This guest post is by Zac Bissonnette.
Excerpted from How To Be Richer, Smarter, and Better Looking Than Your Parents by Zac Bissonnette by arrangement with Portfolio Penguin, a member of Penguin Group (USA) Inc. Copyright © 2012 by Zac Bissonnette.
I hate student loans.
In fact, I hate student loans so much that I wrote an entire book about how horrible they are, why they must be avoided, and how they can be avoided.
Unfortunately, not every single person who enrolled in college read it. Otherwise, I wouldn’t have had to write this chapter— partly because readers wouldn’t need it, but mostly because I would be living in some tropical tax haven sipping my fourth Bloody Mary at 11 a.m. on a Tuesday.
Anyway, two- thirds of graduates leave college with an average of $24,000 in student loan debt — wait, now it’s $26,000 . . . $30,000 . . . wait for it, wait for it . . . $31,000 . . . . Forget it. I’m not even going to try to tell you how much the average student debt load is because by the time I finish typing this sentence, it’ll be higher.
But what’s done is done: If you’re like most people reading this book, you have student loans, and now you have to figure out how to deal with them.
First, a complaint: It’s become sort of chic to tell people “You can still live your life and have a lot of fun while you get out of debt!” The Cliff Notes guide to getting out of student loan debt promises its readers that they can pay off their student loans and, at the same time, “still enjoy most of your guilty pleasures.”
That’s true, if your goal is to get out of debt at the age of 50. Here’s the deal: Every single person who has made short-term sacrifices to get out of debt sooner is glad he or she did it.
Having a bunch of student loan debt is stressful — even if you don’t fully realize it at the time. The happiness of being debt- free is equal to or greater than the happiness that would come from the guilty pleasures, with the added benefit that your debt will be paid off.
Putting $1,000 toward your student loans will generate a happiness boost greater, and certainly longer lasting, than the pleasure that would come from spending it on a vacation. Just trust me on this. Please. It’s so important.
It’s much better to hunker down, get the debt out of your life and then move on. The low-grade misery of chipping away at it forever is just not a good deal.
The People Who Say “Don’t Pay Off Your Student Loans” Are Full of Crap
Before we get into the details of the different types of student loans and their different repayment options, let me just say that the people who tell you “Don’t be in a rush to pay off your student loans” are full of crap. Financial journalists are constantly telling young people not to rush to pay off their student loans for a few main reasons. Here they are:
Student loans have low interest rates. Not any more. Unsubsidized federal Stafford loans have an interest rate of 6.8%. That’s much higher than current mortgage rates and about six times the interest rate you can get in a savings account. Paying off your student loans and getting a guaranteed tax- free return of 6.8% is something you should do before you do anything else.
Yes, private student loans may have lower interest rates — for now — but rising rates could send your payments into the stratosphere, as I’ll discuss in a little bit.
Student loan interest is tax deductible. The thing about tax deductions is that you have to lose a lot of money (the interest you’re paying) in order to save a little bit of money (the value of the tax deduction). What’s more, only $2,500 in student loan interest is deductible even if you paid more. And if your income is more than $75,000 per year, none of it is deductible. So the people who borrow big to earn a lot of money (MBAs, doctors, some lawyers) often get no tax deduction at all.
If you use income-based repayment, some of your debt will be forgiven. A couple of years ago, Congress passed a law allowing for income-based repayment (IBR), which means, if you choose, you can cap your federal loan payments at a percentage of your discretionary income. If you make income- based payments for 25 years (10 years if you’re working in “public service,” although both of these numbers may have changed by the time you read this), whatever you haven’t paid off is forgiven. For most borrowers, though, there won’t be any forgiveness because you will have paid off the loan in full by then, and the smaller payments you make in the beginning will cause interest to accrue and increase the total amount you’ll have to pay back. Bottom line? IBR is great if you literally can’t afford to make the payments on a standard payment plan; under that circumstance, IBR can prevent you from defaulting. If you can possibly avoid using IBR, using a standard repayment plan will likely save you money in the long run.
My advice is simple: Pay off your student loans. There’s no “secret” to getting out of student loan debt, and if you look for shortcuts, you’re likely to pay dearly.
Zac Bissonnette is also the author of Debt-Free U: How I Paid for an Outstanding College Education Without Loans, Scholarships, or Mooching off My Parents.