This is a guest post from my brother Nik. He is currently an emergency room physician.
In our family we were always taught to avoid any debts. I tried not to borrow anything that I knew I could not pay back (which I would do as soon as possible.) I did not buy anything that I could not afford. I never allowed any credit card balance to carry over from month to month to avoid interest charges. But student loans are different.
For our family, education is the number one priority after survival. Education allows you to advance in the world and to get a better job and career. Student loans are an investment into this future and one of the few debts worth taking on.
When I went to college, I was lucky enough to obtain a scholarship which paid for most of my undergrad tuition. Still there were plenty of other living expenses during college and I worked in a work study program and eventually as an RA (resident advisor) to pay as much of this as I could. This, along with the money my parents contributed, allowed me to finish undergrad with no student debt.
Professional school, however, was a different matter. For this part of my training, I did manage to get in to a fairly prestigious East coast private university. The key word here being private which meant the cost including living expenses would be somewhere in the $40k/year range. While I did manage to get some scholarships and worked during much of the next 4 years, there was no way I was getting out without having to take some student loans. I borrowed from both the government (lower interest) and the university itself (higher interest) in order to cover all my expenses, though I did continue to live a fairly frugal lifestyle by living with roommates, cooking a lot, not buying any big ticket items, etc. In the end, I finished all my schooling with about $80k worth of loans, which was pretty good, compared to the $200k+ that many I knew had.
After getting out of school, my friends and I made a modest salary (about $40k) for the next few years. Many of them chose to defer paying off their loans until their salary increased but I started paying at least the minimum every month because I knew that if I did not they would just continue to accrue interest, especially the higher interests private loans from the university. My friends also “upgraded” their lifestyles pretty quickly while I continued to live mostly like a student. Now, six years after I finally started making money, I have finished paying off my higher interest loans and now only have my 3% government loans totaling about $35k. I’ve continued to pay the minimum on those loans and have been putting any excess money into investments which I hope will make more than 3% interest every year. It still bothers me that I have this large debt over my head, but I believe this is the best way to maximize my money working for me while still being responsible to those that lent me money when I needed it.
Should you pay off your student loans early?
Basically, the answer is yes. As far as I understand, there’s a minimum that you always have to pay or else there is penalty so you must always pay at least the minimum. The harder question is whether you should pay extra to reduce the loans faster? I think this question depends on what interest rate your loans are at. If your interest rate is high at 10% from a private bank or something, then you should pay extra to get that down as quickly as possible unless you know of an investment that guarantees a 10% return (tell me, please!)
Once you only have low interest loans left, then perhaps you can consider investing instead of paying extra on the loans. However, investment returns are not guaranteed and you can lose money instead so you have to make your own choices. The rule of thumb for me is to pay off the highest interest loan first then move on to the lower ones though remember that you have to always pay the minimum for all the loans to avoid any penalty.
There are psychological reasons as well to pay down the debt early. Some people don’t like having any debt at all and that’s one reason why I send in an extra $500/month. I’m looking forward to the day when I can write that final check (electronic debit actually) and say I have no more student loans!
photo credit: flickr James Almond
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.