Why we’re slowing down our student loan repayment

We’re slowing down our student loan repayment in 2021.

After a year that saw us shave close to $10K off the principal balance of the student loan, we set a goal for 2021 that will see the balance shrink by less than half that amount — about $3.5K.

Considering how paying back the student loan has been a key focus for us over the last two years, this represents a big shift.

But there are a few factors that make me feel good about the decision.

Our student loan repayment journey so far

We have been laser-focused on paying back our final — and largest — debt since January 2019.

The balance at the start of repayment was $48,293.26. Because this was our biggest loan with the highest interest, we spent the first few years of our debt-free journey making the minimum payment only. By the time we finished paying off the rest of our debt, the principal balance was $47,355.79.

We barely made a dent despite several years of making payments!

Needless to say, when we reached the point where all our debt repayment money was going to student loans, we saw progress much faster. In two years, we brought the balance to under $20K.

Why we’re slowing down our student loan repayment in 2021

When it comes to slowing down our student loan repayment, there are four things that make me feel good about the decision.

• The low principal balance

In 2020, I wanted to shave $10K off the principal balance of the student loan. We didn’t quite hit that number, but we came very close — we’re talking less than $200 away close.

But while we didn’t take $10K off the balance, we did bring the overall principal balance under $20K.

Coming into 2021, the principal balance of the student loan is $19,823.68. Again, for context, we started at $48,293.26.

• The low interest rate

Currently, the federal and provincial portions of this loan have the same interest rate: 2.45 per cent.

That translates to less than $1.35 a day in interest.

For comparison, in December 2020, $41.23 of our $450 minimum payment went to interest. In December 2019, $100.08+ went toward interest.

Now that we are in a place where most of our minimum payment actually impacts the principal, I feel OK scaling back the extras for a short period of time.

• The tax benefit

Currently, we are able to claim interest paid on the student loan as part of our income tax. Obviously, I’d prefer to not pay interest at all, but if we have to pay it, I’m glad to at least have a small tax benefit.

(There has been a suggestion that this might be changing at the federal level in 2021-22. We’ll see what happens).

• We will still make progress driving it down

Making minimum payments only means we won’t make the same kind of progress we’ve made in the past, but thanks to the combination of the low principal balance and the low interest rate, we’ll still see the total shrink — and we’ll still pay it back ahead of schedule. At the end of the day, that’s what matters most to me.

What we’re doing with our money instead in 2021

So if we’re slowing down our student loan repayment, what are we going to do with the money?

We’re going to funnel it into our emergency fund.

Since the start of our debt-free journey, we have endeavoured to have $5K in emergency savings at any given time. Some people advocate for less while you’re in debt but I just can’t get there.

While $5K still feels comfortable to me, 2020 really showed me how quickly things can change. As a result, we decided it would make sense to give this account a boost. Our goal is $10K — it’s ambitious, but it’s doable.

Final Thoughts

The idea of slowing down our student loan repayment felt strange at first, but the low balance, the low interest rate, the tax benefit and the fact that we will continue making progress make me feel good about the decision.

We have made a lot of progress toward becoming debt-free and while 2021 will represent a break in the intensity of our pay back, I’m not too concerned. We’re still on track to pay it back ahead of schedule and that’s what matters to me.

Have you ever changed your approach to debt repayment?

Photo by Sarah Pflug from Burst