The Story of Student Loan Debt
Higher Education in the United States of America is expensive, especially an MBA at a top B School. If you see below, all top full-time MBA programs cost well over $150,000 over 2 years, out of which $100K is just tuition + fees. When I graduated with an MBA in May 2017, I had a little under $100k in accumulated student loan debt. Thanks to Emory University’s generous scholarship, I managed to keep the debt under 6 figures (barely, but yes).
|Business School||MBA Tuition|
|Harvard Business School||$146,880|
|New York University (Stern)||$145,860|
|Carnegie Mellon (Tepper)||$136,000|
|Emory University (Goizueta)||$127,400|
|Washington University in St. Louis (Olin)||$122,000|
|Georgetown University (McDonough)||$118,200|
|University of Texas at Austin (McCombs)||$109,424|
The good thing about MBA from a top school is that it provides you with a launchpad for a high-paying career. I landed a good job that paid a six-figure salary. But, even with a good salary, paying off a $100,000 student loan debt is a daunting task, especially at a high-interest rate that went from 7.5% to 8.25% pretty quickly.
Should I Refinance My Student Loans?
8.25% interest is very high, considering it is nearly impossible for a common investor to pocket post-tax returns of 8.25% through any investment. I started evaluating options to ease this burden of high-interest loans. I tried refinancing, but unfortunately, there aren’t many options for international students (people without a green card or US citizenship status) for refinancing student loan debt in the US.
Please note: Some investors do get higher returns through research and informed investing, but it’s not common if you don’t have the access to the right resource or advice.
In a nutshell, a high-interest rate created a sense of urgency for me.
My Approach to Slay the Student Loan Debt Dragon
Right from the start, I wanted to adopt a balanced approach to paying off my student loan debt. Even though I was desperate to finish off the loan, I wanted to plan for my short, mid and long term financial security as well.
Short term Goals
I saved up some cash and put it aside for a rainy day. Building up an emergency fund was very important for me. A typical stash of cash equivalent to 4-6 months worth of reasonable expenses works fine for most people.
Mid term Goals
I started investing in some safer investments such as ETFs that track the broad US market indexes such as S&P 500 (VOO, SPY). Having taken courses in finance and applied investment management, I felt confident about my stock research skills. So, I also purchased some stocks with an investment horizon of 3+ years in mind. You can read more about stocks and ETFs to learn about them.
Long term Goals
My company matched the contribution to my retirement account up to 6% of my salary. So, basically, I could put EXTRA 6% of my yearly salary into my retirement kitty if I put in 6% or more in my 401(k) account. One of the most important lessons in finance – is to never leave money on the table. I made sure I got every dollar I could through the company match.
Avoid making these two 401(k) mistakes at all costs.
After putting in place a plan for some financial security, I could focus all my attention on paying off the student loans.
I Deployed 9 Tactics to Pay Off Student Loan Debt
1. I Made Smart, Well Researched Investments
Having taken multiple courses in finance and Applied Investing, I had gained the right skills to value a stock and screen potential winners. I put money aside for investing in carefully selected stocks and they grew much faster than the broad market, providing my investment portfolio the much-needed boost with minimum investment.
One stock in particular, that I acquired at an average price of $44 in late 2017 is now trading at almost $275+ (January 2020), which is an insane 525% return in a little over 2 years.
[update November 2020: The stock is trading at $870+ currently]
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Even though I’m a big proponent of investing in ETFs (for common investors), I like to apply algorithms to screen and stock pick when I can. Finance and Investing courses taken during my MBA have given me the confidence to do that. Screening and stock picking can be very rewarding if done smartly.
2. I Wrote The Outstanding Student Loan Balance Down on a Whiteboard
Seriously, write it down on a whiteboard. I wrote the monthly math and my balance sheet on a whiteboard. This is a psychological trick that triggers the thought process and urges you to take action.
3. I Made Lump Sum Payments
When I joined my job, I had received some sign-on bonuses. Almost ALL of it (post-tax) went toward my student loan debt repayment i.e. $17,500. At the end of years 1 and 2, I received my annual performance bonus amounts. I moved most of it to the student loan debt account too.
That was approx. $15,000. I had the temptation to splurge and buy cool and shiny gadgets (that I’d use for two weeks), but I knew my priorities.
4. I Understood the Opportunity Cost of Impulse Purchases
Thinking of purchasing a $1,000 phone? That would take away $1,000 that could be used to pay off $1,000 principal and avoid $82.5 annual interest. This thought process enabled me to think twice before making an impulse purchase.
5. I Learnt How to Cook Delicious Meals At Home
Everyone loves fancy dinners. I limited my restaurant dinners to once or twice a week, which meant I had to cook more at home. I realized that cooking is an art in itself, and I got better at it with time and practice.
Now I feel more accomplished when I cook a good meal all by myself. For lunches, I targeted to bring food from home 3 – 4 days a week. This decision alone saved me about $35 a week, i.e. about $1800 per year.
6. I Put My Expenses on Autopilot and Understood my TRUE Disposable Income
I put all predictable expenses on auto-pilot. Being aware of my monthly expenses, such as rent, car payments, insurance payments, etc., I could automate them all. I created multiple bank accounts- through one account I’d pay out the rent and electricity bills, through another I’d pay out the car payments, car insurance, and student loan payments.
If I cannot control those expenses, I don’t even want to see that money in my main checking account. For achieving that, I configured the direct deposit accounts on my payroll portal with instructions to send exact dollar amounts, as I had calculated, to my different bank accounts.
Whatever was left over, after paying off the bills, got deposited into my main checking account. I only cared about that account and used it to pay for groceries, eating out, and entertainment. The money in this account is my true disposable income available to me.
I made credit card purchases (to earn miles and points) keeping the true disposable income in mind and paid all my cards off every month. Paying off credit cards is non-negotiable for me. If I cannot pay it off in the same month, I don’t buy it – Keep it simple!
See how much you can save by making extra payments: Student Loan Debt Payoff Calculator
7. I Liquidated Underperforming Investments
I regularly evaluated investments and their returns and liquidated investments paying less than 8% returns and put the money in a student loan debt account. Say, I have $5,000 invested in a fund that is giving me 5% returns, and simultaneously I’m paying 8.25% interest on my loan, effectively I’m losing 3.25% on those $5,000.
I took some brave decisions to move the money from the underperforming funds and paid off the loan instead. Of course, while making such decisions, I was ensuring not to sacrifice my short, mid, and long-term goals.
8. I Partially Refinanced My Student Loan Debt Through Other Sources
Since I didn’t have access to better loan refinancing options (most require a green card or US citizenship status), I thought differently. I partially used the margin on my Robinhood investment account to take cash out at 5% interest and paid off the student loan at 8.25%.
Membership of a credit union is super helpful for low-interest loans, I took a personal loan at 3.5% interest from my credit union and paid that toward the student loan debt. It’s all about interest rate differentials, and credit unions are a great source for low-interest loans. Rinse and repeat.
Check how much you can save by refinancing: Student Loan Debt Refinance Calculator
9. I Chose My Medical Plan Optimally
I realized that health insurance premium is another major monthly cost. To keep costs low, I enrolled in a high-deductible plan with an HSA account. I was able to keep my premium payments under $50 per paycheck and put away some money in the HSA account. My employer also made contributions to my HSA account. The HSA balance in excess of $1000 is available for investing and growing.
So, No Fun in Life?
Life is too short to not have fun.
You will incur expenses, so make sure you get something in return. Credit card miles and points are very rewarding in the US. If you get your strategy right, you can accumulate enough miles for a free vacation every year.
God bless America!
I had a strategy in place and accumulated enough points to fly return business class to India on Qatar Airways, to London on American and Delta.
The story on that is reserved for a future blog post.
I Also Made Mistakes During The Student Loan Repayment Journey
I’m human and I made some mistakes while paying off my student loans.
Mistake 1: I Bought A BMW
I always wanted a luxury car, but BMWs are damn expensive! Thankfully I went for a certified pre-owned (2.5-year-old) one rather than a brand new car. I negotiated well and got a good deal. The BMW finance charges were low @2.9% so I took the financing from them.
Apart from the high cost to buy the car, BMW requires premium fuel (AKI 93) and expensive maintenance. It has high vehicle operating costs. Costco membership saved me some money on premium gas. I could save on average $ 0.40/gallon by filling up at Costco gas stations, i.e. about $4 a week, $200 a year. Every drop counts.
Mistake 2: I Paid High Rent For My Apartment
When I got my first rental condo in Miami, I was foolish to pay high rent for sea facing 1 bedroom condo. I was new to Miami, wanted to have the ‘bay view’ from my room, and was happy to pay the premium price for it. While I relished the view, I soon realized I could save up some money by moving two blocks away from the bay. A year later, I did exactly that and ended up saving about $250 a month on rent, i.e. $3000 a year.
Mistake 3: I Gambled on Cryptocurrency
I love playing roulette at the casino, where I’m guaranteed to lose all my money if I play long enough (hence the free drinks offered by the house, to make sure you stay long enough and gift away all your cash to the casino). However, that’s not the gambling I’m talking about here.
I made some high-risk bets and put a good chunk of money in cryptocurrencies – yes, Bitcoin, Ethereum, Litecoin, etc. In the beginning, I made good money, riding the crypto investment craze, but then lost a ton of money later when the craze died down.
Overall, gambling on cryptocurrencies hasn’t been fruitful for me. I still hold some crypto in my portfolio. Maybe someday the craze will be back! (or maybe not!)
[update March 2021: Well. Well. Well, the cryptocurrency craze is back with Bitcoin hitting $60,000 apiece!]
Where Do I Stand Now?
After paying off my student loan, I have a good amount of investment in my retirement account, some in my stock brokerage account, and some in my real estate investment fund. Diversification is key to a balanced portfolio, I have a fairly diversified investment portfolio and plan to invest proportionately going forward.
I do not own a house or condo yet, so I’m missing out on direct real estate investment, but at the same time, I don’t have to worry about homeownership responsibilities. I invest in real estate via REITs. On a positive note, not owning a house provides me a great deal of flexibility to move around and live in any part of the world.
There’s a lot to explore in the world, and excited about the opportunities I’ll have in the future.
[update: I moved to Europe in early 2020 to explore new places and plan to spend some time. Once COVID restrictions ease off, the exploration can begin]
Interested in Starting Investing But Unsure Where to Start?
I have put together some resources in easy-to-understand language for you.
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