Reducing My Student Loan Payments

At the end of last year, I sat down and drafted my 2008 financial resolution. The goal was to pay back $10,000 of my student loan debt by the end of this year. This would require approximately $834 per month. After the first four months of this year, I’m still on track to meet my goal by the end of the year.

However, I’ve recently been reevaluating my situation, and I’m thinking about altering my resolution for the remainder of the year. Instead of aggressively paying back my student loans, I’m planning on reducing my student loan payments and using that money to invest in my retirement accounts and increase my emergency fund. I know this probably seems hypocritical coming from someone who has written about how to quickly pay off your student loans, but here is why I’m planning to do this.

• Low interest rate - My student loan debt is consolidated at a low fixed rate of 3%. Based on the expected return on the investments in my Roth IRA and Roth 401(k) in the long run, it makes more sense to pay back less debt now and invest that money instead, especially since I’m still in my mid-twenties. By reducing my monthly loan payment from $834 to $200, I’ll be able to contribute an extra $4000 to $5000 into my Roth 401(k) this year.
• Unexpected expenses - A recent trip to the dentist reminded me of how important it is to have an emergency fund to cover unpredictable expenses. While I was expecting to have to pay for some fillings, I didn’t realize that I would also need a crown, which is a lot more expensive. Fortunately, I’ve been building up an emergency fund, so I was prepared. Reducing my student loan payments will help me replenish my emergency fund.

Has anyone else been in a similar situation before? Do you think I’m making the right decision?

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