Paying off student loan debt is like a foray beyond the north wall; venturing into the territory of the wildlings where an evil eye gazes at you, where the danger can strike from all four corners.
Err…. for those who are not the staunch proponents of GOT and couldn’t get the analogy, here is the tussle of paying student loan explained in simpler terms: a hard nut to crack.
Keeping the analogies and metaphors aside, paying off student loan debt is commendable. You succumb to the pressure of financial obligation all through your graduation while remaining tightfisted and saving each possible penny.
Fighting the menace
According to our study, 42.2 million Americans owed $1.41 trillion in outstanding federal student loans as until recently. The average federal student loan debt per borrower was $33,460.
Though every individual’s case is different and not all may have student loan debt nearing 30k but still fighting it off is worthy of every praise as paying it off requires one to be in grit for a long time.
You may find innumerable articles on the internet which educate you on the importance of paying off student loan debt and on the strategies you should be adopting to accomplish the feat.
There are only a few articles which tell you about the flip side; possible negative impacts of channelizing all your money and efforts towards paying off student loan debt.
There is an opportunity cost for everything
Besides, there is an opportunity cost to paying off student loan debt which remains unaddressed. The resources are limited. The influx of money can only be stretched to a limit (You don’t have a genie who says your wish my command).
Moreover, you can only curb expenses and prioritize paying off just one category of debt at a time (credit card debt, car loan debt, mortgage etc). So, we all must have a glance at what all you could lose, in pursuit of overpowering student loan debt.
The flip side
Here are a couple of things which can grow sour and jaded if you pay your student loan debt. Paying off student loan debt is a blessing in disguise (at least it comes up as one sometimes) and people often don’t realize it when they are fighting it off.
- Credit Score Getting Pissed Off
Whilst you were paying off student loan via timely monthly payments, your credit score was soaring high. Once you pay off student loan debt in full, the credit boost comes to an end and more often than not, your credit score takes a dip as well.
Besides, student loans are also installment loans, so they add variety to your credit portfolio. Paying off student loan implies that you have tarnished the variety. Therefore, the credit score lowers in these cases.
- Saying goodbye to those soothing tax deductions
The student loan interest exemption is one of those above the line deductions that you can lessen without itemizing. It’s attached to the adjusted gross income AGI.
The deduction lessens your gross income and in the process, you become qualified to take several other deductions and tax benefits.
The maximum student loan interest deduction you can claim is $2,500. There are some constraints to your deduction and income is the greatest of them all.
Deductions are reduced for taxpayers with AGIs around the income limit. Moreover, it’s totally eliminated for taxpayers who earn well above the AGI limits.
Here are the rules and limits for student loan interest tax deduction.
- Denying oneself the opportunities for growth
It shouldn’t be hard for you to understand this, it’s simple math: The money that you provision for paying off student loan debt is inversely proportional to the chunk of money you would provision for investing. Investing for beginners could get tough at times but you can always hitch your wagon to a star robo advisor for achieving success.
Though the market is nowhere close to being predictable, you can still make a lot of money through passive investing; benefitting from the diversity of portfolio over long stretches of time. The money you pay off could otherwise be dedicated to a retirement account.
Paying off a student loan is a certain thing, making huge money through investing can backfire at times, but good things come to those who are willing to take the risk.
What could be worst?
Paying off student loans seems like pulling off a Tom CruiseR (stunt performed by the man himself) and it is like one to quite an extent.
However, folks who break out of this curse don’t get that sense of fulfillment as they thought they would be getting.
The science behind it says that when you work towards a goal (fighting off student loan debt in this case), the anticipation signals out to the brain that the goal could be near and the brain releases happy hormone beforehand. Thus, not releasing any dopamine upon the achievement of the feat.
This makes us look like skeptics but our job is to make you acquainted with the truth and we have been true to our purpose.
To avoid post pay off blues, expect no fireworks and give yourself a pat on the back while assembling your armory for the next financial goal.
- Between the devil and the dead sea
Student loan debt is nothing but a tiny errand compared to other overpowering and unsettling debts, for instance, credit card debt.
Credit card debt also comes with a fury of daunting fees and charges. To add insult to the injury, the horses of interest keep taking a bolt in case of credit card debt.
There is a reason why credit card debt comes under bad debt and student loan debt under good debt. Your student loan debt isn’t particularly bad when you have federal loans with a low-interest rate.
This gives you enough room to target debts with higher interest rates. Long story short, if you ignore your credit card debt in pursuit of shrugging off student loan debt, you may dig a deeper, darker grave for yourself.
- Getting your priorities right
You seclude yourself from the worldly hurly-burly and dedicate each penny that you earn towards student loan debt, commendable. However, the virtues of having a cash reserve at your disposal are many.
Problems don’t come knocking. God forbid, what will you do if you lose your job? Whom will you reach out to? You can’t revoke the payments that you have made recently to your student loan providers.
If you haven’t built up an emergency fund or put aside some money as savings, then paying off a student loan at the earliest might backfire.
You can’t build a penthouse unless you have built the basement. The same goes for paying off student loan debt. Paying off student loan debt may not be that critically urgent as you may think it to be.
Now that we have highlighted the not so good part of countering your student loan debt with agility. We are going to shed some light on some of the many virtues of paying off student loan debt.
The virtues of Paying off Student loan debt
- The easiness of breathing
The best reward that you earn for yourself by paying student loan debt is the breathing space; with no reminder or threat calls. The perks of lowering your anxiety and stress after countering student loan debt are countless.
No longer will you sweat to make your payments on time or suffer the wrath of high student loan interest rates. The sense of unregulated freedom that you get after getting rid of student loan debt is as indescribable as the emotion itself.
- The horses of interest won’t take a bolt
When you make the full and final payment for our student loan, the horses of interest come to a sudden halt. By ditching more accruing interest, you will save yourself a good amount of money. The principal money plus the build up interest over the course of loan can cost you a huge chunk of money.
The lesser the number of installments you make (with the increased amount to pay off the loan), the lesser you would have to pay as interests. Moreover, there are no prepayment penalties in student loan debt.
- More achievable life goals
After paying off student loan debt, your debt to income ratio will curb. Having lesser lines of credit will improve your credit score and increase your chances of opening other lines of credit.
So if you are planning to take a home loan, or owning a car, paying off student loan debt will go a long way in making you successful in your endeavors.
You can also commit the money that you have been provisioning for student loan repayment towards your new life goals.
Let this sink in
You have got to get one thing straight, none of the above points are mean to deter you from paying student loans.
There is no conflict between paying off a student loan and not paying off a student loan. Paying off your financial obligations is always good.
However, this critique intends to highlight the fact that there are situations where getting rid of your student loan debt ruggedly may not prove to be the best in your interest.
For more succinct articles on personal finance visit ebc.com