We all want to get rid of our student debt as soon as possible, but is it always a good idea? I’ll tell you in this week’s Money Minute.
If you’ve got close to $30,000 worth of student loan debt — like the average college graduate these days — who could blame you for wanting to get rid of it as soon as possible?
But before you start stocking up on ramen and skipping doctors appointments to whittle down your student debt, take a step back and do a quick reality check.
Do you have at least three to six months worth of savings for emergencies?
How’s your retirement account looking?
Do you have health insurance?
As far as priorities go, these should come before student loans.
Why? In the grand scheme of things, student loans are a lot more flexible than other types of debt, especially if you have federal loans. Not only are interest rates usually much lower on federal student loans than other types of debt, there are many more options for borrowers who are in danger of missing payments, like income-based repayment, loan forgiveness, deferment, or forbearance.
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On the other hand, if your car breaks down or you wind up in the hospital without health coverage, you’re going to wish you had that emergency fund.
Another reason to hold off on aggressively paying off your student loans is that other types of debt can do much more damage to your credit. Student loans simply won’t make you look as risky to lenders as credit debt will. On top of that, you can actually deduct your student loan interest payments (up to $2,500 annually) on your income taxes. If you have any outstanding credit debt — especially if that debt has a higher interest rate than your student loans, which is likely — then make that your first priority.
We get it. Student loans seem like a much more pressing issue than, say, investing for retirement, which is probably decades away. But before you shove off future savings goals, consider this: the money you save early on, especially in your 20s, can be even more important than money you will save later, because you're giving it more time to grow and benefit from the beauty of compound interest. If your student loan interest rates are relatively low — say, less than 5% — it can makes more sense to put extra cash in a retirement fund, which will likely grow at that rate or higher over the long term.
But here’s the bottom line: you can't put a price tag on peace of mind. So if you want the luxury of debt-free living, then what the hell? Start hacking away at that student debt now. Just make sure you aren’t putting your future financial security at risk in the process.
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For tips on how to start paying off your student loan debt, check out these articles on Yahoo Finance:
13 ways to pay off student debt faster
Should I make interest-only student loan payments while I'm still in college?