Money is a Matter of the Heart

A man who is master of himself can end a sorrow as easily as he can invent a pleasure. I don’t want to be at the mercy of my emotions. I want to use them, to enjoy them, and to dominate them.
— Oscar Wilde

I have a confession to make — I have a strong urge to make a financial move that I know is foolish. Specifically, I really want to pay off the last of my student loans.

Let me offer some background. 2012 was by all accounts a very good year, financially, for the RW household. We sold my house in Virginia at a tidy profit, reaping the rewards of a great deal of renovation work over the past few years, and used some of the proceeds to pay off the last of my higher-interest private student loans. We paid off the last of DW’s debt as well, and even with the wedding, the honeymoon, and buying a new house, our wealth ratio was about 73%, and our capital wealth ratio was 63%. We moved the bar a long way this year.

Here’s the trouble. Apart from our shiny new mortgage (well below average in size for the Bay Area, but that’s sort of like being the classiest person on Jersey Shore), we have one debt left. One last student loan. And that bugs me.

The Niggling Debt

This is a federal loan, and for various reasons including a solid credit rating and never missing a payment, the rate is locked in at 1.6% (not a typo). I’m looking at our bank statements, and we have more than enough to just write a big, fat check and pay it all off right now. I really, really want to. But we really really shouldn’t.

The reason we shouldn’t is pretty obvious — the rate we’re paying is ridiculously low. In fact, it’s actually lower than the rate of inflation. Even if we were mortgage free and had $10 million in the bank, the rational move would be to make the minimum payments until it’s paid. Inflation will eat away at the debt over time, and we’ll pay less in real terms in the end that way, and that’s not even accounting for opportunity cost.

Since we’re carrying a mortgage, it’s even more obvious that we shouldn’t pay that student loan down. The mortgage is at a ridiculously low 3.25%, but that’s still higher than my student loan’s rate, even after you account for the tax deduction. If we have money to spare to pay down debt, the logical move is to pay the mortgage off, first.

The funny thing is, I have no intention of accelerating our mortgage payoff. After adjusting for taxes, the effective rate is about 1.9% (yep, taxes are high in California). I may not be Warren Buffett, but I’m pretty sure I can do better than that with some pretty conservative investments, and I’m perfectly comfortable with the idea of doing so.

Reasonable minds could differ as to whether that’s wise 1, but it’s beside the point. The real question is, why don’t I feel the same way about the last of my student loan debt? Why can’t I stop thinking about paying it off, when I know it would be a mistake? (Far from the worst mistake we could make, to be sure, but a mistake nonetheless, no matter what Dave Ramsey may say.)

Perhaps it’s because its very existence is a constant reminder of the mistakes I’ve made in the past. Perhaps I just want to be able to say that we’re debt-free-except-for-mortgage. Perhaps it’s because student loans are not dischargeable, so I’m worried it would follow me forever if financial disaster struck (the closest thing to a logical reason in the bunch).

Most people seem to think of money as a dry, humdrum subject, but in fact it’s highly emotionally charged. We must always guard against allowing our judgment to be clouded. So I’m going to stick to my guns on this one, and put my money to better use, even if it bugs me. But I’ll have to grit my teeth when I do.

At the end of the day, perhaps a constant nagging reminder of the financial sins of my youth is not such a bad thing. It may serve to help keep me on track when other temptations arise.

  1. More on this to come.


  1. “At the end of the day, perhaps a constant nagging reminder of the financial sins of my youth is not such a bad thing. It may serve to help keep me on track when other temptations arise.”

    I think that’s actually the best reason. I have (thankfully) made very few mistakes in life so far, however a great downfall through arrogance is one of my greatest fears and I watch for it every day.

    If you want bonus points though, maybe aggressively seek some side income and put whatever you make out of that straight towards paying it off quicker. That way the bulk of your saved money is happily working hard for you in stocks etc AND you’ve got a way to continue to attack those bad memories.

    • Sean Owen

      The same logic would apply to that side income, however. With a rate that low, it would probably be better to invest it.

  2. Prob8

    Yeah, that’s a tough one. When the market tanked in 2008, I was in the process of paying off my mortgage. I knew the better position would be to dump money in the market – although knowing you should do it and actually doing it are two very different things. I opted to pay off the mortgage and extinguish all debt. In retrospect, I would have been better off investing. However, I don’t regret my decision because being mortgage free gives me great peace of mind. I’m sure you will end up better off for your decision.

    • Sean Owen

      It’s not a terrible situation to be in, since you’re better off either way. But the current situation is strange. There’s no telling how long these preposterously low rates will last. It could be another month, or another decade (if Japan is any guide.) Once it’s done, though, we’re unlikely to see them again in our lifetime.

      Locking that kind of rate in for the long term, especially backed by an inflation-resistant asset like a house, could be extremely profitable. It also amplifies overall risk, though.

      Psychological benefits like peace of mind aren’t to be taken lightly. You’re right not to have any regrets.

  3. I wrestle with the exact same thing! I only have about $1000 worth of student loans remaining and every month, I desperately want to pay the rest of it off but since the interest rate is so low, I just pay the $131 minimum payment and try to forget about it until the next month rolls around.

    The main reason I’ve not paid it off yet is because the loan is the longest thing on my credit report so I don’t want to prematurely pay it off when it is probably the main reason my credit score is so high. Once it’s paid off, it will eventually fall off my report and the average age of my outstanding accounts will increase dramatically, thus lowering my score. I only use my credit for lucrative credit card signup bonuses every once in a while so even if my score did take a hit, it wouldn’t be the end of the world but it’s still not something I want to inflict on myself sooner.

    I definitely feel your pain but I agree you should stay strong and pump that money into something that earns more than 1.9%!

    • Sean Owen

      Well at $131 per month it won’t be too much longer now, will it?

      Are you living in Scotland still? I have no idea how credit ratings work over there.

      Personally I have a credit card I’ve held onto for over 15 years. I never really use it because I’ve since found a better deal, but I send my cell phone bill to it, and I’ve set up automatic payment of the whole balance. So the account stays active, and I get to hold onto my very old reference.

      • I just got my latest bill today and I actually still have about $1400 left so it will be about a year until it’s paid off. It’d be so easy to just pay off now though so it’s driving me crazy!

        We are back living in America so it’s my American credit score I was talking about. The lucrative credit card sign-up bonuses that I mentioned are usually for American residents only so that’s why I’m trying to build up my frequent flyer miles while we’re still living in the States.

        That’s great you have a 15+ year old credit card. I wish I had left my first credit card open!

  4. a few years ago, for emotional reasons similar to yours, I paid off our mortgage. Certainly not a bad move, but not the best either given the low rate.

    congrats on holding off. you can always pay it later should the urge become overwhelming.

    that’s not advice I give to anyone lacking your fiscal discipline.

    • Sean Owen

      Well thanks for the vote of confidence, Jim! My plan is to set up an alternate account that’s a sort of “mortgage proxy.” I’ll invest much more conservatively there than my portfolio at large, aiming to beat my mortgage rate, but only just – I’m thinking a mix of things like i-bonds and munis. Will probably write a post on the idea soon.

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