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Why I Decided Not to Payoff My Student Loans Early

Student loans seem to be the bane of every personal finance blogger. The personal finance community hates student loans. And it is easy to see why. But here I am, with a different perspective. I am in no hurry to payoff my student loans.

In fact, I probably won’t payoff my student loans early at all.

Why I decided not to payoff my student loans early

Student Loans Facts and Figures

Americans owe over $1.3 trillion in student loans. That’s trillion with a T.

Student loans are the second largest category of debt, behind mortgages.

According to the Federal Reserve Bank of New York, student loan balances have almost tripled between 2005 and 2015 (after accounting for inflation).

The average 2016 graduate left school with $37,172 in student loans.

For recent graduates, the average student loan monthly payment is $351. But this is deceiving because a small portion of student loans have really high balances. The median payment is $203, so half of all borrowers have a payment less than $203. The next 25% of borrowers had monthly payments between $203 and $400.

Student Loan Balances vs Monthly Payments

Most of the attention is on the student loan balance. $1.3 trillion is a very large number. But that’s spread over 44 million borrowers. That’s an average student loan balance under $30,000.

$30,000 is a lot for a new college graduate. The personal finance press is all about paying this off as fast as possible so you can do things like buy a house, get married, get a new car. Spend more money on other things. The media picks out stories for people with six figure student loan debt. Those stories are obviously eye-popping and that kind of debt really does delay your progression into the rest of your life.

And that’s the key: $30,000 is a lot more manageable than $1,310,000,000,000.00. Or even $150,000.

When you break $30,000 over a long repayment period, you aren’t looking at huge chunks of your monthly income. Remember, most student loan borrowers (75%) have a monthly payment less than $400. If you were a responsible borrower and took the student loans out to increase your earning potential, hopefully you are making more than $400 (or your monthly payment) more than if you hadn’t taken out the loans.

But here’s the deal, the interest rate for a lot of undergrad student loans is going to be sub-5%. These are going to be your federally subsidized loans. Most students are going to stick with the federal loans. Of course, if you went private, your interest rates may be all over the place.

Can you start to see why I’m not in a hurry to payoff my student loans?

Benefits of Student Loans

Why I decided not to payoff my student loans earlyEveryone else is out there talking about how bad student loans are. But here I am telling you that they aren’t all bad.

I think most of us see the benefit of taking on student loans. I see two key benefits: early establishment of credit history and allow you to make more income over your career!

These loans are given to people with little credit history and no defined way to pay them back. Wait, this is a benefit?

For responsible borrowers, it is a wonderful benefit because you get to start building your credit history and show a responsible repayment history. With little to no underwriting, almost everyone qualifies. Can you say the same for credit cards?

But you must be a responsible borrower! Don’t take out six figures of debt to go into a career that makes mid five figures.

On the other hand, if you can leverage the loan into a degree that will allow you to make more money upon graduation or to finish a degree you wouldn’t otherwise be able to finish, you’ll end up ahead.

I can definitely say that without my graduate degree, I would not have the career that I do today. I would probably still be successful in a career, but I highly doubt I’d be making what I do today with only an undergraduate degree. Possible. But not probable. Especially when I look at my friends that I graduated with from undergraduate school who did not pursue a graduate degree.

My Student Loans

My beginning balance was less than $30,000. Those loans though helped me through my graduate degree program. I was fortunate to have my undergraduate degree completely covered by parents and scholarships. (Thanks lottery players!) As soon as my payment deferment period was over, I consolidated my student loans at a fixed rate of 4%. I also took advantage of two additional discounts – online statements and automatic drafts. This results in an interest rate of 3.5%. My current balance is just a hair under $16,000.

Now, math geniuses, tell me something. Would you be in a hurry to repay a loan with a 3.5% interest rate when you can make better returns in the stock market? In 2016, the S&P 500 was up 9.5% and the Dow Jones Industrial Average was up 13.4%.

The interest rate on the loan is very low; in fact, the interest rate is lower than my mortgage. So even if you were to look at the debt ladder repayment strategy (highest interest rate first), my student loans would not be the priority to pay first. Only the debt snowball, where you attack the smallest balance first, would attack my student loans first.

I also did the math. If I payoff my student loans today, I will save $2,509.77 in interest over 103 months (8 years, 7 months). That’s an average of $24.37 a month over that period.

Right now, I’d rather keep the cash and invest it. Or even just keep it in my emergency fund.

The cash on hand is also useful for other purposes. I’m looking at needing a new car in the near future. I could payoff the student loan balance of $16,000 or I could use that cash to buy the new car. Even if I decide to go with a luxury car, that kind of down payment will get you the best interest rates on a car loan (ie zero percent). Or couple it with other savings and I’d have no car loan. And no car loan means no hit on my credit score. Or financing costs.

My student loans are less than $200 a month and thus not a budget breaker. With a low interest rate, my student loans are not a priority for paying off first. And I have other uses for the cash. In other words, I just don’t see the benefit to payoff my student loans right now.

Hedging My Bets

There’s risk to investing in the stock market. The market can go down, like it did about a decade ago. You can pick bad investments and lose it all even if the market overall is doing well. If you payoff your debt, you are guaranteed that rate of return (in my case, 3.5%).

So what I am doing to make sure that I’ll be OK is to include those monthly student loan payments in my emergency fund that is not invested in the market. In fact it is in cash or near cash, not subject to the whims of the stock market. As I get closer to the end of the student loan period, I may decide to reduce the amount in the emergency fund, but until then, I want to make sure I am covered.

Also, until all my debts are paid off, I am keeping a relatively conservative balance in my investments. They are more broad market based and not individual stocks, and so help reduce the risk from a bad stock pick. I may not have the largest gains possible but there is a smaller risk on the principal amount invested. I am less likely to lose it and not be able to payoff my student loans later.

Why I Might Still Payoff My Student Loans Early

I definitely recognize the benefits to paying off the student loans early. There’s a certain peace of mind knowing you have one less debt to worry about. Especially a debt that is difficult to discharge in bankruptcy if the worst should happen. There’s also a benefit to simplifying your finances. One less payment to remember to make every month or to keep a running balance in your primary checking account.

And you can’t be debt free if you still have student loans.

But no, I still won’t payoff my student loans early. It’s going to take me more than 8 years and 7 months to payoff my mortgage and in the meantime the student loans will go away on their own. In fact, I have 13 years left on my plan (2030 baby!) for eliminating all the debt, taking care of home renovations, and several other big purchases along the way.

How Have You Gone Against The Grain of Common Advice?

Have you also decided to go against the grain of common advice or wisdom? Has it paid off for you? Comment below!

8 thoughts on “Why I Decided Not to Payoff My Student Loans Early

  1. I’m one of the lucky six figure borrowers (MBA) so I’ve decided to knock them out as soon as I can. I’m in banking so my salary is also in the six figures so to me it was worth it to get the career boost. But that $1500 a month payment is a BEAST even with a high salary. I’ve decided to take a few years and knock it out so I’ll be able to make larger purchases like a house eventually. I’m still in my 20s so I’m ok with living like a college kid for a few more years. It seems like you’ve definitely done your research and gone with the best money maker so kudos to you! Personal finance is just that – PERSONAL! So I’m glad to see that you’ve made the right choice for you!

    1. Ouch! I really cannot imagine that kind of student loan amounts. And yes, at $1,500 a month, I totally get why you want to get rid of the loans. It makes complete sense for you to work on these aggressively.

      So many people forget the PERSONAL part of personal finances. I hope that more people figure out that it is ok to be different and to do what works for you. On my journey, I have tried and discarded many different approaches. And am still doing so. Not everything will work for everyone. And one plan will not work perfectly for someone (ie you may need to tweak it to fit you)

      Good luck on your pay down journey! It appears you have the right approach, living without the lifestyle inflation. You’ll get there soon!

  2. Seriously, this is the best post I have read in a long while. I am completely with you. When I graduated from college, someone told me I could extend my student loan period, to pay off my higher interest credit card debt, that’s exactly what I did. It was great, now I had a tiny student loan payment and lots of money to pay off my 15% plus interest credit cards.

    When I got married, we paid off my 5-6% student loans first, but we kept my wife’s 4% or less loans much, much longer. I believe we paid them off in the “standard” 10 year period. I was happy to have them.

    I don’t regret delaying our student loan payoff AT ALL, and I’m almost 41. Not for a second.

    As a bonus, if you die (albeit getting hit by a meteor is more likely), Uncle Sam FORGIVES your student loan balances. Your estate need not pay them back at all!

    1. I treat student loans as I do any other debt. And I use the interest rate ranking to determine which ones to pay off first. So when the 3.5% student loans are the highest, then I’ll attack them. Maybe. Depending on inflation.

  3. I know my head says hold off on the low interest rate loans and put that money to better use. I was fortunate to come out with mid five figure loans and making a good anesthesiologist salary I paid them off in 18 months. I know it wasn’t the best financial decision, but the part about not being dischargeable in bankruptcy always scared me a bit.
    I know they can never take your education away, but I didn’t want those hanging over my head if the worst happened and I couldn’t work.
    If I had credit cards I definitely would have paid those off first.

    Tom @ HIP

    1. Tom, psychology is a big part of personal finance. Some people can stick with the spreadsheet and go strictly by that. Others though need the psychological boost of having no debt. Right now, I like having the extra cash on hand and in investments – that’s worth more to me than the interest on the loans. Still psychological rather than pure spreadsheet driven. So I get it. Thanks for stopping by!

      PS Paying off loans isn’t wrong! Ideally, we would have no debt and lots of investments. We will both get there someday! -Kimberly

  4. I think it’s awesome that you only have 30k in student loans especially for you graduate degree! There’s people I know who have more than 30k only for undergrad.

    I agree you won’t get much benefit from paying off your student loans other than piece of mind 🙂 It seems like you have your mindset and I’d probably do the same if I were in your shoes. In my case I think it would probably be best to finish paying off my $5,000 in student loan debt since it’s a smaller amount.

    1. I definitely feel fortunate to come out of school with less than $30k in student loans. I know people from my grad school class that had $130-150k for both undergrad and grad school. It’s a totally different ballgame when you look at those kind of numbers. Monthly payments for those student loans look more like mortgage payments.

      When I look at the market and think it is riding too high, it sure is tempting to sell off some stock and pay off the student loans. At least if they are paid off, I know that they won’t come back. It’ll be more and more tempting as the balance gets lower. Even at my current balance, I think about it every once in awhile. But then I look at the card hold numbers and always shy away from it just because it doesn’t make that much difference in interest.

      Thanks for stopping by!

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