I paid my student loans aggressively for 3 years before deciding that I would reduce my payments and hold off on paying them off completely. These are the reasons I won’t pay off my student loans:
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1. Build Credit History
My Student Loans are My Oldest Credit Line
I didn’t have any credit cards when I was in college so my student loans are my first and oldest credit line. I will keep this line open until I have built more credit history with my other credit lines. Otherwise, closing this account could have a significant impact on my credit history. Since credit history has the greatest impact on your credit score at 35% it is important to have multiple lines of credit.
Start Building Credit ASAP
A great example is a credit card which is a revolving source of credit that can allow you to build credit history over time. This is why it is important to start building credit early! By starting early, you will be in a strong position when you go to buy a home or buy a new car. The stronger your credit score, the lower your interest rate will be. A lower interest rate will save you more money over time.
2. Opportunity Cost
My obligations changed
When I first graduated from college, paying down my student loan debt was my first priority. I put all of my discretionary income towards paying it down. However, my commitments changed as I started to move through my 20s. I started to realize that I didn’t have much cash saved up. This was because I was putting all my money towards my debt. When I wanted to do certain things like move or take a financial risk, I realized I wasn’t in a position to do so.
I didn’t have an emergency fund
I realized that I didn’t have an emergency fund and that while paying debt is great, it is not the same as having cash and assets. Once you pay debt, you no longer owe someone, but you also no longer have access to that money. I started to realize that having a stronger financial foundation was more important than being debt free. By having that foundation, I could be confident that I will be able to pay off my debt.
I Chose to Build Wealth and Pay Off Debt
Do you know what your net worth is after paying off debt while having no assets or investments? The answer is ZERO. I don’t know about you, but that doesn’t sit well with me. I’m working to pay off all of this debt, only to break even? I don’t think so!!
3. Safety Net
Paying Off Debt in Hard Times
It is not always beneficial to pay off debt even when you can. This is especially the case when there is an economic downturn or you fall on hard times. Once you pay back debt, you no longer have access to that money. Having debt is no longer stressful if you manage your debt while having enough cash and assets to pay it off. If I had not reduced my student loan debt payments over a year and a half ago, I would hot have been able to build my emergency fund up to the point that it is now.
Having peace of mind while having debt
So often, we try to pay off debts early for peace of mind. If you run the numbers, it typically is not the best choice financially. If you have high interest debt such as credit card debt or payday loans you are better off paying those off as soon as possible! I consider high interest debt as anything over 7%. Equipped with this information and knowing that the stock market averages a return of 7-10% annually, I was better off investing instead of paying off low interest debt.
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Make your money work for you
Once your debt is at a manageable amount, it is important to start looking for ways that your money can work for YOU. Receiving interest and dividend payments will change the way you look at the interest you pay your creditors. You will start to realize that just like how they are earning money from lending to you, you can invest or loan your money to a business to produce a return as well.
4. Leaving my comfort zone
Shifting my mindset
Since I had no clue how to build wealth when I graduated college, I just wanted to pay off my debt. I did this because I felt that would make me financially stable. When I realized I needed to make some changes, it required a HUGE mindset shift. I went from making massive payments to only barley paying over the minimum amount. After doing this for a year, I looked at how little progress I seemed to make on my payments in comparison to other years and almost reconsidered my strategy. But then I remembered how I changed my life is so many ways by putting my money elsewhere.
Paying off debt wasn’t enough anymore
When I decided that I was going to start investing, there was a huge learning curve. This was intimidating to me at first and it would have been very easy for me to continue to pay off debt instead. But I knew I wanted to build wealth and create a passive income streams and simply paying off debt wasn’t going to do that for me.
My desire to pay off my student loans quickly was driven by fear.
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5. I no longer fear debt
Less debt is not always less stress
My desire to pay off my student loans quickly was driven by fear. I was afraid that something horrible would happen that would wipe me out and I would be stuck trying to pay a debt I couldn’t afford. My thought that being debt free was freedom. I believed that if I didn’t owe anyone, my life would be easier and less stressful.
How the rich manage debt
If you were to ask most millionaires if they have any debt, most of them would say yes. Why do they have debt? Because using debt means they don’t have to use their own money. Instead of putting their own money at risk, they are putting someone else’s at risk. Having debt does not mean you are poor or don’t have money. This became easier for me to accept once I became net-worth positive all while having student loan debt.
I was losing money by paying off my loans
Why should I pay off my student loans that have a fairly low interest rate when I can invest my money at a higher interest rate? The more money I put towards my student loans, I am LOSING OUT on having my money grow.
Don’t miss out on an opportunity
I earn more money investing every month than what I owe on my loans and that is only because I realized that I needed to do both at the same time. I needed to invest and pay down debt at the same time. The opportunity cost while I am young and able is simply too great to pass up.
The TLDR
So there you have it! This is why I haven’t paid off my student loans even though I could pay them off today. In short, my priorities and my mindset are different than they once were. I put the work in early to aggressively pay down most of the debt and now I am able to focus on other areas of my finances.
Disclaimer: The content in this post is my opinion and should not be considered financial advice. I am not a financial expert or advisor. This content is for informational and educational purposes. For more details please visit the Disclaimer Page.
