Student loans: Set it and forget it?

Graduating with a boat load of student loan debt can really be depressing.  When you finally see that final number which you’ve been ignoring for years, it can really be shocking.  Graduate and professional students like myself can easily come out of school with 6 digits of debt.  The student loan companies will put you in something ridiculous sounding like a 15 or 20 year re-payment plan.  If you get a good job coming out of school, it can be tempting to put the student loans on the back-burner and focus on enjoying your money because you feel you “deserve” to.  Nothing wrong with having some fun, but there is something wrong with paying minimum payments on a debt for 20 years.  This is a pretty bad financial move for most people, because you should hardly ever stay in debt longer than you need to be.

We often think of our debt from solely our point of view.  But it can make a lot more sense if we think of it from the banks point of view as well.  A student loan debt is a contract between us and the bank.  The bank gave us money to go to school and educate ourselves (how nice of them.)  They want us to pay this money back when we’re done with school.  They charge interest to cover themselves in case we don’t decide to make all the payments and to make a LITTLE money themselves.  They would like nothing more than for us to quietly make our minimum payments while they get all of their interest.  What they don’t want is for us to accelerate our payments and save ourselves a lot of money and time.  Which is why this is EXACTLY what we should be doing.

A student loan is an investment in yourself, and the key factor every investor looks for is the return on investment (ROI).  The ROI measures the efficiency of an investment, and investment cost is one aspect of that efficiency.  By opting to pay your student loans over a long period of time and end up paying the maximum amount of interest, you are decreasing the ROI in yourself.  Paying whatever extra you can on your highest interest student loan will effectively increase your ROI and make your education worth more.  Everyone wants a great investment, and paying off your student loans early will help ensure your education becomes a great investment in yourself.

The other obvious side of paying your loans off quickly is that it frees up money, money you can use for whatever you like.  Now I prefer to keep the avalanche going by using that newly freed up money to attack your next student loan, but if you have an unexpected expense or a great investment you want to get in on, you can use your money on that.  The money isn’t being used to generate interest for the bank anymore, and that’s a plus in itself.  That new money can almost be looked at as a bonus, since you were hopefully able to live without it before.  Creating income is the best thing we can do to become financially free, and paying off student loans is a great way to do just that.

There can be some arguments made against paying student loans off early such as not getting the student loan interest tax deduction or opting to contribute to retirement plans instead.  In most situations, not deciding to pay off student loans can be a pretty short sighted decision.  Paying off student loans early provides a GUARANTEED rate of return, because you are definitely going to be paying less interest than if you went with just minimum payments.  A tax deduction on interest is nice, but pales in comparison to the benefit of not paying ANY interest.  I would recommend contributing something to a retirement account as you have compound interest working on your side, especially up to an employer match if possible.  But again, rates of return will vary with your retirement account, while paying off student loans is guaranteed to give you a positive return.

Obviously, I’m not a big fan of just making minimum payments on your student loans.  In a way, you are selling yourself short by making your education worth less than it can be.  It’s also preventing you from freeing up your money which can be used however you please.  So if you can afford to throw some extra money at your loans, do it.  Your future self will greatly thank you.




  1. It’s also a good idea to pay off student loan debt aggressively early on before other major expenses arise like a wedding or a child.

    • Syed says

      Great point Stefanie. Both those events can really put a pinch on your wallet!


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