paid off the rest of his loans. or about 40% of our combined remaining loan balance. So all we have left now are my loans. And my loans are currently sitting there, interest-free, until (apparently - who can say?) at least August 2025, subject to change at any moment.

REPAYE is dead, and SAVE is definitely dead, which AFAIK just leaves IBR and standard loan repayment options. The thing is, though, we make a good income (just have very expensive basic needs) so we will not qualify for IBR, which means the 18 years (?) we’ve put into loan payments will be completely wiped away and we will not receive forgiveness.

So those are the things you may not know about student loans.

Now, about our current financial situation:
We are 42 years old, by the way, and have a five year old special needs child. He’s doing great. He becomes less expensive as of July 2025.

  1. Really don’t know what’s happening with student loans still. This makes me more inclined to pay them off because I don’t trust the federal government.
  2. Massive economic uncertainty. Markets rally or global recession? Who can say?
  3. We are sitting on a significant amount of cash that is not currently invested. I have two groups of loans, one is twice as large as the other, and we have enough cash on hand to pay off the small group today and still have 3 months income + investments + just a bunch of random savings for various categories of things.
  4. We have a burgeoning cash flow problem. Our basic living expenses are absurdly high. There is no amount of tweaking to our budget that can fix our current cash flow problem. The lot rent on our manufactured home is a pittance compared to the cost of a house, condo, or even a rental. We are not currently paying student loans and we already cannot afford a mortgage. Currently, our only real shot at home ownership is saving up enough cash to buy something in full. I even calculated the cost of paying for a condo with 50% down - we cannot afford it.
  5. We can make more income, however, if my husband takes on more clients. But I don’t think enough to pay for a mortgage and I can tell you right now, we will never, ever own a home as long as we have student loans.
  6. Besides student loans, we currently have zero debt, and half the money saved for my husband’s next car. (We drive used Hondas.)

After a discussion with my husband, he has given me full approval to pay off my smaller group of loans, which is in the low tens of thousands of dollars. But I need to think about it first because that is a lot of money.

My feeling is that these student loans are a burden that is going to make a recession hit extra hard. But there’s also the possibility that our investments tank and we wish we had more cash on hand. Also, I work in the nonprofit industry, and to say that’s a shaky place to be right now would be an understatement. I think my job is secure, though, based on seniority and the fact that I contribute to bringing in millions of dollars a year to fund our programs. My husband is worried a recession will affect his number of clients, but I am not. He has a wait list over two years long and plenty of them are rich people.

One final point: Currently and possibly for the next few months, the loans are not accruing interest. Which means the time to act on paying them down would be now. It’s our only chance to really hammer that principle.

Okay, I know that’s a lot, but just… is there anything I’m not thinking about here? I’ve experienced recession before (2008), but I was strategically in grad school at the time, accruing debt.

I see three options here.

  1. Pay off another chunk of student loans to reduce monthly payment.
  2. Invest the cash on hand.
  3. Keep sitting on the savings until the economy reaches its nadir (wild-ass guess), then invest.

What do you do when there’s such massive uncertainty?

Thank you for your consideration.

2

Hard to say without knowing your full financial situation, but here is what jumps out at me in your post:

“Really don’t know what’s happening with student loans still. This makes me more inclined to pay them off because I don’t trust the federal government.”

“we have enough cash on hand to pay off the small group today and still have 3 months income + investments + just a bunch of random savings for various categories of things.”

“We have a burgeoning cash flow problem.”

“I can tell you right now, we will never, ever own a home as long as we have student loans.”

Home ownership seems to be a big goal for you, but I think that consideration is for the future. For now, IMO the best course of action is:

“Pay off another chunk of student loans to reduce monthly payment.”

This will reduce your total loan liability, and more importantly help with the cash flow problem. If the current uncertainty really bothers you (and I think you are right for being concerned about it), keep 6+ months income in savings rather than 3 months.

3

Your current loans are not accruing interest charges at the moment, correct? Then i think the obvious stance, purely financial, is to invest your current ‘available’ funds in a solid money market fund and let interest accrue. When the loans will again accrue interest, pay off what you can using the larger mm fund balance.

4

The loans will either start accruing interest on May 6 or in August. I don’t know which. I’m not sure that is enough time to make a meaningful investment.

I have not received a single email from my loan provider or the Department of Education explaining the plan, but Bondi recently announced, in the most insulting and belittling way possible, that they will resume payment May 6 (although even that statement implies collection on default loans, which doesn’t apply to us.) When I log into the website it tells me payment will resume in August, but that has never been reliable. They won’t tell me my monthly payment, either, until three weeks before the due date.

It’s lovely.

Yeah, I’m thinking of something like this. Maybe we can’t pay off all of group A this way, but I can reserve six months and use the rest for loans, which is still a good chunk.

5

Do you already have twelve months or more of living expenses in savings? If not I would not pay down the student loans.

6

If by savings, you mean in investments, then yes, we could live for a year on our non-retirement investments if we had to, probably even longer. But we had kind of earmarked that money for future down payment on a house. In addition to those investments we have a lot of cash sitting in savings and that’s what we’re trying to figure out what to do with.

7

I’ve seen recommendations that people should have three to six months of expenses in an easily accessible account.

8

We have at least three months easily accessible and could get another year of savings by making a phone call - at the expense of buying a house.

Paying off the student loans wouldn’t touch those dollars.

9

Is there any reason not to wait until August to see what happens? Can you afford the monthly loan repayments if/when they become due?

And what’s the downside to paying the loans off now? That you won’t have the money for other things? That they might otherwise be forgiven until a future President?

10

I have a 38-year old who’s been paying, deferring, paying, restructuring, and probably delinquent on his loans at various times. I can’t even advise him on what to do, so I’m certainly not going to spout off here. But I can see the dilemma:

A) the fear and uncertainty of having this debt continue to hang over your head, vs.
B) paying off your debt and the fear and uncertainty from drawing down your cash reserves AND deferring your dream of buying a home.

My question to you is, which of those two options twists your gut more? That’s the one you should do something about first.

11

Sorry for the delayed response. I was on vacation.

@Kent_Clark, to answer your question, having debt twists my gut more. I hate debt. It doesn’t bother my husband as much. We are not wealthy but he comes from a wealthy family, so he has said that I think about debt the way a poor or middle class person thinks about debt: categorically bad rather than potentially strategically useful. I feel like I have been worried about this for 18 years of my life. It’s just a bummer.

I don’t want to live in a manufactured home forever, but we all genuinely like this house. We are not suffering living in a 2,000 square foot domicile that is still in pretty good shape. It’s a decent community. So I wouldn’t call moving urgent by any stretch.

I don’t know if I have until August. I don’t know how much the monthly payments will impact our bottom line because I don’t know what they will be, and I won’t know until three weeks before they are due. We will probably be able to afford them, but not comfortably. The biggest reason to pay them off now is to avoid paying interest. Anything I pay right now will go toward the principle and then whatever is left over, the calculated monthly payment will be lower when it finally kicks in.

The downside to paying off the loans now would be not having as big of a safety net if we go into recession. I hold out zero hope of loan forgiveness and I don’t particularly want it. As liberal as I am, I have always been more in line with Republican policy with regard to student loans. The previous plan was not sustainable. BUT, that needs to go hand in hand with lowering the cost of education. I went to an elite university for graduate school, something I definitely didn’t have to do, and I feel like I have a responsibility to pay for it.

Speaking of which, I think I finally got some hint of an answer for what’s going to happen. People in SAVE forbearance such as myself will continue to be in forbearance until the courts decide what to do with people in the SAVE program.

The new proposed Republican legislature would go into effect for loans taken after a certain date in 2026 - that’s not me. The old repayment plans would still be an option for anyone whose debt precedes this date. So the most likely thing that will happen is that SAVE will be eliminated and I’ll be kicked back into REPAYE. Whether this would result in debt forgiveness in 2035 I can’t say.

I talked this over with my FIL, who is a former financial adviser, crunching actual numbers. Our financial situation isn’t terrible but it’s not great, and given his input I think home ownership is not the top priority here. It’s going to be retirement savings and student loans. He suggested putting $30k toward student loans, and reserving some for my son’s special needs in the future.

It’s funny, the thing he was more worried about than anything wasn’t our finances but how we were taking care of ourselves while we parented our child. I think spending a week with my kid opened up his eyes to the challenges we deal with. But I think we are coping just fine. If he’d have asked us two years ago, it would have been a different story. But my kid is moving toward fewer supports, not more, and within another couple of years may not require any. So he will be fingers crossed significantly less expensive.

Anyway, FIL says paying down the loans may not be the only good decision, but it’s not the wrong decision. Six of one, half a dozen of the other, I guess. So I’m going to do the thing that makes me feel better. I’m going to pay off the small group completely and then spend the remainder on the loans in smaller amounts over the next several months.

Thanks for your input everyone.

12

My adult kids are in a similar situation. Their federal loans have been paused for so long that they’ve made no payments at all since graduating college. They’re both in the SAVE program. Iirc the interest rates on their loans are around 4% but the loans are not incurring interest at the moment. When it does restart I worry how they’ll manage the payments, they’re both working but underemployed in the arts.

On top of the federal loans they are responsible for, I co-signed Sallie Mae loans for them both and those represent a much bigger slice of the total loan pie and with larger interest rates. At the time I co-signed we went with a variable rate that ranged from 1-3%. Payments were comfortable. Then a couple years ago the rates went rocketing up to 6-9%!

When my folks passed away I used my small inheritance to pay down a good chunk of their private loans. Thanks mom and dad! Kinda makes me smile as my folks were unable to help us kids with college.

But sadly neither of my kids have any dreams of home ownership it feels completely out of reach where they live.

13

Yeah, all of mine were 6.5% interest. I’m quite certain I’ve already paid the original amount of the loans, it just went toward interest.

I think barring an inheritance, home ownership is out of reach for many Millennials.

It feels weird because it’s still a social expectation. We have all the things you’re “supposed” to have. We married at 23 years old, followed by graduate degrees, professional jobs, retirement savings, a child.

We live in a high COLA but we are kinda trapped here for various reasons. My Aunt lives in Illinois. She asked us what our lot rent is and I told her how cheap it was -$700 - and her jaw hit the floor. She pays less on her mortgage. Whereas a median mortgage around here at current rates would run like $2500/month.

14

The thing is that mortgage payments don’t really change over time while rents increase, so if your aunt has been there a long time, that could be why her mortgage payment is so little.

15

This speaks to me. I really hate debt as well, and I drug a student loan around with me for 20 years, paying the minimum, with the bullshit excuse of “ my investments are doing a better job than any repayment would”.

Is your husband actually using money that would normally go towards paying them down and investing them? Is there a breakdown somewhere showing those specific funds and how they’re performing? I know money is fungible, but that’s how this sort of alternate to paying down debt should be treated, especially if one party is so adverse to holding long-term non-mortgage debt.

I say pay them off (or as much as you can afford.are comfortable with). If he goes the same amount of time pinning after the salad days of having a pile of debt, he can go out and get a loan.

16

We are definitely investing the money, I think we save fully 40% of our income (but a lot of that is spoken for… retirement, my son’s college education, future car, future home repairs, etc.). And whenever we get a windfall from his rich grandmother, we have invested the vast majority of it. That’s how we’ve seen a steady increase in our net worth despite the tight cash flow. I guess some people wouldn’t consider that tight. But those bills are coming due eventually, so I feel they are essential to save for. When I say we have a ‘‘cash flow’’ issue that’s what I mean. Paying our very high living expenses, medical, and still saving for inevitable expenses, it’s very hard to get it all paid/saved. I’m most concerned about it hitting our ability to save for retirement.

I’m not sure what the exact rate of return has been on investments. That’s a good question. But with 6.5% interest on the loans, I think we’re at least breaking even?

Anyway, I paid down the small group of loans yesterday, and it left us with enough to buy my son a new bed (he’s five and still in a toddler bed) and replace my mattress which could happen tomorrow or three years from now. And we still have our emergency fund. I feel good about this decision. I’m hesitant to put in any more because of the coming recession, but I can dole it out gradually over the next few months. That way I can always pull back on paying extra each month if the economy tanks.

17

So not the question you were originally asking about, but have you considered deprioritizing saving for your son’s college and instead putting that towards retirement and home down payment savings? Your son can take out student loans (as you’re quite familiar with!) but you won’t be able to take out loans to pay for a good retirement home. It might be less burdensome for his future self to pay for his own college and know that you own your house and have enough to fund your retirement needs without his support.

18

That’s a very good thought. I’ll chew on that one.