Paying off debt is often a top priority. Not only can too much debt hurt your credit score, it can impact your ability to achieve other important milestones in life, such as buying a home.
But when it comes to student loan debt, obsessing over repayment and devoting every spare penny to paying down balances can actually have negative consequences, particularly when you become so focused on repayment that you ignore all other elements of a sound personal financial plan.
“I’ve seen a number of individuals who have devoted unhealthy amounts of time and money towards paying down their student debt, people who are pinching every penny,” says Michael Lux, founder of The Student Loan Sherpa, a website focused on student loan education, strategy, and borrower advocacy. “You can’t just look at your student loan debt in isolation. You need to consider all of the things that paint the complete financial picture.”
As Lux indicated, there’s a variety of reasons why devoting too much of your hard-earned income to repaying student loans can be an unwise approach. Here are the top five.
1. It’s Not Sustainable in the Long Run
Denying yourself all of the day-to-day extras that you enjoy in order to pay off your student loan is not likely to work forever, says Lux.
“The key to success is making it sustainable for years,” he explains. “First, you have to know yourself. When you make a budget, you have to make a realistic budget. If you’re someone who loves the movies, you have to budget money to go to the movies.”
Another tactic that helps create a more balanced and manageable approach is to create milestone repayment goals for yourself and then reward yourself in small ways when attaining those goals, says Lux. For example, when a loan is half paid off, treat yourself to a fancy dinner. Or, when one loan is completely paid off, find another affordable and meaningful way to indulge in some positive reinforcement.
2. Retirement Savings Should Also Be a Top Priority
Paying off student loan debt should not come at the expense of getting started on a retirement plan. But unfortunately for some, that’s exactly what’s happening.
“Many people put paying off student loans ahead of retirement saving,” says Ryan Farnung of New York–based GPS Financial. “So while they are saving some interest on student loans, and ultimately freeing up some monthly cash flow, they may also be . . . missing out on the potential to tap into the power of compounding interest.”
Carrying some student debt is all right, says Farnung, if it means using your money elsewhere in ways that will provide a greater long-term benefit.
3. Establishing an Emergency Fund Is Also an Important Part of a Healthy Financial Plan
A sound personal financial plan also includes establishing emergency savings accounts, ideally two separate accounts—one with six months of living expenses and a separate liquid emergency fund.
“Student loan rates are so low right now, under 4 or 4.5%,” says Oliver Lee, owner of Michigan-based The Strategic Planning Group. “So I always recommend my clients pay the very bare minimum. Then, create a six-month or one-year living expense shelter so if something goes wrong when you get out of school or you can’t find a job, you have the money you need. And once you have that, you also need a liquid emergency fund—in case the tires go bad on the car or the transmission goes. This account should have $1,000 to $3,000.”
Those who don’t have such emergency funds are likely to rack up costly credit card debt in order to pay for life’s unexpected expenses. And the interest on a credit card is almost always far more than the interest on a student loan.
“You could have your student loans completely paid off and yet have $10,000 to $15,000 in credit card debt because you had no emergency funds,” says Lee. Making savings a priority can help prevent unnecessary credit card debt.
4. Real Estate Is a Better Investment
Devoting too much money to student loan repayment often leads people to put off other investments that come with valuable rewards of their own. Home purchases are a prime example.
Real estate has historically given returns far above the interest rate of student loans, says Lyn Alden, founder of Lyn Alden Investment Strategy. So it’s beneficial to prioritize building these sorts of investment assets, even if it means keeping low-interest student loan debt around for a while.
5. Missed Life Experiences
There are many variables to consider when deciding how much money to devote to student loan repayment, but according to Farnung, they revolve around one primary question: what are you giving up today in order to improve cash flow tomorrow?
It’s easy to measure how much it costs to carry student loans by determining how much interest you pay annually and what that looks like after taxes. But what’s far more difficult to measure is the experiences you may miss out on or the opportunities for real financial growth you may be overlooking when focusing solely on student loan repayment.
“If you’re postponing funding and maintaining an emergency fund, contributing to your retirement savings, getting married, buying a home, or any number of other life goals and aspirations, you need to take a step back and really think about what the interest on your student loans is costing you,” says Farnung.
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