I doubt very many of my teacher friends would be interested in this post, but my nerdy friends from back home and I talk about this stuff quite a bit. This is what happens when you love people who are engineers, accountants, architects, and otherwise math inclined people.
My friends and I have debated back and forth on the student loans vs. retirement issue for a while. Everyone is different, with different priorities, and has different levels of risk aversion, but I wanted to figure out what I should do based on my situation. I think this post might also be useful for other international teachers like myself who have considerable student loan debt and who can’t rely on social security or a cushy teacher retirement plan.
You have been warned…there are many numbers ahead!
I decided to aggressively pay down my student loans first while currently investing 9% of my salary into retirement.
I asked myself a few questioned and used a few of the free calculators found online to answer them as best I could.
- How much would my lowest payment be (without doing an IBR) for my student loans so that I can pay more into retirement? $392 according to the repayment estimator.
- How long would it take me to pay off my student loans at that rate? 25 years
- How much interest would I have to pay on my student loans if I paid the minimum? $ 117,529 I just vomited in my mouth!
- What if I really did pay the $0 based on the income based repayment plan? I would pay $0 as long as I was living overseas making less than $80K, have this excruciating number hanging over my head until I was 54 years old, and then at age 54 I would have to pay income taxes on the $152,274 in loan forgiveness. I don’t know how that tax part works, but that sounds scary considering that that number is more than 3 times my yearly salary!!
- How much interest would I pay on my student loans if I paid $1000 a month plus two extra $1000 payments at the two bonus pay months? $8691 according to a debt reduction calculator
- Would I rather take a lower paying job with a better location and better social life that wouldn’t allow me to make this standard payment (hey Barcelona!)? Yes
- Can I get any teacher loan forgiveness? It would be awesome since I am making about the same amount as teachers back home! Sadly, since I teach upper class students in a private school I don’t qualify for this.
- Am I missing out on a ton off compound interest in my retirement accounts? In one word…yes.
I’m sure I am missing things in my calculations because I am writing this after school, I’m tired, and I don’t do this kind of planning for a living, but I have done my best to answer my questions. As a teacher I have a final question for myself; what have I done to apply this information?
Right now, I have linked my tax returns to my student loan accounts and requested the income based repayment plan based on that info. The student loan powers that be then set my monthly amount to $0USD.
So, I could TECHNICALLY pay $0, but then I would be accruing tons of interest. Instead, I choose to pay off my student loans based on the highest interest first (8.5, 6.8, and 1.7% respectively). I pay $1000 per month on my student loans and make an extra $1k payment in December and June when I get a bonus from my work.
The thing that worries me the most is the compound interest I’m missing out on in my retirement planning. I read this article in the NYT and it just fed into my worry. This worry is actually what spawned this entire post.
What kind of compound interest could I earn on my retirement account if I invested an extra $600 (based on the lowest payment) or $1000 (based on IBR) per month?
$984,085.17 at $600 per month, $1,590,172.14 at $1000 per month, and $1,226,009.37 if I continue paying what I am now for the next 5 years and then bump it up to $1000 per month for the rest of the time according to a compound interest calculator.
Personally, I can’t imagine ever having more than a million dollars in a retirement account, so any amount over $1mil seems outstanding. I am a little pissed that I am missing out on $364,163 by paying off my student loans aggressively. However, the peace of mind I will get after kicking my student loans out of my life will do something to make up for it.
While I am going to continue my aggressive student loan repayment, by writing this post and doing all this research, I have convinced myself to throw any extra money (outside of my emergency fund and travel dreams) toward my retirement. Hopefully the extra deposits will shrink the amount of retirement money I’m missing out on!!
Other resources for a more general picture on this issue:
https://studentaid.ed.gov/repay-loans/understand/plans/ different repayment plans.
https://docs.google.com/spreadsheets/d/1k6Jx8LddXEvqxz2Eb93XAyY_eu_xqdmDHqPW6kZ1yLA/edit#gid=1520347266 spreadsheet I found with different student loan scenarios…that I didn’t use because I’m too tired after writing this
Please comment! What do you think? Am I on track? What am I missing? Share your thoughts!