Most people would agree that credit card debt should be paid quickly, since the minimum payment won’t get you anywhere fast (except maybe more debt). Exceptions may be made for balance transfers with zero interest offers for careful users. Credit card debit is a considered one of the riskier kinds of debt.
What about student loans which typically have a much lower interest rate and needs-based deferment plans? Is there any reason you shouldn’t pay them down quickly? Some people choose to pay just the minimum even when they could pay more.
Let’s look at the alternatives to paying off student loans quickly and talk about what your preference is and why. For each alternative, I’ll explain why we are still planning to pay off our student loans as quickly as we can!
Alternatives to paying off student loans fast
*and why they don’t work for us
1. Hope for forgiveness
With the many repayment plans offered for federal loans, there are loan forgiveness possibilities that come into play after anywhere from 10 to 30 years of regular payments. Some people avoid paying more than the minimum on their loans in hopes of having their loans forgiven.
*We actually WANT to pay our debt. We don’t want to stick around long enough to see how the loan forgiveness programs pan out. The risks of the public service loan forgiveness program apply at least in part to the other repayment programs that offer forgiveness. We want to be responsible for our student loan debt. After all, we did borrow the money and give our word that we would repay it.
2. Pay the minimum and invest the rest.
Between suggestions from readers and multiple articles and comments I’ve read lately, I’ve learned that some people prefer to pay just the minimum on student loans and invest any extra in the stock market. If you are paying 6.8% interest on student loan money but can earn 8-10% in the market, you could come out ahead. Here’s a look at that perspective.
*While the numbers might entice some to invest extra income while making minimum payments on student loans, I am not interested in going this route. Part of the reason is that it’s additional risk I’m not willing to take. Historically, the stock market has performed well enough over the long term to support this theory. Over a period of just a few years, though, you could as easily lose 10% as gain 10%, leaving you short when it comes time to use that money you’ve invested. For most people, returns on investment are also subject to taxes, eating up part of that higher interest rate. We want to have our debt over and done with in a couple years and not have to wait for the stock market to perform favorably to pay off our student loans.
Even though this method has potential to earn money we could put toward student loans, I prefer the safer, surer method.
3. Slow and steady will eventually finish the race.
There are hundred of other priorities that could be put above paying down student loans, so many people are comfortable coasting along paying the minimum payment on their student loans. Maybe you would prefer to put money toward other financial goals. Perhaps you are barely scraping by paying the minimum. Maybe your student loan debt has an especially low interest rate. Perhaps you have other debt that has a higher interest rate. The scenarios are nearly as numerous as the borrowers. Personal finance is personal and that’s fine!
*For us our top financial priority is getting out of debt. We are waiting to buy a house (or even rent one) until our debt is paid off. Thanks to our living arrangement, our expenses will never be as low as they are right now. For us, NOW is the best time to crack down and destroy our student loans. We aren’t actively saving for retirement right now, but we also aren’t touching the retirement we have already put away. Focusing on a single goal allows us to make progress faster and increases our motivation.
In addition, the faster we pay off our debt, the less we’ll pay in interest. Even our little ones understand the urgency that having to pay interest gives us. Comparing the total amount we would pay in interest depending on how quickly we paid off the loan, like we did when we first set our goal, is really eye-opening!
Of course this all assumes that you are in a position to make a choice between just paying the minimum or working to pay off student loans fast. If you haven’t started your debt repayment journey or you don’t know where to start to tackle your debt, then check out How to Get Started Paying Off Debt.
How about you?
- Are you trying to pay off student loans fast or are you happy with making the minimum payments?
- What are the major factors that have influenced your decision?
- Do you (or would you consider) paying the minimum and investing the extra in hopes of coming out ahead?