I’m Not Rushing to Pay Off My Student Loans, and You Shouldn’t Either

in Financial Planning, Personal Finance Essentials by

You’d think that student loan repayments were the Sisyphean rock for American millennials – doomed to a life of never-ending debt repayments as we delay buying homes and starting families. A monthly payment to retroactively fund an expensive education is crippling for many, but new data shows a different story for many young Americans.

We help over 1.3 million Americans track their net worth at Personal Capital. Among them are 43,000 people monitoring student loans, 17,000 of which have at least $100,000 in investable assets. We analyzed this well-off group and found that they carry nearly $90,000 in student loan debt but have almost $200,000 in investment savings on average. So why aren’t these well-off Americans, and others like them with the means to pay off their student loans, actually paying them off? As a millennial with my own student loans, here are three reasons I think it pays not to pay them off with my investable assets:

Cash is king – Liquidity is important, especially when it comes to having a solid emergency fund and planning for long-term financial priorities like buying a home.

Retirement savings – Saving for retirement takes priority over quickly paying off my loans. There are powerful compounding effects of time on money and severe penalties and taxes I’d incur if I prematurely liquidated my nest egg to pay my student debt.

Market return – Interest rates on federal student loans are less than 5%. The average annual return on the stock market right now is 7%. Sometimes if you’re willing to take the risk, you can make more over time in the stock market.

Popular rhetoric claims that student loan debt is crippling an entire generation’s future. But why not consider if some millennials are simply being thoughtful with how they prioritize their money and making a wise financial choice not to pay off their student loans just yet?

Read more about why I’m not rushing to pay off my student loans (and why you shouldn’t either) at Huffington Post.

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Michael Ruderman

Michael Ruderman

Michael is Director of Marketing at Personal Capital. He oversees cross-functional growth and engagement projects for over 1 million Personal Capital users. He is also a regular contributor to the Huffington Post and holds an MBA from Stanford.

16 comments

  1. Travis

    I am happily making the 10 year payment minimums. While I want to minimize the amount I pay in the long-term, the difference between 10 and 25/30 year loans is approximately $100 per month, so I’m willing to forgo that money for now, even though I can’t invest it. I do see many of my peers rushing to pay off debt without considering how they’re using their money. I finished 2016 with a 15% ROI. This made me a lot more money than paying off extra through my student loans that average 5.5%. And this was through investing just in some Vanguard mutual funds – I’m no expert on investments. I’d much rather take 10% extra in my nest egg than have that money paid towards my student loans. Particularly since I earned above the limit to deduct any interest this year (which I’m trying to remind myself is a good thing!).

    Reply
  2. Bill

    I’m a boomer with negligible investable assets and a bit less than $8,000 in student loan debt. They will be waiting.

    Reply
  3. Julia

    Lol. Making consistent 7% in the market is easier said than done. So many things can go wrong.

    Takes a lot of guts living with a loan of such size

    Bravo to all those who can.

    Reply
  4. Tom

    Another reason for not paying off federal student loan debt (or not paying it off more quickly) is that the debt – or at least a portion of it – might be forgiven or canceled for various reasons. If that became a reality after you paid it off, you would really be kicking yourself. Another possibility is that the government might eventually offer attractive refinancing. So some of us are just hedging our bets and, like you say, continuing to invest for retirement.

    Reply
  5. E

    ” The average annual return on the stock market right now is 7%. Sometimes if you’re willing to take the risk, you can make more over time in the stock market.”

    I’d like to see an actual source for this….

    Reply
  6. Aaron

    I have been tossing around this very question for the last 3 years. One thing I would point out is that not all federal student loans are less than 5%. I have some that are 7.9%.

    But yes, I agree with the posted reasons for holding off repaying. Students need to organize and demand the federal government allow refinancing to current rates. It really is hobbling an entire generations potential.

    Reply
  7. Greg

    “Thoughtful with prioritizing money?” If a person has taxable investments greater than $100,000 (with some as high as $200,000) and they have student debt of upwards of $90,000, they are not being thoughtful. What they are likely doing is paying the minimum and sticking to pay that for 20 years after which any remaining will be “forgiven.” Guess who picks up the price tag of all of the enormous debt of these “thoughtful” peers of yours? You guessed it, the hard working responsible adults who paid off our student loans faithfully and completely realizing that the loan was an incredible gift that allowed us to invest in ourselves for a better future. Not simply money that is seen as a handout while leaving debt to lay on the backs of other generations. But by all means, let’s consider all of these savvy investors that forego their repayment to increase their investment accounts as “thoughtful.”

    Reply
  8. Emanuel Lewis

    To me you demonstrate a lack of integrity. I am 81 years old and had been taught an honor code that included accepting responsibility for any debts. I have passed down this honor code to my children and grandchildren. Apparently, you have been taught that only fools pay their debts. People like you drag down our civilization

    Reply
  9. Dee Smith

    And not paying off/delaying paying off your student loans is rather disgusting. It’s called a “loan” for a reason. Hope that MBA is getting you a bigly salary.

    Reply
  10. Joe Franklin

    Solid thoughts on student loans. Thanks!

    Reply
  11. Rene Negron

    Hi Michael, thanks for your post.

    Although the interest rate return differential between paying-off debt and investing in the stock market is on average 2% (or more ), the risk adjusted return by far favors paying off debt. Whereas the 7% return is subject to systematic risk and could just as well be -20% in any given year, paying off debt that compounds at 5% is an entirely certain outcome.

    Additionally, though I would generally agree that withdrawing existing cash from a retirement account to pay-off debt is inadvisable, perhaps it is worthwhile to consider not depositing money into the retirement account in the first place until a certain percentage of the outstanding principal on the loan has been paid down. A retirement account (assuming you are referring to one with a tax-deferred set-up which gives the account holder a larger basis to compound off of) is indeed a powerful investment tool its return is also subject to the risk profile of its asset exposures and might therefore not offer any better returns on a risk adjusted basis.

    Reply
  12. D

    Those choosing to make only minimum payments over 10, 20 or 30 years on student loans and invest what they can are missing the big picture. Sure, putting $100 or $200 a month into retirement has the potential to earn you 7-12% return, a cool $250k in 30 years (7% avg return).

    Now, think if you put that extra $200 towards student loan and eliminated that debt early. Pay off the student loan, and now you have freed up an additional $350 to beef up that retirement account (average student loan payment; https://studentloanhero.com/student-loan-debt-statistics/). Even if you invest ZERO dollars for the first 10 years while paying off debt, that $550/mo after just 20 years will be worth nearly $300k ($50k more).

    Look out even further, and 30 years of investing you’d have $650k. That’s an extra $150k over your $200/mo investment for the same time frame. I’m not suggesting to PULL money from an existing retirement account, the taxes and penalties will certainly wipe out any benefit. This is simply delayed gratification. Not having that loan statement show up in the mail each month AND and additional $150,000 in the bank… sign me up!

    Reply
  13. SD

    Garbage advice, Michael. You took out the loan, so you need to pay it back, and fast. The rest of us who busted our behinds to get through school with savings, work, and scholarships will be the ones whose taxes pay for your future debt forgiveness, if it comes to pass.

    For those with $100,000 in investable assets and $90,000 in school loans, why not just pay off the loan and be done with it? If you were able to save up $100,000, you’d definitely be able to build that back up very quickly without your student loan payment.

    Debt = Risk. Bottom line. Get it out of your life. All it takes is a market crash or car crash to wipe out your $100,000 in savings. If you don’t pay it off, the loan will still be there when the dust settles.

    Reply
  14. Elliott Miller

    This is dumb advice.

    A 500$ minimum payment on a 25000$ loan could have been half a million dollars over 30 years if invested.

    Pay your loans off asap. Your debt is an emergency.

    Reply
  15. Jimmy Greek

    Sounds good on paper. Delay all your loans or make minimum payments and make a killing in the stock market.However, like Mike Tyson once said everyone has a plan until they get punched in the face. A job or market loss like 2008 had plenty of people having to pull out money in 401k to pay debts they could no longer afford. They were leveraged to the hilt and ignored risk in hopes of easy money.

    Reply

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