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?
LInked to Thrifty Thursday at LWSL, One Project at a Time
Note a mistake in the Excel Spreadsheet. In the “Amortization” sheet, the min loan payment PLUS the additional investment is used until the loan is paid off. After this point, only the additional investment is used in the investment account. As a contrast, the “Amortization 2” sheet is correct, but since it assumes that the min loan payment is applied over 10 years, it will almost ALWAYS result in higher final value than paying the max payment on the loan. This is simply an algebraic mistake.
Simply put, in the case where you’re applying all you’re money to pay off your loan as fast as possible, you should continue to invest THAT SAME AMOUNT for the duration of the 10 years. If you invest a smaller amount, it will obviously yield less money at the end. If the invested amounts are different, you can’t compare the final return as a ROI metric.
Sorry commented on wrong post
Anderson Smith says
I think a lot of people don’t see how bad student loan interest rates can be. They think 6-8 percent interest isn’t much, but in reality over time it adds up. Like you said in your post, the faster you pay off your debt the better! The numbers don’t lie, the faster you pay off your debt the less you will pay in total interest.
Kate @ The Beautiful Useful Project says
I think I’ve probably made all of the mistakes possible when it comes to student loans. I worked as a teacher for years, and I was waiting for a loan forgiveness program to happen (I was not teaching in a high-needs school). When I started out, I selected a graduated payment plan because I truly couldn’t afford the higher payment. Fast forward ten years, and I’ve made very little progress in paying off my student loan. Now I’m working really hard to pay off that student loan debt, and I wish I would have paid more attention to it earlier in my life.
Better late than never, right?! That is frustrating to have lost of much time making progress though. I’m glad you’re working hard at paying off those student loans now! 🙂
For those considering the waiting for “forgiveness” plan, you might want to consider that under MOST programs loan forgiveness is TAXABLE INCOME! So there’s really no forgiveness at all, just shifting collection from Sallie Mae to the IRS, who has way more power. If I waited for my loans to be “forgiven” (i.e. 25 years). My TAX BILL would be MORE than I initially borrowed!!!
Isn’t that crazy Ashley! If I’m not mistaken, only public service loan forgiveness doesn’t count as taxable income. Other forgiveness that just comes after a certain number of years (forever) of paying an on time payment. That would be one heck of a tax bill!!
Jessi Fearon (@TheBudgetMama) says
I am always amazed at how some decide to just pay the minimums on their student debt because of the “tax advantage” in terms of claiming the interest paid. I swear that just cracks me up when people use this argument. Most don’t realize that you can only clam up to $2,500 on your taxes anyway and if you have an enormous amount of debt then chances are you are losing out on your deduction because you are paying more than the $2,500.
Love this post as it plays a little bit of devil’s advocate to get people thinking about their debt!
Thanks Jessi! I’m no tax professional (though I’m quickly becoming a debt professional!), but I would agree that the tax advantage claim is silly for most situations. 🙂
Definitely in the pay it off quickly camp. When I started working, before having kids, we made it a priority to pay as much extra each month as we could. As a result, I was able to switch to half time after our second child was born, as my student loan debt was GONE!
We are one of those “blessed” to have a 2.75% interest rate. We want the law school loans gone, but decided that paying off our $31k HELOC (at just over 7%) would be better. Besides it’s a balloon loan that is due in full in a couple of years. Then we will tackle those pesky student loans, then our mortgage (3.875%). I think if we stay the course on student loans and not paid any extra, we would finish up when our oldest would be a Freshman in college! Not cool!
We are loosely following the Dave Ramsey plan, but with our rates not typical, it makes us think a little differently.
I totally agree Sarah! I would definitely take care of the HELOC first. That’s really nice that your student loans are on the low side and lower than your mortgage even!
My student loan debt is going down! I hate the burden it places on my family and I am determined to get it paid off as soon as possible. I’m paying about 4 times the minimum payment and will be paid off by next June!
That’s less than a year! Wahoo! You are so close Stacey!
When we originally decided to pay ours down quickly it was because the hub’s was in a job that we knew to be temporary so we wanted to minimize or eliminate as many monthly bills as possible. So it was purely so that when we went to one income eventually we would have less money that we would have to pay out each month. Once we started doing it though and we realized how much interest we were saving we couldn’t help but to pay them off ASAP. One of the best decision that we had ever made.
Now the hubby is working for a university and is able to go back to school for his masters for a deeply discounted rate. We are also saving to buy a home. We are kind of conflicted on the priority between the two, but I know eventually the situation will work itself out.
I’m always impressed with your dedication and progress CeCee. You’re right– it will work itself out. 🙂
Stephanie you impress me so much more. I enjoy reading your blog because you do so much more, for more people, on a smaller income than we have currently.
I appreciate the kudos though and tell everyone I know to read your blog. Even my co-workers are amazed at my commitment to finance. Now they know you are one of my inspirations
You’re sweet CeCee. 🙂
Thanks for this post–it’s a timely topic for us because next spring our remaining federal loan deferments will end and it will be time to start repayment. Currently we are renting a house and paying off a school-sponsored loan aggressively–we are paying 4x the minimum payment and expect to have it finished by the end of the year.
But we want to move closer to my job and are pretty convinced that buying a house beats renting in our target location. So that means we need to balance saving for a downpayment and paying off loans–the kind of split in focus you mentioned. I’m not thrilled at the idea–part of me wants to just focus on the loan, but since we’re going to have housing expenses either way, it also makes sense to bite the bullet and buy rather than continue renting.
Thanks again for the great insights and ideas!
I can totally see what you mean Dave. If we didn’t have our free basement set up we would be in a similar position. It sounds like you’re already making awesome progress with the loan you hope to finish off by the end of the year. Keeping that momentum up will be such an asset, even if your funds are split between two goals.
I agree with your outlook, Stephanie. I’d rather not invest the rest as some people do. *Maybe* if you had super low interest rates, like 2%-3%, it’s less of a gamble, but mine are around 5%-6%. I’m prioritizing my student loans mainly because we’re also holding off on major things due to them. It’s an emotional thing. I just want them gone!
You’re right. It might be a different story if the interest rate was super low. It will be so nice to have them gone though!
I’m all about crushing my student loan debt. It’s crazy huge law school debt and I hate it! I’m trying to get a 2nd job, so that I can put even more toward my loans. I’m hoping to be done by next December. Sadface payoff would be a year after that.
But I do love the progress, I’m a little addicted to it. Going from paying almost $1200/mo in interest to just over $650/mo is awesome. Who knows what will happen with forgiveness. I just can’t take the chance.
Progress does get addicting! That’s a huge drop in interest each month! Way to go! Next December sounds great!
Before I was in the pay it off slowly camp. Because I work at a state university, we would have gotten 10k forgiven in 10 years. However, when we sat down and crunched the numbers we would have paid close to that in interest over that time. Sitting down and thinking it out made us switch to the fast student loan repayment lane. Plus we have other goals and I don’t want to wait the eternity it would take to pay the loans off with minimum payments.
One more reasons I hear people say that it’s better to take it slow in repayments: you get a tax deduction for student loan interest paid up to $2500. Again though if you calculate it out it’s totally not worth it.
Thanks for mentioning the tax deduction. That actually crossed my mind when we did our taxes last year and I realized that we paid a whole lot more than $2500 in interest. For a second I thought “maybe we should spread this out more,” but then I remembered how much we would be saving by paying our loans off early, and the benefit from a tax deduction paled in comparison!
We are paying off our (huge) student loan debt as fast as we can, too. When we looked at the amount of interest we would pay over the long haul (if we chose to make minimum payments and not snowball once each loan was paid off), it was sickening. We couldn’t help but think of how we would rather give that money to people who actually need it rather than to our loan companies! So, that’s one reason. Another is we’re not so young and once we pay off our debt, we need to save for retirement. We’ve been amazed in the last few years of marriage how much we’ve been able to trim from our budget little by little as well as bring in additional income sources. I highly recommend starting somewhere in paying off debt (like you’ve mentioned!) and then setting little goals. I used to pay much more for groceries and then I started seeing if I could save $10 a shopping trip. Once I had done that for several weeks, I cut that extra $10 out of the shopping budget and gave it to loans. It seems so little but now we use half the amount of what we used to for groceries/restaurants.
Thanks for your articles! It helps to read about someone else who is ‘six figures under’ and who is paying off this debt fast! 🙂
Sickening is right! I about passed out when I calculated how much we would pay in interest if we paid off our student loans in the normal time frame.
Jen, that is awesome that you’ve cut your grocery budget in half by challenging yourself to use a little less each time! Keep up the good work!!
Sorry Jen, but you don’t know what you’re talking about. For many people, including me, this is just plain dumb advice.
You’re telling me to pay back loans using after tax dollars to avoid interest, when I could put that money into a 401(k) or some other tax deferred savings account? Ever heard of opportunity costs or compounding interest? What’s sickening is the amount of investment earnings you are giving up to pay off your loan early.
No mention of Income Based Repayment plans or other gov’t subsidies to help student loan holders? Under IBR, interest doesn’t even capitalize. Did you do any research at all?
Elisabeth (Life or Debt) says
We plan on crushing our student loan debt as soon as we can! I just don’t want it around any longer. It’s suffocating.
Amen Elisabeth! We’ll be so happy when ours is gone too!