Why I’m Not Paying Off My Student Debt This Year, Even Though I Can Afford To
Recently, the first installment of the TFD book advance money came through, and it was a decent chunk of money that I was extraordinarily thrilled to receive. I immediately leapt into action, and began brainstorming all the different ways in which I could use the check to upgrade, replace, or fix a variety of things in my life. One of the thoughts that initially came to mind was my student loan debt. Sometimes, I forget just how much I have left to pay in student loans, and if I was less diligent with keeping track of it, it could threaten to upset my monthly budget tracking. I’ve always been prepared to make monthly payments, keep track of what I owe, when to pay extra, and when payments are due, and I never gave my monthly grin-and-bare-it routine too much additional thought until now.
It dawned on me that by the time I receive my part of the third book check — it’s broken into four installments total, and we are splitting a third to myself, Chelsea, and staying in TFD — I would have the ability to pay off my loan completely and in full. Wow. That revelation dawned on me recently, and I felt like jumping for joy at the thought of no longer having the old student-loan-debt ball and chain weighing me down. After a few minutes turning over the prospect in my head, I made up my mind that “yes,” paying off my student loan debt in it’s entirety, with this chunk of money, would be the hands down best possible thing I could do with my money. Right???
Well, it turns out that I actually didn’t know for sure. I didn’t have any spending/savings strategy to speak of at the time the check hit my account, so I didn’t know if paying off my student loan in full would be the best option. I didn’t know what the best strategy for my money looked like, because I hadn’t done enough research to understand if it was truly better to save money or pay off my debts…a very common question for financial advisors. And, the more I researched, the more I thought it might not be the best decision to reroute nearly all my cash flow into paying off my student debt.
I wasn’t sure how to portion out my money in the most useful and effective way, and I wondered, “Is it better to invest some of my money in something that could make me money?” And, I thought, “was it better to pay off a small lump sum, but keep some of the debt in order to continue building up credit?” I honestly didn’t know, but I was determined to find out how to make my hard-earned money who even harder for me. A lot of people I know are vehemently opposed to having a lot of student loan debt, and it’s also something we talk about avoiding if possible here on the site. But, I wanted to know if I was being irrationally fearful of having said debt, and whether or not I should really pay it all off or use the cash in a different way.
One of the first points that directly competed with my student-loans-are-100%-bad-to-have-and-I-must-get-rid-of-them mentality, was discovering that having student loans (and paying them off responsibly) can actually benefit my financial situation. I knew that making timely and consistent payments on debts such as a car lease or credit card debt could be beneficial, but I failed to realize that student loan debt can also help build your credit score in a positive way. (Obviously, accruing extra/unnecessary debt for the sake of building good credit is not recommended, but if you already have it, you can make the most out of paying it back.) That payment history is a source of data for lenders, from which they are able to draw useful information about your behavior and financial health. That is a reality that you can use to your advantage if you’re smart.
I found a great article that breaks down the way student loans affect your credit score here, which is worth checking out. Another article on the topic briefly covers the topic, saying, “Proper debt management is great evidence that shows how you’re in control of how much money you borrow, within your credit limit.” However, it’s worth noting that the same way that student loans can have a positive effect on your credit score, they can have a negative one as well, so treat them with respect and diligence. There are many articles that explore the unexpected ways student loan debt can affect your score, and another fact I stumbled upon from All Tuition said, “Many people mistakenly believe that paying off their student loans quickly will only serve to help their credit score. In fact, if you pay off your student loans too quickly, or any debt for that matter, it will actually hurt your score. Why? It’s simple: lenders earn capital by the interest on the loans they disperse to borrowers.” Who knew.
Another thing I failed to consider when considering my initial options, was how a significant cash depletion (i.e. withdrawing a huge amount of money to pay off my debt) would affect my daily spending habits and my ability to save for an emergency fund. If I did pay off a giant lump sum on my loan, how would I handle my monthly credit cards payments and the way I spend/budget on a day-to-day basis?
Normally, articles such as this one advise “In general, if you have high interest-rate debt that is not tax deductible, you should pay it off before saving,” but, they acknowledge that student loan debt is different. The experts say that, “If your debt has a very low interest rate, it may make sense to save first.” Interest rates on student loans are generally not that high, and provide you with a tax deduction. Rather than taking excess cash flow to repay student loan debt more quickly, you might want to build up your emergency fund to give you more flexibility or invest more into your retirement account given that stock market returns have historically been in excess of current student loan rates.
The more I researched this issue, the more I found that it’s important to have an emergency fund built up before you go and pay off debt with any and all available cash. It’s important for me to be prepared for something unexpected. For my situation, my own emergency fund and saving account were both lower than I liked, so I knew it was important to replenish those to a place where I wanted them before paying off all my student loan debt. Would I be more inclined to charge things on my credit card, would I be unable to spend on supplies I needed for design work I do? The kind of short-term financial stress I would experience as I waited for my next paycheck might be enough to derail otherwise smart financial choices. Experts say that, yes, it’s important to focus on “bad” debt accrued on high-interest credit cards, but I learned that student loan debt isn’t necessarily “bad.” (But some of it definitely can be, and you should find out if yours falls into that category.)
In the end, it was really interesting to review my findings, and it just went to show me how much more I had to learn in order to make a financially-sound decision. After I put in the time to research what was and wasn’t a rational fear — with regard to understanding how student loans would affect my future — the easier it was to plan how to use the lump of money I received. With the info I gathered, I decided that in the end I’d pay off a little lump sum of it for my own peace of mind (to feel really badass, too, tbh), but I would leave the rest of my student loan debt on in my account for a little while longer. I now knew with some certainty from the expert advice I researched that it wouldn’t kill me or bleed my finances dry. While this decision might not be applicable or right for everyone, because not everyone is going to work in industry where paychecks ebb and flow, I think it’s a useful way to illustrate that what we think are the best uses of our money are not always what we think.
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