I am sitting in bed right now looking over my student loan and thinking about how much I loathe debt. In fairness, my student loans have opened a lot of doors for me. I was able to make a pretty substantial career change that has led to a more challenging work and a larger income because of my graduate program. And I am incredibly grateful for that. The career opportunities I have had since completing that program are the type of work I was hoping to be doing when I went back to school. The older I get, the more I make a conscience effort to focus on gratitude. And I am grateful for the doors grad school opened.

But the aftermath of graduate school also included an incredible pile of loans that I desperately want to pay down. Each month I make that payment I just think about the different ways that my wife and I could use that money: more into our Roth IRAs, build up taxable savings, take a trip to Europe, or invest more for our soon-to-be born daughter’s future.

Tonight as I am thinking about those student loans, or any form of debt really, those commercials about “The Real Cost” of smoking popped in my head. That’s exactly how I feel about debt! So to show why, I ran some numbers really quick on my student loans to show how debt can completely crush your ability to be financially free, and that isn’t just about that monthly payment that is coming out of your pocket.It’s about the opportunity cost of the interest that you are paying back on that loan, whether it’s a credit card, mortgage, or car loan.

The first example I have is shows the power of an interest rate and how much of an effect that has on how much we end up paying back on a loan. I currently have just about $98,500 in student loan debt and was paying a 5.875% interest rate with 8 years left on my loan (initially a 10 year loan). I was making about $1212 as a monthly payment. A couple of weeks ago I got a letter in the mail from SoFi with an opportunity to refinance. I didn’t think much of it because I had already refinanced before and I didn’t think I would benefit from it. But I filled out an application anyways to see what happened and I am glad that I did. I got approved for a 7 year loan with a 4.25% interest rate. So at face value that’s one year fewer I have to pay back this debt, at a lower interest rate. But what about the monthly payment? My monthly payment on a loan that is one year shorter, with roughly a reduction of 1.6% in interest rate only increased by $70 per month.  That’s also the power of a lower interest rate! Even more amazing, over the life of the loan, the total cost decreased from $25,190.63 to $17,864.72. That’s $7,325.91 less over the life of the loan. Here’s a quick table I pulled together to show how it all works out.


That’s roughly $7,300 that can be used to take a trip to Europe, or better yet, put towards financial independence! Over a 10 year period, at an estimated 5% return that would grow to $11,364.89. All because of a lower interest rate!

As another example I checked an old credit card statement that we paid off about a year and a half ago. At the time we had $12,938.77 in debt on the card. If you check your credit card statements when they come, you’ll notice that credit card companies outline how long it will take you to pay off your credit card, and how much it will cost you. Then they show an alternative payment. Here’s what ours looked like on this statement:

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Twenty-one years to pay off the card making the minimum payment! And roughly $10,000 in interest on top of what is already on the card! $10,000 may not seem like a lot of money over a 21 year period of time, but again, think about what happens to that money if you invest it, or have it available to take a trip and make memories with loved ones?

One final example real quick is a mortgage. On a 30 year, $200,000 mortgage with a 5% interest rate, you end up paying $186,511.67 in interest payments alone if you only make the minimum payment every month. That’s almost 20% of a million dollars that is spent on interest alone. That brings the total cost of a $200,000 mortgage to $386,511.67. You almost pay as much in interest as you do on the value of the property itself!

So the next time you’re thinking about running up those credit card bills, don’t forget about the real cost of debt. It isn’t just about that monthly payment, it’s about all the other things you could be doing with that money and those interest payments that are part of the equation too. Maybe one day we can start an advertising campaign for debt like we have today for those smoking commercials!