Student Loan Debt: When To Pay It Off, Get It Forgiven, Or Stay The Course

Student loans are the second largest source of household debt after mortgages. Student loan debt topped off at $1.774 trillion as of June 29, 2023 and with interest starting to accumulate again for the first time since the Covid-19 pandemic, many borrowers are starting to consider this item on their balance sheet a little more seriously. Debt is not binary in nature, and here are some ways of thinking about student loan debt, debt forgiveness considerations, when not to rush repayment, and when to consider using excess funds to pay your loans faster.

Ways Of Thinking About Student Loan Debt

Like mortgage debt, most people get something in exchange for their student loan debt. A mortgage allows you to buy a house, and a student loan gives you access to education, which can increase income potential for the remainder of your life. The federal government recognizes this and incentivizes people under a certain income level by providing tax deductions on interest associated with student loan debt.

However, it is important to consider the return you are getting in exchange for this debt. If you are taking on $20,000 in debt but your income potential has increased by $40,000 per year, many would say this is a fair trade. If you are taking on $200,000 in debt to go into a field that does not pay well, you may feel as though you’ll be under this debt for the rest of your life.

There is also the question of interest to consider. I’ve seen people with a wide range of student loan interest rates, from 2% all the way to 16%. The loan interest impacts whether it makes sense to keep debt on your balance sheet or rush to pay it off.

Consistently making payments on time has a positive effect on your credit score while having a high utilization of available debt has a negative impact. For example, if your available credit from credit card companies and other lending agencies is $100,000 and your outstanding debt is $10,000 — an amount which you are consistently paying down — that is viewed as positive. If your available credit is $100,000 and your outstanding debt is $100,000, that can have a negative impact on your credit score and hinder your ability to take on further debt.

Student Loan Forgiveness Options

Public service is a noble cause, but those positions often do not pay well. Teachers, lawyers, nurses, government officials, and many more professions must go through extensive education to be public servants, at a much lower salary than if they went into the private sector. For this reason, several loan forgiveness options are available to public servants with federal student debt.

Public Service Loan Forgiveness is one of the widest-reaching loan forgiveness programs. If public servants verify their income annually with the program, make 10 years of qualified loan payments, and apply correctly, they can have all of their remaining loan balances forgiven. This path tends to be well-suited for someone whose debt far exceeds their annual income — i.e., you have $200,000 in loans and expect to make $75,000 per year.

There are a number of other forgiveness options, so be sure to do your research to see which one is best suited to your personal situation. This is not to mention the current plan by the Biden administration after the Supreme Court overturned the previous loan cancellation bill.

Potential Reasons Not To Rush

I know a couple where both spouses took on large sums of student loan debt and ended up in high-paying career paths in the private sector. Both of them are aggressive investors, they don’t have extremely negative feelings toward debt, and the loans were taken out in a low-interest environment. They both move cities often so they’re not in a rush to add a mortgage to their list of debts. While they’re not eligible for any loan forgiveness options, this couple is a good example of borrowers who I would not recommend rushing to pay off their loans.

Here’s why. If one or more of the following reasons apply, you may not want to rush paying down student loans:

· Your loans are fixed at a low interest rate.

· You are eligible to deduct student loan interest from your taxes.

· You may be eligible for loan forgiveness programs.

· You have a high tolerance for risk and may wish to invest the funds you might have used to pay off the balance in full.

· You would like to reap additional tax benefits by maximizing a retirement plan contribution.

· Your credit utilization ratio is considered in a reasonable range.

Potential Reasons To Rush

If you have the excess funds to pay off student loans, you may want to rush to pay the debt off if one or more of these reasons applies to you:

· Your student loans are high interest or variable interest.

· You have a low tolerance for risk.

· You would like to qualify for more significantly more debt in the near term.

· You experience extremely negative emotions from having debt.

Conclusion

There are many considerations that go into the question of whether to pay off student loans as quickly as possible. It is important to weigh them prior to making a decision that can impact your long-term financial security. Consult a financial and tax professional to discuss your unique situation and find the path forward that makes the most sense for you.