I have seen this on a lot of blogs lately and a lot of carnivals. Bloggers going around telling readers to not pay off their student loans. While this is not the dumbest thing I have ever seen from a personal finance blog, it ranks pretty high. I am also the type of person who hates to have debt, so why would you want that debt sitting around there while you deliberately ignore it?
I have seen bloggers say don’t pay it off because if you die, the debt goes away. While I do not believe this to be true if you are married or have children, this is just plain bad thinking. First off, if you don’t think you will live to be 55 (out of school by 25, 30 years to pay off debt), then you shouldn’t really care about money to begin with. If you really want to be retired and still have that student loan hanging around, then that is your prerogative. I am sure that whatever company issued you the loan is not going to sit back after you retire or die and forgot about their money.
Another big thing is that people say Student Loan interest is tax-deductible. That is correct, up to $500. My wife and I had over $800 in student loan interest last year, and we didn’t make too many payments on her private loans (the ones with the huge interest rate). If we just sit back and make scheduled payments and not pay extra principal, we will get hammered on the extra interest rate payments we make. Any money that would be made with alternative investments is gone due to the extra interest payments we make.
Finally, this is another case of people looking short-term and not long-term. Yes you can save that money that would be used to pay extra principal and do whatever with it. But what about your credit and credit score. Creditors will see those loans lingering out there and wonder why you don’t have it payed off, but you want to buy this nice new house. It will also reflect on your credit score as you will have those monthly payments out there, and you won’t be able to borrow as much, or the interest rate on the loan you get will be higher.
Bottom line: There is nothing good about loans and debt. I think readers should be weary when reading articles that say don’t pay back loans or debt. I think they should also take a look at the kind of people writing them. I know I steer clear of those sites because if they tell me that dying is a good way to get rid of a loan, then I don’t want any finance advice from them.
After we pay off our 1 car (we have 2), next up is either my truck or my student loans. We’ll make that decision when the time comes though.
I don’t want ANY debt, and that includes “tax deductible” debt. Of course, once I pay off all my non-mortgage debt, then it’s time to save towards retirement and emergencies, not necessarily to start paying down the mortgage.
But we’ll see. It’s still at least 2-3 years before we get all that debt paid off.
Martin, I disagree with this post on several points.
1st, it is a good thing for your credit score if you show them that you make timely payment on your long term loan.
2nd, i want to slowly payoff my payment since my rate is only 2.25% fixed over 30 years.
why pay it off early when you have credit cards or mortgage loan that has higher interest rate?
or why not just put the extra money in a savings account with 5.3% APY
3rd, like you mention, it’s tax deductable.
Ok Hustler, I don’t think you read my article.
#1) Yes it is good you make timely payments, but the balance left on your loan is money you cannot get for another loan. Also, the fact that you have a balance at all is not good for your credit score.
#2) I didn’t say don’t pay off higher loans first. All I said is that it is wrong to not pay off your student loans. Your situation is a little different since you have such a low interest rate, but you are only making $30 a year for every $1000 you have invested. I just think it is wrong to being paying interest on something when you don’t have to. I don’t know your situation (i.e. monthly payments), but I bet you are losing money in the long run.
#3) It is tax deductible to a point. That is like saying an interest only mortgage is a good idea because it is tax deductible.
actually, I read your post twice word for word before the 1st comment.
1) Here is a direct quote from Experian.com
“Items that make scores better:
Paying your bills on time is the single most important contributor to a good credit score.”
http://www.experian.com/credit_score_basics/improve_credit_score.html
I have a balance of 60K on my student loans but I was still able to get a 160K mortgage loan, and a 25K car loan.
2) But you didn’t say that in the post. I guess you should state in the post that you need to pay off your higher interest first, then student loan. You can’t assume all readers know what you are thinking.
I was fortunate to graduate in 2002 when the rate for consolidation was the lowest in history. I guess now is a diff. story since it’s around 6%. So for me personally, it is good since 2.25% is less than inflation 4%.
3) My student loan is not an interest only loan. Hence you are comparing apples and oranges. I would even argue an interest only mortgage is good in some cases…say in Cali, whereas house appreciation go up dramatically. But that is another story.
In any case, I was only providing constructive criticism. The post did get me thinking which is always a good thing.
I have a friend with medical school loans of 1.5% for the next 30 years. She has no intentions of paying them off until that point. She can do much better in a bank earning 5% or… in the span of 30 years… she’ll likely make 8+% on the money in the stock market. It’s a long enough time span that it’s pretty likely with close to zero risk.
As usual it’s really difficult to make blanket statements.
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I help people consolidate their student loans for a living. . . I partly agree with you. . .
While I agree that it is smart for people to pay off debts, student loans should be the last debt to pay off (especially federally-back/low-interst ones). Mortgages should probably be last, but the only toss-up is the fact that mortgage is secured and student loans aren’t.
Anyway, you should contact a GOOD CPA about only being able to deduct $500 in interest. A good CPA would be able to help you on that. . .
Also, as another poster stated, if you have a lower rate, such as 3% to 4% or even less, then it is a “Smart” move to keep the loans and make a better return in the stock market or other investments.
Also, look at how consolidating could help in a unique way: the average person with about $40,000 in student loans at around 5% will pay about $430 a month. After consolidating, they will pay about $230 a month. Yes, the loan term is extended, but there are no prepayment penalties. Anyhow, that extra $200 a month can not only pay for extra bills, clothes, cars, etc (what most people do with their savings) but it can ALSO be used to fund a retirement plan. That extra $200 could go to fund an employer contribution-matched 401(k) and make 8% and by the time you retired 30 years later you would have over $550,000 for retirement. not bad eh?
With a 1.25% incentive off your rate, in that time you wouldh have paid about $19,000 in interest VS the $10,000 you would have paid without consolidating.
So paying off your loan faster may have saved you some interest, but the MAGICAL QUESTION IS: could the money you’re using to pay off your debt be more helpful to you in some other way? When facing paying off credit cards, the answer is often “no”… but when looking at paying off student loans, the best bet is USUALLY to use that money elsewhere.
What do you think?
I work at University Loan Services and help people
consolidate their student loans. My name is Jason. Feel free to call and ask me any questions.
Of course, I hate debt just as much as the next guy, so I even have to force myself to do the “logical” thing sometimes.
You are sooo right! I have lingering debt and even thought its paid on time it still effects me negatively. It is always good to pay things over time but who the heck wants to be paying the same thing for 20 years. I know I dont!
My goal is to eliminate any school loans and other debt as quick as possible! there are many home buying tips, and tricks when it comes to having debt and getting a home loan…