Like so many other millennials, my twenties and now thirties have been plagued with student loans. It’s been the thorn in my side for over a decade. The majority of college-goers have some sort of student debt, and it’s an issue that affects spending habits during the years when most people are at their highest rate of transition — and, therefore, very likely to make big purchases. I saw one article this week that even suggested both presidential candidates eliminate student debt because it would have similar effects as a stimulus package. I believe it. Currently, I hand one-quarter to one-half of my paycheck over to Navient, a student loan collector. For some with debt in the hundreds of thousands (common for most post-graduate students in law or medicine), this debt could follow them around for the rest of their lives.
If you follow the advice of certain financial gurus, you throw every single dollar of extra income you have at these loans, one by one. You buy nothing unnecessary if you can’t pay for it in cash. For some people, it works, and it works well. I agree with many of experts’ principles on savings and delayed gratification. Other experts may tell you to build up an emergency fund of three to nine months before paying off any debt. And this money is to be used only for just that — emergencies only. Think broken air conditioner, car accidents, or medical surprises.
I did NOT subscribe to either theory in paying off my undergraduate student loans. In fact, I did just the opposite. I put myself in a substantial amount of additional debt to attend graduate school, then I bought a house as a single woman with 3.5% down. I began the debt snowball method only AFTER my graduate school degree and housing purchase damage was done.
Were these choices two massive mistakes? Absolutely not. I did my research, and both “risks” turned out to be the two biggest contributions to my financial health today. My home was an incredible opportunity to buy in an up-and-coming neighborhood. It has provided rental income for the last three years and has increased in value by almost 40%. This was not without some degree of planning and sacrifice. Not every person is cool with living in a neighborhood that was essentially a warehouse district in transition to a residential area. Other people might shudder at the idea of renting your bottom floor to a person from Craigslist. But again, you have to assess your own situation, and that situation worked just fine for me. While some may have considered starting more school before paying off the first batch unwise, I beg to differ. With the raise I obtained from my job after graduating, I was able to pay that small loan off within a year and increase my potential income exponentially. If I’d waited, my future salary could have suffered. Or even worse, life could have happened, and I never would have obtained a master’s at all.
My main point within this piece is that a one-size-fits-all financial plan is not the holy grail for most people. For the plans presented here, one leaves millennials with zero wiggle room during years when life transitions are at their highest, and the other may leave you paying much more interest on loans than necessary. These plans don’t take into account the opportunity cost of investing early, or the cost of foregoing many of the major decisions that you should be making in the prime of your life.
College is more expensive than ever and has fewer opportunities for scholarships. Therefore, we have now an entire class of millennials that have been putting off major life steps like buying property, starting a family, or investing in themselves until they’ve paid off their student loans or stashed enough cash “just in case.” This doesn’t even take into account the loss of the entrepreneurial spirit that inherently accompanies foregoing opportunities that are far more plentiful and, frankly, practical at a young age. Trying a business in your twenties sans children and a mortgage can be way less consequential than trying it at 40 when you “have it all together.”
So, where do we go from here? Last year, after following the “throw everything but the kitchen sink at your student loans” mentality, I made a change with my finances. After essentially living paycheck to paycheck with only $1,000 in cash reserves, I’d paid off almost two-thirds of my student debt. Actually, including interest, I’d already paid off my original student loan plus some. But even though it was a relief to almost have those loans paid off, I had zero other liquid cash. This was a problem. One family emergency or home repair away could have put me in major credit card debt with a crushing interest rate. And even more disconcerting was an emotion that was even more frustrating than fear of an emergency: I had a sense of loss and regret.
After working so hard to move up the career ladder, put myself through school while working full time, and conquering a number of demographic statistics, I had ZERO financial freedom at 30 years old. I’d done everything right. I felt I deserved financial freedom, at least to a certain extent, especially when I had a choice in the matter. It began to really hit home. I looked at my options and have now ended up splitting my leftover money 50/50 every pay period between savings and debt payoff. I ran the numbers and found a ratio that worked for my lifestyle and comfort level. Foregoing more money towards loans will mean that in the long run, I will pay more interest. But it’s a more empowering move, since it means I will have exponentially more money in my savings, should I need it during a time when life transitions are at their highest.
Please do not assume that a guru with a one-size fits all approach to finances will necessarily be best for your situation. Should you make more than the minimum payment if you can on your student loans? Should you save for long-term goals? Absolutely. At the same time, I know individuals who have foregone major opportunities in their lives that would have had a far higher pay off than that saved interest rate on the student loans. Investing in yourself is almost always a fine option.
Kristen is a Texas-born recent New Jersey transplant. By day, she works at an Ivy League university managing an international securities program. By evening, she’s usually cuddling with her dog, Oscar, or scoping out where in the world to find great Tex Mex in the Northeast.
Image via Unsplash