The Dutch FIRE community has its own little Slack group. In that group I can talk with other bloggers and non-blogging finance junkies about everything finance. A running joke is the hashtag #teamlowcost (freely translated from Dutch). This is usually typed when you’re talking about how you’re paying down your debts. I am not in this team. I’m in team investments. So why on earth did I pay down my student loans?
The Origin Of My Student Loans
When I went through college, I didn’t have to take out student loans. Studying in The Netherlands is cheap compared to the UK or US. We pay approximately 2,200 euros per year for tuition, unless you’re attending private universities. For the four years I was in college, I think my average cost was a bit below 2,000 per year. Next to that, the government used to pay us students a small stipend. This money was a gift.
Today, this stipend is gone, and instead, students are encouraged to take out loans instead. In The Netherlands, student loans are pretty cheap. All loans are through the government, and you’ll pay the rate the government is paying to attract capital, i.e. the rate on government bonds.
Since this rate is extremely low, and even negative today, Dutch students pay 0.00% in interest on their loans. When I went through college, I took out loans at 0.01% – I know, a bit risky…
I took out these loans when I realised there was this massive arbitrage opportunity. In the last two years of my studies I learnt about investing, and that’s when I started taking out these loans. It was like getting free money that I could invest. Every year, I would just bank the difference.
I Would Never Ever Pay Them Early
Or at least, that’s what I would say. I mean, the interest rate was fixed until five years after graduating at 0.01% and I didn’t even have to pay anything at all. There’s this five year period in which you can pause payments for any reason. So that’s what I did. I let the loan just sit there, accruing a few cents per year in interest and I didn’t pay a penny. Until last week.
Over the last few years I have been extracting enough arbitrage from these student loans. It was a fun ride, but it’s enough. I’m still a big proponent of investing, but I paid off the loans. All in one big swoop. I clicked the link online, confirmed the transaction, and close to 7,000 euros was gone from my account.
A Better Balance Sheet With Paid Off Student Loans
A few weeks ago, I shared my balance sheet with you. On a balance sheet you list all your (financial) belongings (or assets) on one side, and the source of that capital (liabilities and net worth) on the other side.
Banks might look at your balance sheet to determine whether you’re a good candidate to get financing. With a lot of loans on your balance sheet, your bank might decide not to lend to you.
Especially with student loans, banks are increasingly more difficult these days. The rules around getting a mortgage are getting quite strict, and that means that getting rid of the student loans helps.
The reason I’m now busy polishing up my balance sheet is that I want to be ready for a potential move, be it literally moving, or buying a rental property, or maybe something even more exotic (more on that in a later post).
What About Paying Off The Mortgage?
As you might remember from another recent article, I have been thinking of paying off the mortgage too. Well, not completely paying it off, but at least paying a little bit extra. I will not stop putting money in my investments, but I might shift a little bit towards paying down a bit to my mortgage.
Next to that, I will stop hoarding cash, that’s sitting on the side-lines doing nothing. So my overall investment strategy will change. The original thought was to not pay extra on the mortgage and build capital in stocks and cash to eventually purchase rental real estate.
With how things currently look like, it seems I might have to take out a mortgage on my personal residence if I want to take a rental. In that case, it makes no sense to have a mortgage on the one hand and a large cash position on the other hand. That’s why I’m going to look at my mortgage as part of the real estate fund. I already allocated the cash cushion towards my investments, and starting this month I will be putting in a little extra towards the mortgage.