Why Pay Off Student Loans Early?

Don’t keep student loans this long!

Most college graduates have college debt, unless you did something crazy like going to medical school for free.

I’ve talked to several very smart individuals lately who aren’t convinced they should pay off their student loans early; rather they’d like to pay the minimums the life of the loans.

I’ve encouraged them to knock out the student loan debt since they have the income to do so, but after they pay off their other credit cards and consumer debt.

I’ll share a few reasons why I believe paying off student loans early is a wise financial decision.

Why Pay Off Student Loans Early?

Student loans are a huge boulder that many college graduates carry with them for decades. Let’s put that boulder down and free your hands and money to work towards your goals.

1. You don’t know the future- The future is unknown and you don’t know what it will bring. That large student loan debt (a.k.a. student mortgage) limits you. Examples:

• I’ve met female lawyers and docs who want to pause or quit their practice to start a family, but they can’t due to their $100,000+ student loan debt.
• You are counting on the fact that you’ll be able to work, but the possibility for disability is a reality (another reason for disability insurance).
• If you’re single and thinking of getting married, why bring debt into the relationship? Debt just isn’t sexy and might actually turn off a potential financially responsible spouse.
• So many other possible future unknowns: death, sickness, divorce, change of professions…etc.

2. You’ll have more choices- Being debt free gives you choices. Want to transition to a lower paying job that you actually like? Do it! You want to live off one income? Go ahead!

Our family was able to do just this. My wife was able to quit her day job and stay home with our son since we paid off the remainder of my student loan. If we still had debt, this choice might not have been possible.

3. Opportunity cost- By paying principal and interest, the opportunity cost to grow your net income is gone.

Just think what you could do with your student loan payment? What if you paid off your your student loan early and had an extra $250 to apply towards savings or debt?

That is $3,000 a year that could be working for you earning interest! Action - Figure how much you are missing out per year due to your student loan debt.

4. Freedom- Being debt free except for your mortgage gives you a feeling of freedom and relieves stress. Being able to rest at night, knowing that you don’t owe anyone is a great feeling–I dare say being debt free is addictive.

Bad Reasons to Keep Student Loan Debt

These are a couple reasons I’ve heard from people who want to keep their student loans:

“I want to keep my loans for a tax deduction.” Keeping your student loans shouldn’t be for tax reasons, in fact any financial decions shouldn’t be driven by tax reason.

The cap on deductions for student loan interest is $2,500 per year and you’ll need to make less than the required amount that changes yearly. 2011 it was $75,000 single or $150,000 jointly. Check the IRS requirements

True, you do receive a tax deduction for the interest paid, but this is a small amount. It’s like the government giving you a cheap plastic trophy when you were actually on the loosing youth soccer team.

“My interest rate is lower than inflation, so I’m making money.”- This is usually a statement from an educated guy who wants to beat the market. Inflation is a given and uncontrollable, but your debt doesn’t have to be.

The problem with this statement is it doesn’t account for opportunity cost or factor in the risk of debt.

Start Paying off Your Loans

If you’re out of consumer debt, there is really no reason to start getting aggressive to pay off your student loan early.

Paying any extra towards your student loan debt will start reducing principal or more interest from accruing.

Example: a $35,000 student loan at 3.25% for 30 years results is estimated to have minimum payments of $152.32 and cost you $19,836 in interest.

If you add just $100 extra per month in this example it reduces interest payments of $8,948. That’s a $10,888 difference in interest payments and shortens your time in debt to 15 years!

Use this student loan calculator to figure your monthly payments and how much you can reduce your total payout by adding extra monthly payments or a large one time payment.

What are your thoughts about paying off student loan debt early? 

Photo Credit DonkeyHotey (Creative Commons)

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