Student Loans
Student loans are a topic with a lot of baggage these days. It's more common than ever that students are taking out large sums of money and not fully understanding the consequences of the debt they're taking on.
The Reality
In terms of overall personal finance, student loans are a mixed bag:
The Good:
- Interest rates are often lower than credit cards
- Interest may be tax deductible
- Education can increase your earning potential
The Bad:
- Large balances can take decades to pay off
- They're almost impossible to discharge in bankruptcy
- The psychological burden can affect life decisions
Strategies for Managing Student Loans
There's no magic, easy way out, other than being diligent about keeping up with payments and paying extra when you can.
Federal vs. Private Loans
Federal loans often have more flexible repayment options:
- Income-driven repayment plans
- Public Service Loan Forgiveness (PSLF)
- Deferment and forbearance options
Private loans typically have:
- Fewer repayment options
- Potentially higher interest rates
- Less flexibility if you hit hard times
Should You Pay Extra or Invest?
This is a common question. Here's a simple framework:
| Student Loan Rate | Strategy |
|---|---|
| Under 4% | Consider investing instead (historically, market returns ~7%) |
| 4-7% | It's a toss-up—consider your risk tolerance |
| Over 7% | Prioritize paying off the loan |
Remember: Paying off debt is a guaranteed return equal to the interest rate. Investing has higher expected returns but comes with risk. There's no wrong answer—both build wealth.
The Psychological Factor
Don't underestimate the mental burden of debt. Some people sleep better at night knowing they're debt-free, even if mathematically they might have more money by investing instead. Your peace of mind has value.
If your student loans stress you out, there's nothing wrong with aggressively paying them off, even if the interest rate is relatively low.