I haven’t posted in a while. Guilty as charged. I got the taxes done and after all the stuff related to running my photography business alongside the fact that this was the first year that I filed as married, we got a sizeable tax return. Guess where that’s going? Straight to Navient and that good ol’ student debt. Damn I have made some good progress. Yes I am bragging. I have earned it. A couple years ago I was almost $130k in debt (school loans and credit cards). As I look back at my student debt journey, I have been trying to think why I have been so motivated and what keeps me going. One would think it is the satisfaction of seeing that debt number go down every month when I make a payment whether it is small or large…but that just isn’t the case.
It is the pain that has motivated me.
That is sort of sick. What’s the story? At a basic level, we can think of motivation as the stick or the carrot. The carrot is the dream of being debt-free which is a long term goal, but even the short term goal of seeing the principal balance go down isn’t that satisfying. It’s like trying to lose weight and you’re only seeing a pound of progress per month. It is progress but it isn’t enough to celebrate like crazy. Short term progress over time will yield big results, but for me and my debt, it is the daily pain that has pushed me.
Introducing…the daily interest calculation or DIC for short. And this metric really is a dick. How do you calculate this? This is copied verbatim from the Navient site:
The amount of interest that accrues on your loan is determined by a simple daily interest calculation:
Your current principal balance
× The number of days since your last payment
× Interest rate factor = interest rate ÷ 365.25 (number of days in a year)
= Your daily interest rate
If you have multiple student loans, you likely have multiple interest rates, so you will need to do this calculation for each loan, and add them up to see all the daily interest.
Once interest is capitalized, it becomes part of the principal balance and interest begins to accrue on the new principal amount.
At the end of each year you should receive a tax document from Navient and each of your loan servicers detailing the exact amount of interest that you paid.
The good news is that the IRS treats capitalized interest as interest for tax purposes and is deductible as payments of the principal balance are made on the loan. However, no deduction for capitalized interest is allowed in a year in which no loan payments were made.
Let’s use my current situation. Current principal balance is $57,693.77. Last payment was 1 day ago. Interest rate is 6.125%. Using the formula above that would be:
$57,693.77 x 1 day x (.06125 interest rate ÷ 365.25) = ~$9.67.
In other words, I am paying $9.67 every single freakin’ day on INTEREST. Every 30 days, $290 is going to nothing but interest. Ouch. Pain. Motivation. That’s a solid meal in downtown Minneapolis every day. That’s a car payment every month. That’s money towards an investment that could earn me some money. That’s a kid’s tuition savings. That’s seeing a movie every day. That’s a couple drinks at happy hour. Whether it is a frivolous purchase or a responsible long term investment, that is cash money going out your pocket and into The Man’s. The opportunity cost of that money is pain that we don’t always think about.
Some people have low interest rates, which is why they don’t feel compelled to pay of their debt in an aggressive manner. I would argue that the interest you’re accruing is actively working against any positive interest you’re gaining. All depends on your unique scenario, I know.
There you have it. Some more insight into what is driving me to pay this beast down. What motivates you?