Why Paying Off Student Loans Should be a Priority Comments36 Comments

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If you’re a recent college grad or an undergraduate degree, chances are you have student loans. Two-thirds do. For those who did borrow, the most recent estimate of the bill is $26,500 per borrower.

This amount often includes a mix of private and federal loans. As you may have heard, private student loans are a time bomb for your finances. Paying for college using private loans is like paying with a credit card. But that doesn’t stop 33% of people in bachelor’s degree programs from taking out private loans at an average of $12,550 each.

Why people take on so much debt to pay for college is beyond me. It’s so bad that some are forced to put off dreams like having kids or buying a house. But here we are, and it must be dealt with responsibly to limit the damage.

Federal Loans Aren’t the Deal You Think They Are

I’ve read dozens of books and blog posts telling me to take my sweet time paying off federal loans. Why? Because they have low, fixed interest rates. And the interest you pay is tax deductible! Plus, if you become unemployed or take a pay cut, there are several repayment options at your disposal.

Balderdash, baloney, rubbish. Interest rates used to be low, but the government is taking steps to eliminate subsidized student loans. That means most borrowing now happens at 6.8%. How is that a deal??
The tax deduction argument is overplayed. With most tax deductions, you have to spend a lot to save a little. That’s true here as well. All you doctors out there who borrowed a fortune – you’re likely getting no tax benefit, because once your annual income exceeds $75,000 (or $155,000 for joint filers) you’re not eligible for this deduction.

Federal loans do come with flexible payment plans, but these should only be used in dire circumstances. If your goal is to be debt-free on your 60th birthday, by all means deviate from the standard repayment plan. For those seeking financial independence, stick with the standard plan (10 years) and save yourself thousands of dollars in interest.

Private Loans: So Easy to Pick on

I’m not sure how many times I’ve cautioned against private loans. I picture these loans as the fat kid with glasses and braces, sitting alone at lunch. So easy to pick on.

The dangers of private loans are real. Congress has granted private lenders incredible power to reach into your pockets if you don’t pay up. They can garnish your wages without even proving you owe a debt. The interest rates are almost always variable, and even though rates might look good now, it’s not long until they will skyrocket as the economy improves.

Remember the $26,500 figure we started with? About 20% of that is private loans. That means most of us aren’t maxing out our capacity to borrow federal loans before subjecting ourselves to this torture. (Dependent students can borrow a maximum of $31,000 total and independent students up to $57,500.) Why would you put your future self through this if you don’t have to?

Your first goal after graduation needs to be paying off any private loans. Yes, even if the interest rate is only 2.5% right now. Remember the rate is variable, which means it can change every month. These loans are a time bomb, and you should do everything you can to eliminate them from your life.

The Right Thing to do

Stressful. Tormented. Miserable. This is you with student loans in your life. Every day you wake up knowing you have that loan payment due at the end of the month. That even if you don’t pay, they can legally reach into your pocket and take their money back. You don’t need that stress in your life.
Make some short-term sacrifices now and get these clowns off your back. And later, maybe you won’t have to worry as much.

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By : Adam | 7 Mar 2013
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36 thoughts on “Why Paying Off Student Loans Should be a Priority

  1. Bill Myers

    The fact is that sometimes getting a private loan is not easy to avoid. I am one of those 33% that had to take a private loan my junior and senior years. I fall into that class of people where their parents made too much on paper but in reality were supporting three students in college and one at home. After my sophomore year I decided to move off campus, and in retrospect lost my grant. After pleading with resident life to allow me to move back and reinstate my grant, I was rejected. If I were to transfer I would have to add on another year and a half of school at least to graduate, so I made the mature decision to take a private loan. Do I regret it now, yes, however sometimes its hard to avoid.

    Reply
    1. Ryan

      I still don’t think private loans are a good idea, in any situation.

      Most students don’t max out their federal borrowing capacity before thinking about taking out a private loan. Dependent students can borrow up to $31K, and independent students up to $57.5K. If you need more than that, getting a part-time job is the best option. If that still doesn’t get it done for 4 years, the school you’re going to is too expensive.

      Private loans are an abomination, and should be in the same category as payday loans or car title loans. Lenders of private student loans have all the power of lenders of federal loans, without any of the repayment flexibility offered by federal lenders.

      Reply
  2. Cat

    I did a co-op program – 4 months school, then 4 months work, etc. Helped me graduate without debt – which was nice!

    Reply
    1. Ryan

      Working through school is a good way to limit your debt. I think some people are afraid they won’t have time for studies, social life AND a job. But the reality is it helps you develop time-management skills and teaches responsibility.

      Reply
  3. Jose

    Thankfully, I never acquired any debt from student loans so I don’t have to worry about it. I guess that’s one of the benefits of starting college AFTER you start your professional life, if your lucky, your employer picks up a big chunk of it.

    Reply
  4. Money Bulldog

    A lot of people in the UK are facing hard choices when it comes to student loans because tuition fees have recently increased. It must be a real weight to have on your shoulders so I agree, the sooner they’re paid off the better.

    Reply
    1. Ryan

      In most US states, universities are increasing their tuition at 2 to 3 times the rate of inflation. At the same time, state governments are decreasing the amount of money going to universities.

      All this means students are forced to either borrow more or get a job to make up the difference. College isn’t as cheap as it used to be!

      Reply
  5. Alan

    This is a very informative article. I was not aware that the salary cap for student loan interest payments were so low. My wife has a very small student loan balance that we are currently paying the minimum because we have other debt that has higher rates and we cannot use the interest to write off on our taxes. Although the amount is small, it is still a right off and every penny counts. I am hoping that after this year when we try to consolidate again, we can pull this into the consolidation loan begin to lower it a lot quicker than we have been doing.

    Reply
    1. Ryan

      Thanks, Alan! I wasn’t aware that the salary cap for claiming this deduction was so low either. I assumed that the more interest you paid, the more you could deduct. That’s true, up to a point.

      When we did our taxes this year I was only able to deduct $2,500 of interest payments, even though our total interest for last year was more than that. You’re exactly right that every penny counts, especially if it’s a year you OWE taxes!!

      Reply
  6. Grayson @ Debt RoundUp

    Oh the taboo of student loans. The real problem here isn’t a private loan, it is the ever increasing tuition rates across the globe. People want to better their education and create a better life for themselves, but end up in more debt than they originally began. It is time to stop the mantra of you will make more money with a degree. It is true in some cases, but not true in many more.

    Reply
    1. Ryan

      I agree. College isn’t necessarily a no-brainer for everyone. It’s an investment, and people should start looking at it that way.

      Reply
  7. Darnell Jackson

    The problem with college loans is they are given to unemployed teenagers and expected to be repaid by unemployed twenty somethings.

    Think about that for a second.

    The scandal is the fact that when the loans go bust the government cracks down on the student and even takes their income tax returns.

    Reply
    1. Ryan

      Most high school students view student loans as “free money”. They don’t consider that they’ll have to pay them back soon after graduation, and certainly don’t consider what would happen if they graduate and aren’t able to find a job.

      When lenders agree to let students, who often have zero income, borrow tens of thousands of dollars with no regard to their ability to repay, and then steal their paychecks down the road if they don’t, there’s something fundamentally wrong with the system. It is absolutely scandalous.

      Reply
  8. Edward Antrobus

    My loan’s hardship status recently expired. Before that, I was paying $18 in principal each month on a $27,000 loan. Most debt calculators wouldn’t even let me enter the values in because they said the loan would never be repaid. That’s obviously untrue, but I was going beyond the limits written into the programming!

    Reply
    1. Ryan

      So basically you’d pay off that loan when you’re 108!

      I hope you’re able to find additional income soon so you can start throwing it towards your student loan.

      Reply
    1. Ryan

      Thanks!

      You know, it’s tempting to inflate your lifestyle a little when you see those first paychecks coming in. Especially after living like a college student for 4 years. You convince yourself that you’ve earned it, you deserve it, and can “afford” it.

      Well, the reality is that if those with student loans would just continue living the college lifestyle a little longer, it would free up a lot of cash to put towards the loans. THEN you can start thinking about that new gadget or wardrobe.

      Reply
  9. Brian

    It’s actually surprising to see how high student loan interest rates are, considering how low mortgage rates are. I would have thought that there would be more incentive to get a student loan, but maybe that’s for the best!

    Reply
    1. Ryan

      What we actually need are DISincentives for people taking out student loans. I used to wonder why the government charged people such a high rate (6.8%) to borrow for school, but now I think it’s probably best.

      Although I’m not sure how many people are dissuaded from taking out loans just because the interest rate is high.

      Reply
  10. Snarkfinance

    I agree and disagree. For those not particularly financially savvy, or those who don’t wish to pay attention to interest rates then yes, paying off loans as quickly as possible is likely the best course of action. For the other bunch, the answer is always “it depends”. One could “play the spread” and invest money otherwise meant for student loans, collecting the difference in % gained vs. % APR on student loans. If the rates a variable, then the “pile of investments” grows until the APR on the student loans becomes even or higher than the stockpile of cash’s return, at which point a “lump sum” payment is made. This is a bit simplified, but it is, on paper and for those responsible enough to execute it, a superior way to deal with student loans. This is the unemotional, “math” orientated way of course. If one hates student loans entirely, or debt in general, then yeah, pay them off ASAP.

    Reply
    1. Ryan

      I’m one of those who hates student loans specifically, and debt in general. The way we did it was to pay off all high-interest debt first, including credit cards, while paying the minimum towards all other debts. That gave us the best bang for the buck.

      When the credit cards were paid off, we focused on the student loans, all of which have either high fixed rates or variable rates that will rise as the economy improves. That’s where we are now. The only other debt we have are two low-interest car loans, which aren’t a priority at all to pay off.

      I suppose you could get into interest rate spreads and all the rest, but I think keeping it simple is best.

      Reply
  11. Tb at BlueCollarWorkman

    Like I’ve said before, one great reason not to go to college, haha! It hink some people don’t realize that getting student loans isn’t a great idea. They don’t know that there is another option(s). Which is too bad.

    Reply
    1. Ryan

      Haha, yeah college isn’t always best for everyone.

      I think the reason people don’t think of student loans as “bad” is basic human psychology. We see an immediate benefit of taking out loans – that is, we’ll have enough money to cover the expenses at our chosen college for an entire academic year.

      As humans, we tend to place more importance on the present while discounting any future consequences. Maybe if we could figure out how to make those consequences a little more painful in the present…

      Reply
  12. Nick @ ayoungpro.com

    I totally agree! Getting out of debt as early as possible in your career will make your life a whole lot better. I really want to go to grad school, but now that I am out of debt there is no way I’m taking out student loans to do it.

    Reply
    1. Ryan

      Funny how that works. As high schoolers, we’re eager to attend the school of our choice, even if it means we’ll have to take out $20K in loans each year. Then as college grads when the bills start coming in, we become wise to the folly of taking on student loans.

      Reply
  13. Kim@Eyesonthedollar

    You have to be smart with student loans. I don’t think they are bad if you have to have them to get the career you want. You can’t take out a ton of loans for a job that doesn’t pay much, though. If I were graduating right now, I would make it a point to get those suckers paid off ASAP, otherwise you’re almost 40 and still paying on student loans.

    Reply
    1. Ryan

      Taking out student loans isn’t altogether a bad thing, but where people go wrong is when they borrow to the extreme. I agree with Clark Howard’s advice: Limit your borrowing to your likely first year salary after college.

      Reply
  14. Jeremy Norton

    I am glad to say I didn’t have to pay much on student loans after I graduated. It took me a lot of sacrifice while studying so I won’t have to pay much after graduation.

    Reply
    1. Ryan

      Getting through college with little borrowing is getting harder and harder. Colleges are increasing tuition in response to higher costs and limited state support. You really have to be creative to limit your borrowing.

      Reply
  15. Rhea P

    I think our society is kind of getting to a breaking point with student loans, and the psychology around higher education will change over time. When I went to college, as a middle-class kid, the norm was to not just get my degree, but get the college experience, which often means leaving home and going to school out of state, living in campus housing (read: paying more money). I think in the future this mindset will have to change to encourage students to go to the less expensive school that gives more scholarship and financial aid money and is closer to home.

    Reply
    1. Ryan

      I faced a similar choice as a high school senior. I was accepted to two schools: One was a private school two hours away, and the other was a state school in my hometown. The private school offered me about 80% of the cost in scholarships. To pay my 20% I’d have to take out over $20K in loans, versus about $5k at the state school.

      I chose the state school to limit my borrowing. I still lived on campus to get the full college experience, but could easily come home on weekends to do laundry and eat with my family.

      My suggestion to those in the college search process would be to focus on value. How much extra does it cost to attend that expensive private school? You may get more individual attention, but is it worth the extra cost?

      Reply
  16. Jon A

    Paying off any debt should always be the priority, especially for students just coming out of college. The longer you take to pay off a loan, the longer it will take you to get rid of it and it will end up costing much more than the initial borrowed amount. Don’t figure it out the hard way!

    Reply
    1. Jeremy

      Yeah who wants to pay all of that extra interest when you stretch it out as long as possible. Instead pay it off quickly and enjoy the freedom that provides.

      Reply

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