I was fortunate enough to go through my undergraduate years at the tail end of the nineties and early years of the new millennium. This was good fortune for me in that interest rates of student loans hit record lows right after I graduated college, when my loans went back into repayment. At that time I was an inexperienced rookie at life and I had basically no clue about how to best handle money… even though I thought I did at the time.
It all made perfect sense to me when I took my first job. I could pay the bare minimum payments on my student loans and put as much as possible into stocks. Over the long term I would pay my balance down slowly but my investment gains would quickly surpass the extra interest I would be paying. On paper it all made sense at least until real life started changing my perspective.
We all know what happened to stocks in 2008 and we all know how many people lost their jobs during the recession. What I couldn’t foresee as I wrapped up my college years was the unpredictability of life. I didn’t understand that life doesn’t follow the simplicity of spreadsheet. Noting in life is truly linear.
Looking back on those first few years post college I can see what opportunity I had and squandered. It’s been over ten years since I graduated from college but my loans still exist, and they’re hardly any smaller than when I started paying them. My investments? Let’s just say they haven’t followed that compounded chart I so happily made when I landed my first job.
You see when I got out of college I had very little debt other than student loans. I wasn’t married; I didn’t have kids. I wasn’t tied down to a job. I wasn’t married to my work or even the location of my work. I could do anything I pleased. I even shared a room with a friend which kept my housing expenses extremely low. It’s crazy to look back on how much disposable income I had right out of college.
Sure, it makes mathematical sense to pay as little as possible on a subsidized debt payment at a very low interest rate but the benefits of paying the whole debt off early were far greater than I ever understood at the time.
I only learned later on in life that even if my personal finances were managed well my debt ratios were high when scrutinized by outsiders or lenders. When I bought my first home my ratios just barely allowed me to do so even though I had plenty of cash on hand to close the deal.
Soon thereafter my wife and I started shopping around for jobs and places to live and it quickly became clear that having a monthly debt obligation hanging over our head made it difficult to make major life changes. We considered moving out of state but that would have been difficult with active student loan debts and no new job waiting for us with open arms.
Credit standards also changed significantly not long after my college years ended. This is something that I couldn’t have possibly foreseen and it’s an uncertainty that anyone with debts today can’t possible forecast for tomorrow either. You simply never know what can happen in the future. You never know what economic conditions will arise and how those conditions will affect you. You don’t know if you’ll be in a car accident tomorrow and be unable to work. You never know.
Had I simply paid off loan debt when I had the opportunity to do so I would have had far less obligations to carry through the credit crisis to come. I learned this the hard way; when credit is tight then you are at risk. Any creditor can deem you high risk at any time but by paying your debts off as early as possible you can and will minimize your odds of ever being lumped in as a high risk debtor.
Another thing to understand at a deeper level (which I didn’t when I got out of college) is the differences between the best options mathematically and the best options in the real world. The best option for the real world can be best illustrated by looking at one’s cash flow.
If at any point in your life your cash flow drops you quickly start feeling pinched. It’s a leveraged scenario because every household has both fixed expenditures and variable. You may start making less money but your fixed costs cannot be altered easily.
If you have a fixed expenditure like a student loan and have the disposable income to pay it off then you make it easier for your cash flow to adjust to new income levels down the road in the case of a lost job, a move, or a change in family conditions. You want to take a year off of work to raise an infant? You better have the cash flow to bridge the gap between jobs. It’s a big gap. You may be able to save less or eat at home more, start couponing, but you can’t lower a fixed monthly debt payment. You will feel the pinch.
Is it worth paying off student loans early?
I know I didn’t think so at all when I started working but in hindsight I wish I had. I think the intangibles are well worth it. The peace of mind of being debt free is far more important than any spreadsheet can offset. For some it’s hard to make money but over the course of a lifetime most will have a few surges of income and dips throughout the journey. Keeping debt loads low is the best way possible to stay sane and happy no matter what happens along life’s journey.