This post is inspired by a conversation with my fellow blogger DFD of Debtfreedoc.com regarding student loan repayment.
Let me start with a classic social psychology question from my home country of China: Two grandmas, both buying a house. The Chinese grandma works hard her entire life, saving every penny, never spends any money outside what's absolutely necessary, buys a house with cash at age 80, lives in it for 5 years and passes away at age 85. The American grandma takes out a mortgage at age 35, makes regular payments on it, takes her children and grandchildren to Disney World etc. Finally pays off her house at age 80 and then passes away at age 85. The question is: which grandma are you?
While this may have been proposed as a Chinese vs. American question, I believe there are plenty of Americans who think like the Chinese grandma. The core of the question is how important "debt-free" is to you. To many, the mental clarity of not owing anything is paramount. And then there are others who don't mind taking out payday loans on a regular basis and living in a perpetual state of indebtedness. I like to think that most of us tend to live somewhere in between.
My original discussion with DFD involved student loan repayments following my previous net worth update post. The question was why go for Public Service Loan Forgiveness (PSLF) on Income-based repayment (IBR) if I had such a low level of student debt (relatively speaking)? Why not just pay it off as quickly as possible and save on the interest?
The short answer is that I'm more American grandma than Chinese grandma. The long answer is that if I switch to a standard repayment plan with the goal of paying my student debt of as soon as possible, my monthly payment will go up by roughly 4x. To me, instead of losing that capital up front, why not invest the difference and make 8-10% annually or maybe take the occasional Vegas vacation? Surely there is a good reason why Apple plans go out and borrow another $5 Billion while sitting on over $178 Billion in cash. My plan will undoubtedly result in more total interest paid over the lifetime of the loan, but I no longer value the concept of "debt-free" as highly as I did before. Call it whitewashing, call it bananafication, call it what you will, but that's my American story and I'm sticking to it.
So, which grandma are you? Let me know in the comments!