Why I Temporarily Stopped Paying my Student Loans

Why I Temporarily Stopped Paying my Student Loans

A few months ago, in a quick conference call, my co-workers and I learned that our company was going to split into two smaller ones. Our department was most likely not going to be part of the parent company going forward. So far, it looks like no actual positions are threatened.

Nevertheless, knowing how these things work, I decided to prepare for the worst. At the time, I was in the middle of paying my student loans and was actually kicking some butt. With about $12,000 left, I was halfway there less than a year in. Why I Temporarily Stopped Paying my Student Loans

Nevertheless, a big decision had to be made. If something were to happen, I would be completely out of cash in a matter of days. My conclusion was that I could either keep pounding at the student loans and live on the edge (I only had about $1000 in savings), or I could put the monthly student payments towards savings and ignore the loans until I was sure that my position was secure.

Side note, when I was paying them down, I was putting way more than minimum payments on my student loans. As a result, I can literally go two years without paying anything and not get in trouble with Sallie Mae.

I ended up deciding to put a temporary stop to my aggressive debt payment plan. It came down to having to pick between the emotional discomfort of my student loans staying stuck at the same number for a while and the rational discomfort of being an executive decision away from unemployment with no cash reserves.

I knew that no matter how long it took to get my job situation sorted out, freezing my loan repayment was only temporary. On the other end, the potential damage stemming from being unemployed with no cash was enormous and long lasting.

If I took a nerd approach to the problem and started comparing interest rates, I reached the same conclusion. Credit card interest rates are much higher than my student loans’. There was no point spending time on the subject. In the end, I felt very good about my decision. My main worry was no longer how I would survive in the worst case scenario I described, but instead whether I should start looking for other job opportunities. After all, I didn’t want to have to use the savings.

After weighing all my options, I realized that the only upside to sticking to the original plan was the mental satisfaction of seeing my loan balance go down. Don’t get me wrong, I’m the most anti-debt person you will ever meet. But over the years, I’ve come to learn that sometimes, we need to be flexible in order to make the right decisions.

Related post:  Debt Free, Now What?

Student loan debt is bad, but credit card debt is worse. If I can avoid the latter by temporarily ignoring the former, that’s exactly what I’m gonna do.

This whole experience made me realize that personal finance is not always about following a plan with no room for flexibility. Sometimes, smart decision making can make the difference between  complete financial distress and a minor setback. Is this situation ideal? Hell no! I certainly don’t enjoy not making progress on my student loans or better yet having the balance increase due to interest. But I still feel very confident in my ability to weather any type of storm, however brutal it might be. The worst case scenario is me losing my job and having to dig into that savings account for a few months.

I just couldn’t afford to ignore the higher than usual potential for an emergency. I know for a fact I wouldn’t have the same peace of mind even if my loan balance was at zero today. Being one conference call away from deep credit card debt is not a situation I want to be in.

Real Time Update

I wrote the above post a few months ago. This section is from “real time me”.

A few weeks ago, about six months after my company’s announcement of the big shakeup, I was informed that I was part of a small group that would be staying with the parent company. This means that my position is secure for the near future.

By the time I got the news, I had already stashed $11,000 in savings. I immediately wrote a check to Sallie Mae for that amount ($10,400 to be exact – I hate seeing my bank accounts go to zero). With less than $2000 left in my original $20,000, I am now exactly where I would be if I didn’t go with this plan, minus a few hundred dollars in interest.

Of course, I was lucky and that was the best case scenario. But if things didn’t go as well, I was fully prepared.

What up?! I go by Mr. Compounding (I know, great name). I grew up in Port-au-Prince, Haiti and moved to Boston after high school. My goal is to share my personal experiences and opinions, as well as encourage people to take control of their finances.

9 thoughts on “Why I Temporarily Stopped Paying my Student Loans

  1. Always, always, always be prepared! I’m going to bring writing a post soon about how people with successful mindsets are always building bridges to their next goals even before they need them. Don’t wait to build a bridge when you’re underwater. Build it before you need it! The path to finding wealth is in being prepared and knowing when and where to build the life bridges. Way to go and God bless.

  2. “…we need to be flexible in order to make the right decisions.” Wise words! This was a great plan you decided on. I am glad that the worst case scenario wasn’t realized and that you’re not too far from your original goal!

  3. Glad to hear your position wasn’t affected! I had a similar thing happen a couple years ago. Luckily we had two incomes so I didn’t stop paying on our loans completely but I did move to the minimum payments for awhile so we could build up our cash. It can be a little rough after an announcement luke that and you don’t know what is going to happen.

    1. I was lucky and had student loans, so I didn’t have to make minimum payments after a few big payments. Definitely made things easier. Thanks for the kind words!

  4. I did the same thing. Earlier this year, I found myself very unsatisfied with my job and decided to start searching for a new one. I had about $12k left in student loans. Rather than keep paying it down, I decided to take the interest rate hit and save that money in a separate savings account until I saw how my job search shook out. I ended up finding a new gig and once the offer was in hand, I pulled the money out of there and paid the loans off all at once. Sure I took a small interest rate hit, but I think it gives you the best of both worlds. You have cash as a safety net but you can just pay your loans off all at once when the time is right.

    1. Glad you had this plan work out for you too. I think the biggest key in both our cases is actually not touching that cash until the situation works itself out or we actually need it, in which case it’s a far better outcome than going into credit card debt.

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