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Tag: student loans

There is now more student loan debt than there is mortgage debt in the US.

And credit card companies are now getting into the game.

This is bad and only going to get worse, mark my words.

Question: Should I pay off my student loans ASAP?

Answer: Generally not, for a number of reasons.

One, the interest rates on student loans tend to be fairly low, much lower than credit cards or other debts.  As such they should be fairly far down the list in terms of which debts to attack.  Add to it the fact that the interest is usually deductible, so the rate is actually even further down the priority scale.

Secondly, you need to compare the rate of the loan with the opportunity cost of paying it off.  Using a conservative rate of return (even 6%, a good assumption for 10 year returns in accumulation.  Add 1% per full decade thereafter assumption up to 9% for retirement oriented savings), it is pretty easy to see that paying off the loan quicker actually sacrifices the returns, thus creating negative wealth by paying off the debt faster.  Yes, it might FEEL good, but looking at the numbers it is the wrong move.  Paying off 5% faster than earning 8% is a net LOSS of 3% per year, which is actually fairly substantial over an extended period.

So hopefully those student loans got you an education where you learned enough to think about the situation before gut re-acting.  If it did, than my logic is intuitively obvious and you will make the right move.  If not, maybe you should get a refund for college.