This post is from our regular Wednesday contributor, Erin.
It’s no surprise that we talk about the issue of student loan debt on Young Adult Money often – after all, it’s a burden many of us face in our 20s and 30s (and beyond).
However, we all have different priorities when it comes to paying off debt and saving. That’s what makes personal finance personal, right?
Since DC is taking the longer route with paying off student loans (as that’s what makes sense for his situation), I figured I would talk about why I’m doing the opposite and prioritizing paying off my student loan debt.
My Epiphany With Student Loans
I began my post-college life like everyone else: I thought student loan debt was going to be a normal part of my life. I didn’t think much of it, except that I wish I didn’t have it!
Several months after graduating, my fiance and I were on a walk. The topic of our student loan debt came up.
We both realized if we continued paying the minimums, it would take us another 8 years or so to get rid of it. Neither of us liked the sound of that.
It only got worse once I ran the calculations on how much interest I would pay over the life of the loan if I continued on the way I was ($5,500, to be exact).
There had to be a better way, and I was determined to find it.
In my quest to look for information, I came across a few personal finance blogs – ones I still read to this day. There were people sharing their stories about how they were making serious progress on their student loans.
Those stories gave me the inspiration to start paying extra toward my loans, and to share my own journey with the world.
They also made me realize debt was a choice. So many of my peers resign themselves to thinking they’ll be in debt forever, when it doesn’t have to be that way. Even if student loans are considered “good debt,” there’s no reason to keep them hanging around.
Here are my list of reasons why I decided to prioritize paying off my student loans once and for all.
It’s the Only Debt I Have
I’m very grateful that I learned to use credit cards responsibly at an early age. I built up an emergency fund as soon as I got a part-time job in high school, and I haven’t looked back since.
Saving has always been important to me, and I absolutely hate having debt. While it’s taught me many valuable lessons, that doesn’t mean I want it to stick around.
I completely understand prioritizing other debt that might have higher interest rates first, but in my case, this is it!
Since my savings is in good shape, I can either invest the money, or get a guaranteed return by paying my loans off. Here’s why I’m not investing it…
My Interest Rates Aren’t Great
Some of you out there have low interest rates where it makes sense to save and invest your money.
Unfortunately, my interest rates vary from 4.5% to 6.8%, and I know there are others out there that have 8%!
Compared to credit card debt (where 22% is normal), I know that’s not super high. However, every time I log into my account, seeing how much interest has accrued is depressing.
There’s nothing that motivates me more than realizing how much of my payment is going toward interest instead of principal.
Paying off my student loans quickly means paying less interest on my loan – I’m saving thousands.
It’s a sacrifice compared t0 what I might be getting in returns from the stock market, but one I’m willing to make.
It’s the Only “Major” Financial Goal I have
I have no other “major” financial goals I’m working toward right now. I took care of my emergency fund and other savings goals I had last year.
The only thing that’s up in the air right now is possibly buying a car this year, but that’s something I can handle.
Aside from that, I’m not in any rush to get married or buy a home, and I don’t want kids.
If any of these apply to you, I could understand wanting to prioritize saving over paying off your debt. Those are all huge goals!
One major goal is missing from that list, though.
I Want to Start Saving for Retirement
This is where it gets tricky. Saving for retirement is a major goal anyone should have, so why am I putting it on the back burner?
For the most part, I’d rather completely focus on my student loans. One goal at a time tends to work better for me.
I did open a Roth IRA last year, contributing the minimum needed to start, but I still feel very behind. (Sadly, none of my employers ever offered a 401k.)
It’s better to start earlier than later, thanks to compound interest, so the sooner I can get my student loans paid off, the sooner I can start saving for retirement.
Debt is Emotionally Draining
I just want to be completely and utterly debt free. Again, my student loans are the only debt I’ve had, and they feel like a “black mark” on my otherwise good record.
Whenever I earn money, I want to know it’s 100% mine. I don’t want to have to send it anywhere I don’t want to.
Along with that, I’ve been battling feelings of guilt the entire time I’ve had my loans.
The way I prioritize paying off student loan debt is to ask, “Would I rather have X, or would I rather put that money toward my loans?”
Anyone who has paid off debt knows it gets tiring after a while. Constantly denying yourself things doesn’t typically lead to motivation unless you’re hyper focused on your goal.
I’ve never been a natural spender, so being in debt reinforces the guilt I experience when buying something.
Even though I’ll be focusing on saving for retirement after this (where I’ll continue the “Would I rather?” game), I think I’ll feel a lot less guilty when contemplating a purchase.
I Just Want to Move On
Overall, I feel like I’ve been stuck in this “student loan debt phase” ever since I graduated from college. It feels like it’s time to move on.
I know 3 years is relatively short in the grand scheme of things, but having debt hang over me every day isn’t fun.
Don’t get me wrong – I’ve learned a lot from having student loans, and I don’t have many regrets.
If I had avoided being in debt, I doubt my money management skills would be half as good as they are now. But it’ll be nice to move on from this stage and begin enjoying freedom.
______________________
I’m usually all for mathematical approaches to finance, but I have to admit, my reasons here are largely emotional. At the end of the day, being in debt doesn’t feel good. I want to be happy about my financial situation, and that’s why I’m prioritizing paying my student loans off.
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Have you prioritized your student loan payments? Why or why not? Do you take a rational or emotional approach with your finances?
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We paid off our student loans early even though they were at 3.25%. We haven’t regretted it once. Like you, we were just ready to move on.
I think my loans were somewhere around 4% or so, but like you we wanted to be done with them once and for all. There were just too many things that we wanted to be able to focus on and use that money for – though the interest alone made us want to pay them off as soon as we could.
I’m in DC’s camp on the student loan payoff issue, but mainly because my interest rates are so low. Lowest ones slightly under 2%, some slightly above that and the highest ones at just under 4%. I did pay off the higher ones which were at 6.8% So in your situation, I can understand wanting to get rid of them. But I’d also encourage you to save more into your IRA…(great job on opening the IRA!)…you can contribute a small amount monthly. Compounding works magic so don’t delay. You can prioritize the student loan debt payoff but still save a little for retirement as well. Just my humble opinion =)
I’m hoping to pay off my student loans way sooner than 10-year term I’ve been given. I agree it is emotionally draining and I’m so ready to move on and focus on my other financial goals
Great approach. Paying off the debt frees up both your cash flow and your mind. My wife and I thought the same way. Free yourself and free up your money. It sounds like you have some great financial habits, keep it up.
I do recommend putting money into your retirement, even if it’s a tiny amount – as there always seems to be a higher priority for money than retirement (which doesn’t occur for decades). You’ll never regret putting more money into retirement, you’ll only regret not having enough.
Sometimes, I find that it’s easier to prioritize my finances when I approach them with emotional reasons. I hope you get to put a plug in that emotional drain hole soon. You’re on the right track!
My husband and I are in the same space mentally. So ready to move on with our lives! We got married right after college graduation and had $43K to tackle. Every day it felt like a cloud over our heads. I just felt suffocated and stuck. So we’ve been living frugally but still managing to have some fun while we pay these loans of ASAP. I insisted we put some money away for emergencies first and to put some in our 401ks every month – but then we put a hefty chunk against the loans because it’s been 3 years now and I’m so over them! Luckily, our hard work has paid off and come May 2015 – we will be all done with our student loans. So it is possible, takes hard work and discipline, but once they’re gone… you’ll feel so free :) Keep up the great work! (for anyone who wants to follow our debt payoff story visit: https://mrcandmeblog.wordpress.com/lets-talk-money-series/ )
I paid off my student loan debt, along with all the rest, in my late twenties.
The main benefit that I found was that paying off debt aggressively built an important habit. By budgeting my money every month and making big payments to the student loan debt, I was also tracking my spending and laying the foundation for making big contributions to investments down the road.
I’m not entirely sure I’d have been as aggressive with contributions to investments in my twenties, had I not addressed the debt the way I had.
For better or worse, paying off the low interest debt was the catalyst.
Holly at ClubThrifty Sometimes that’s what it comes down to! Debt isn’t really fun to deal with, low interest rates or not.
FrugalRules Good to know I’m not alone! I definitely want to have more goals for my money, and right now, student loans are just getting in the way.
Andrew LivingRichCheaply This is something I come back to a lot, and I usually end up torn on it. I know compound interest is worth it, but I only have so much money to dedicate to everything. With joint finances, we’re paying off two sets of student loans, largely paying extra on my fiancés. I’m just not sure the return is worth it. I figure if I can pay my loans off faster, I’ll be able to invest sooner.
Chonce I’m sure you’ll have them paid off before then!
UnexploitedFin Thanks! As I said in my reply to another comment, I do get torn up over putting nothing in my retirement fund right now. But with paying off two sets of student loans, and paying extra already, there’s not much left to go around. I know saving for retirement won’t be a problem (I’ve always been a natural saver) once my loans are paid off, so I figure the faster I can accomplish this, the sooner I can make retirement a priority.
Anum Thanks! I do find that sometimes you just have to listen to what your heart is telling you as far as going after what you want in life.
DonebyForty Exactly! Debt has taught me a lot about money management, and I’m sure it will only serve me well in the future. I don’t think I would have been as steadfast with budgeting and tracking my spending if I had nothing to worry about.
Andrew LivingRichCheaply Thank goodness someone in this thread agrees with me…. ;)
DC @ Young Adult Money Andrew LivingRichCheaply Hey now, I never said I didn’t agree with it! :P Honestly, if I had lower interest rates, a larger balance, and different goals (wanting to buy a house, for example), I probably would have prioritized the house. But it’s not going to take *too* long to pay off my loans at this rate, so I figure I might as well. I can understand why others take a different approach.
Erin @ Journey to Saving DC @ Young Adult Money Andrew LivingRichCheaply Haha fair enough! I think sometimes people over-think student loans, too. The potential gains/losses are typically relatively small unless you really plan out the details of your payback period and how you will utilize the cash that you don’t put towards it or the cash flow you start receiving when you do pay it down. We actually will be able to “refinance” our student loans through excess grad student loans we don’t need but are at an even lower rate. I’m all about “interest rate” hacking but it seems MUCH less popular than travel hacking ;)
I can’t lie, after being out of college almost 7 yrs I just got focused enough to pay them. Right now I’m paying the minimum per month. Once my debt snowball gets going I will start paying more on them. I just checked my a debt payoff calculator. The results for only paying the minimum are not flattering at all.
I appreciate what you are writing here. I mean I am eight years out and I am still paying off my debt (I was stupid and took out way more than I needed for grad school. If I could go back in time and facepunch myself I would). I think that it is great that this is a priority. And there is something to the idea that focus will allow you to get this done quicker and you can get into retirement saving. Good luck!
Hey Erin, this is your only major financial goal? There isn’t any goal in there for financial freedom/independence? :O
As for student loans I’m extremely lucky that I actually don’t have any as I was lucky enough to secure a scholarship that paid for most of my tuition fees, plus my degree all up cost me ~ 30K total.. I have goals that now carry through to my finances i.e. holidays, investing, dating accounts, charity etc and where possible I look to make it based on numbers rather than emotional :)
I admire your goal to be debt free and I would recommend paying off the higher interest loans as fast as possible. It would kill me, though, as a freelancer to have to pay such a big percentage in taxes. I think I would try to offset some of my income in tax deferred accounts before putting all of the money toward loans. Hindsight is always 20/20 as I didn’t pay off all my student loans until I was 39!
Jason @ The Butler Journal Looking at debt payoff calculators can really be motivating. Once you see the numbers it tends to hit you!
j3edwards It happens to a lot of us! You’re definitely not the only person who has taken out more than they needed. Glad to see someone else agree that having a singular focus can help!
mycareercrusade My only immediate financial goal. :P Of course, I’ll be aiming for financial independence down the road, and thankfully I have more than enough time to get there. I’m not really sure what it will look like yet, either, as I don’t think I could ever stop working fully.
That’s awesome you were able to get a scholarship! That’s one thing I didn’t really apply for, as I transferred to my college, and they weren’t big on rewarding transfers. Interesting you say your savings goals are based on numbers and not emotions. I’ve been so focused on debt I haven’t thought about the flip side, plus saving is kind of automatic to me.
Eyesonthedollar That’s a good point to bring up, Kim. Since this is my first year freelancing I didn’t make enough to be taxed at the highest bracket, but that’s definitely something I’ll consider going forward. Thanks for pointing that out!
I am really thankful that I graduated without student loan debt because pretty much all of my clients have it and it is definitely a financial and emotional burden that they have to bear. I like to see my clients deal with it as many others deal with mortgage debt. They are focused on paying it down, but know that it will be a longterm process so we plan on other events along the way with the debt. It makes their lives less focused on just debt repayment which can grow old very easily.
It’s tough when math doesn’t correlate with emotions. I always advocate going with what gives you the most mental health. If you’re only 3 years out of college, you can delay retirement for a little bit more. It’s not ideal, but it’s ideal for you.
blonde_finance Really good point, Shannon. It’s definitely not fun to dedicate all your focus to debt, especially if you have a larger balance. As I said to DC, if my balance was larger, I probably would have taken a long-term approach. But I figure if I can get it paid off soon, I might as well. It can be a roller coaster of emotions, though.
AbigailP Mental health is so, so important when dealing with finances. I try to think about it in terms of what would keep me up more at night if I “ignored” it. Personally, having a savings buffer comes first, then debt, then retirement.
Being in debt in general, and specifically student loan debt, brings out all kinds of emotions in people. For the longest time I was focused, more like hell bent, on paying off all of my loans completely ASAP. But I have some varying interest rates. I have a couple of 6% loans which I’m focusing on and one 4% loan too. But after that I have a bunch at 1% and even some at 0.8%!
So my new plan is similar to DC’s, in that I will focus on getting rid of the high interest debt and once I’m done with that just pay the minimum on the low interest loans. Since the interest rates don’t rise with inflation, the loan value will actually be worth less and less as the years go on. I figure I’ll invest the rest by either maxing out my 401k and/or opening a taxable brokerage account.
But who knows maybe I’ll get the itch and just want to be done with them once and for all!
thebrokeprof I am jealous of those lower interest rates! I think it’s a good idea to invest in that situation, though it depends on the person – some people say they will, and then spend the money elsewhere. But I know in the PF community we take that a bit more seriously. =)
Good point though – there’s nothing wrong with changing up your strategy! Our priorities can always change.
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