Am I Going to Regret Aggressive Student Loan Repayment?

Michael Lux Blog, Strategy 0 Comments

Financial experts often advocate aggressive repayment of student loans.

By quickly repaying student loans, borrowers can save a fortune on interest. The aggressive route can help borrowers get ahead by thousands of dollars.

Because of the immense value of accelerated repayment, this site has sought to help empower borrowers to make fast repayment of student loans as easy as possible.

However, it is worth noting that a singular focus on student debt elimination is not always the best route. In fact, there are several circumstances where borrowers might decide that aggressive repayment was a mistake.

The Need for an Emergency Fund

The drive to get rid of student loan debt can lead to some risky financial decisions. One mistake commonly made by borrowers is ignoring the need to have an emergency fund.

In theory, having an emergency fund makes a ton of sense. It is a resource for unexpected medical bills. It is a source of comfort for people who are concerned about how they would put food on the table if they lost their job. We never know what rainy day may come, but most people will inevitably face some sort of financial hardship where an emergency fund can be a huge asset.

Despite the considerable need for an emergency fund, trimming reserves to pay down student debt can be extremely tempting. Lenders routinely charge interest rates of 7-8% or more on student loans. Meanwhile, some banks pay out interest at .01% on savings accounts. Month after month, it can be frustrating for borrowers who do nothing with the emergency fund while they get beat up on student loan interest.

Carefully evaluating how much money should be set aside in an emergency fund is important, but the results are not always satisfying. Unfortunately, the emergency fund frustration is unavoidable. Borrowers should consider themselves lucky if they have an emergency fund, and they don’t have to use it.

No Money for a Down Payment on a House

Borrowers who use every penny they have to pay down student debt will find it challenging to buy a house.

Like with the emergency fund, the money saved for a house earns little interest, while student loan interest can be brutal.

Unlike an emergency fund, owning a house is not a necessity. For this reason, it can be hard to balance the desire to own a home against the desire to pay off student debt.

While there are many strategies for student loan borrowers who want to own a home, most borrowers must answer a simple question: what is my priority?

A homeowner might look back and regret not being more serious about student loans, while the borrower who eliminated their debt may regret not setting aside money for a mortgage.

The simple answer is that there isn’t a simple answer. Borrowers need to carefully consider their goals and balance the pros and cons of each option.

Federal Forgiveness Changes

One of the biggest concerns about aggressive repayment is missing out on student loan forgiveness.

It is certainly possible that the government will decide to forgive large amounts of student debt. It is also possible that borrowers may spend way more than necessary if they pay the minimum on their federal loans in hopes of eventually getting forgiveness.

A good example of how this might play out can be seen in how borrowers responded to Elizabeth Warren’s 2020 Presidential Campaign. Early in the campaign, Warren released a bold plan to forgive large amounts of student debt. Readers wrote to this site asking if it was smart to change repayment strategy in the hopes that Warren gets elected.

Warren didn’t win, but the analysis behind the evaluation of the situation remains. Chasing forgiveness comes at a cost. Borrowers have to figure out how to weigh that cost against the possibility the forgiveness becomes a reality.

Retirement and Investment Opportunities

Each dollar used to pay down student debt is a dollar that can’t be used towards retirement or investment opportunities. In economics, this is called the opportunity cost. Borrowers must choose whether their money goes further planning for retirement or paying down student debt.

In some cases, the decision is easy. Employees who have the opportunity to get an employer match on their retirement contributions will usually want to take full advantage fo the program. On the flip side, few investments will justify ignoring a student loan charging 13% interest.

Some borrowers handle this issue by refinancing their student debt. Those that can secure interest rates in the 2-3% range will have a much easier time justifying getting aggressive in saving for retirement.

Here again, it can be very difficult to know the best choice. The stock market could crash, and the borrowers who attacked their student debt may come out way ahead. Alternatively, thirty years from now, those who started saving for retirement early may look back and be thrilled they didn’t obsess with their student loans.

Borrowers who are unclear whether they should be paying down debt or saving for retirement should first spend some time understanding the many ways repayment and saving intersect. In some cases, borrowers may find that setting aside some money for retirement can actually help their student loan situation.

Final Thought: Always Focus on the Big Picture

Eliminating student loan debt is a massive undertaking.

It takes years of sacrifice to pay off student loans, and while the benefits of quickly eliminating the debt are massive, it would be wrong to say that aggressive repayment is always the best idea.

Borrowers need to consider how other goals, such as retirement, providing for a family, or buying a house, enter the equation. In some cases, borrowers can split the difference to try to get the best of both worlds. In other cases, tough decisions have to be made.

As with most big decisions, there isn’t always an easy answer. The borrowers who want the best outcome should be willing to research their options, carefully consider their plan, and be open to change things as the situation evolves.

Skipping steps may be the quickest route to regretting the decision.

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