Student Loans: To Pay or Just to Save

Paying off your student loans is good, but you don’t want to pay them off so aggressively that you don’t build up a nest egg.

Student loan debt in the United States is no joke. In 2019, the national student debt load is the highest it has ever been at $1.5 trillion. For undergrad students from the class of 2017, the average loan debt post-grad is over $28,000. So the question remains: Is it better to pay off loans more quickly or build up savings?

It’s a question new millennials in the workforce face for years after graduating as they hammer away at their debt while simultaneously trying to build their nest eggs. And many wonder if they’re doing what’s best for their financial future.

No easy answer.

According to Andrew Pentis (@andrewpentis), personal finance expert and certified student loan counselor at Student Loan Hero, this common query does not have a black and white answer.

“You might prioritize another financial goal because it makes more sense for your situation,” Pentis said. “It could be wise to save for a rainy day if your forecast shows the potential for, say, a stack of medical bills. Making minimum or lower student loan payments could give you the breathing room you need to handle other debt or routine expenses. On the other hand, you might prioritize repaying debt because it will lift the emotional strain.”

He suggested looking at the issue mathematically. He posited that if your loans are at a five percent interest rate and you can only get a 2.5 percent APY high-yield savings account or CoD, it’s better to pay off the debt first.

As one of her seven steps to paying off student loan debt, Casey Bond (@caseylynnbond) at HuffPost suggests bi-monthly payments instead of one monthly payment or putting any windfalls or extra income against the debt as well.

That isn’t to say that starting any kind of savings is a bad idea. The experts agree that putting funds aside for emergencies should be part of the plan regardless of how much you are putting towards your student loan debt.

With well-stocked emergency fund (and a decent credit score) you’ll keep yourself safe from predatory no credit check loans like payday loans, cash advances, and title loans that take advantage of people who need quick cash. No amount of student debt is worth getting stuck in a spiral of short-term bad credit loans with 400 percent APRs.

Prioritize other debt.

It’s also important to keep an eye on other types of debt—especially those with higher interest rates—before tackling student loans head on. If your credit card debt interest rates are higher than your loan debt, it makes much more sense to knock those out first.

And your credit cards probably are more expensive than your student debts! A 2018 article from CNN Money found that the average interest rate for credit cards is around 15 percent while the average for student loans is only 2.6 percent.

Two of the most popular debt repayment methods are the Debt Snowball and the Debt Avalanche. If you want to learn more about them, you can check out these posts:

If you’re up to your neck in personal debts, it might be worth considering a debt consolidation loan which can help you stay on track financially and rescue your credit score from the certain doom of unpaid minimums or past due balances.

Build a nest egg that will grow.

When it comes to building your savings, one option is investing that versus simply putting it aside. When paying down debts, it might not be possible to set aside a ton of extra money each week or month, but a little can go a long way if it grows in the market.

According to a CNN article from 2014, Mohammad Majd (@CNNMoneyInvest) suggests investing instead of paying down student loans. As with the rest of the advice, it all comes down to simple mathematics.

Majd explains his reasoning for investing simply, “One important concept that I came across was Opportunity Cost—the notion of quantifying what you give up when you chose one option over another. I asked myself: Why am I rushing to pay off loans with 3 percent to 6 percent interest rates when the S&P has historically returned 11 percent?”

You can also compromise!

So there isn’t an easy solution to this problem. But there are a lot of avenues to decide from. While each individual borrower will have their own idea of what’s best for them, Pentis gives some general guiding advice for choosing your own path with a potential compromise:

“A potential compromise: Be aggressive with your student loan repayment but keep your payment amount at a level that would also allow you to sock away a few extra dollars every month. Then you can work toward achieving both of your goals.”

To learn more about how can save more money and take care of your finances long-term, check out these other posts and articles from OppLoans:

Do you have a  personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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Andrew Pentis (@andrewpentis) is a staff writer covering personal finance for Student Loan Hero. His work has appeared in 30-plus publications.

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