When should you pay off your Student Loans?
Student loans are the crippling reality of most healthcare professionals. The average education debt of a Physician Assistant is $126,371. With the current market volatility and rising interest rates, it is more important than ever to have a plan to tackle debt. Many are unsure how to confront debt and their available options. In this blog we hope to address these topics head on.
Adapted from: https://www.cnbc.com/2020/06/18/many-on-the-front-line-of-the-pandemic-have-crushing-student-loan-debt.html
Student Loan Forgiveness
With student loan interest on hold due to covid-19, one hot topic as of late is if the federal government will provide some additional relief. The current administration has hinted at canceling $10,000 to $ 50,000 of student debt, but no formal plan has yet to be released. While many await such an announcement it is wise to have a personal strategy should the government not come through.
Should you pay off loans early?
When I finished Physician Assistant school I had nearly $100k in student loans. I was determined to pay them off as fast as possible. This seemed like the right idea and was often encouraged by my peers and some popular financial personalities. I picked up a per-diem job in urgent care and worked many overtime shifts to put as much extra money as I could towards my loans. I lived frugally, rented a house with 2 friends and maintained a low-cost lifestyle. Because of this dedication I paid all of my loans off in under three years. Although many have applauded my effort, I often wonder if this was the best strategy; let me explain.
The student loans I had were a mixture of Direct PLUS loans with varying interest rates. About half of the loans had a 6% interest rate while the other half had a 4.5% interest rate. Because of my aggressive repayment plan I invested minimal to my retirement accounts for those three years. This is where I believe I may have made a mistake.
Here is a a practical example:
If I would have invested the ~$50,000 I paid to the student loans with the 4.5% interest and only paid the minimal payments I would have over $500,000 after 30 years of growth. You see, the stock market has an average yearly return of 10% (its really 7-8% when adjusted for inflation). If you took 30 years to pay off the $50,000 loan you would have paid $91,203 making a whopping difference of over $400,000 in retirement.
This shows the power of compound interest. The problem is most people are not aggressive investors or even know how. However, if you have discipline and plan to invest the money you would have paid in student loans, it may make more sense to spread out your student loan payments and only pay the minimums. Play around with the compound interest calculator and the student loan payoff calculator and see what makes the most sense for your situation. Another option would be to refinance your student loans to attempt to get a lower interest rate.
“Let’s face it, student loans are a drag. It’s only natural to want to get rid of them ASAP. But here’s the thing, we’re also getting older. Investing shouldn’t be relegated to some future date when things are peachy and the debts are done.”
- Ramit Sethi, New York Times best selling author
Other cons to paying off your student loans early
Less money to pay your cost of living or unexpected emergencies
May negate the opportunities for student loan forgiveness
Do not get to tax write off loan interest (only available if you make <$85,000 MAGI)
Pros to paying off student loans early
Pay less over the entirety of the loan
Can focus on other financial goals without the burden
Reduce your debt to income ratio which could help qualify for loans