Clearing student debt as quickly as possible is a primary goal for many student borrowers.
This approach makes sense. Student loan balances are often as large as a mortgage, and the longer the debt lasts, the more the borrower spends on interest.
This is why I urge borrowers not to ignore their debt. That’s the reason I push many to pay a little more each month.
However, I am concerned that some borrowers may focus too much on their student loans. The obsession with eliminating student debt is useful, but taken to the extreme, it becomes risky.
Emergency funds are more important
Before launching a campaign to reduce your student loan balance to zero, it is essential set up an emergency fund first.
Financial emergencies are not an unlikely possibility. They are a practical certainty. You could lose your job. Your rent could go up. Your roof could be leaking. You could get sick.
The list of potential financial emergencies is endless.
It is essential to have some cash on hand for any of these events. If you don’t, your financial emergency could lead to high-interest credit card debt or an expensive personal loan. Some desperate people even turn to dangerous payday loans.
If you have an emergency fund, you can weather the storm.
How much should I set aside in my emergency fund? Many financial experts suggest at least 3-6 months of living expenses. However, there are many factors to consider that could increase or decrease the size of fund you need.
Saving for retirement might be a better investment
Balancing saving for retirement and eliminating student loan debt can be tricky.
You don’t want to let your student debt escalate, but you don’t want today’s financial crisis to create tomorrow’s financial crisis.
In some cases, decision making is easy. If your employer offers a generous counterpart to your contributions, take advantage of this advantage first.
However, finding the right balance is not always easy. Stock market returns are difficult to predict. If you’re several years away from retirement, this might not seem necessary.
The important thing is that all borrowers understand that there are ways to save for the future and eliminate student debt at the same time.
Interest rates matter
Some people get caught up in the idea that student loans are bad, so I have to eliminate them immediately.
It’s not the worst attitude, but some context is important.
If you have credit card debt at 28% interest, eliminating your student loan at 5.5% is not the most pressing problem.
This may seem obvious in the case of high interest rate debt, but there are other angles to consider. Do you have a fixed rate student loan with a really low interest rate? With some banks now charging nearly 4% on high yield savings accounts and CDs, it might be a good idea to pay the minimum and put your money to work elsewhere.
Options for making student debt more manageable
Many borrowers are overwhelmed by the complicated rules of student loans. As a result, they decide to repay the debt immediately.
However, these complicated and frustrating rules provide opportunities to save money. Before aggressively repaying federal loans, it is worth considering the many benefits and protections that come with federal loans. A little research could mean big savings.
Borrowers struggling with the least forgiving private loans still have options. Refinancing with a private lender could mean a significantly lower interest rate and easier repayment:
Don’t get carried away
To be clear, the suggestions in this article are not an invitation to ignore student debt or pay the minimum.
Having a plan for clearing your student loans is essential.
However, it’s also crucial to look at your student debt in the context of your finances and goals. You may find that the way you spend your money doesn’t align with your priorities.