You shouldn't pay off your student loans ASAP. Here's what to do instead.

·4 min read
person sitting on a couch while looking at their smartphone and writing on a notepad
person sitting on a couch while looking at their smartphone and writing on a notepad

At least 1 in 8 Americans are on the hook for student loans. So, for many of us, our first introduction to bills comes in the form of seemingly insurmountable debt. Our first glimpse of that bill can send us to any number of places. Does avoidance sound familiar? How about denial? Some borrowers might even become tunnel-visioned, determined to pay it off as soon as possible (note: I was not one of those people when I owed $34,000 in student loan repayments).

This level of sticker shock has tricked many people into throwing as much money as they can as fast as they can to pay down their student loans. It's not uncommon to see people rack up credit card debt in order to pay off their loans. I have worked with clients who put 45% of their monthly income toward student loan debt.

Student loan debt can feel like the end of the world. But with the right plan in place, it can be very manageable. Still, the emotional trauma of being blasted into adulthood owing tens of thousands of dollars can have a lifelong impact on our relationship with money, savings and debt. I certainly remember feeling like my student loans would follow me around forever.

Many finance coaches preach that all debt is bad and to focus on paying it off as soon as possible. If you look under hashtags like #debtfreecommunity, you’re likely to find entire forums for people who are committed to paying down their debt at any and all costs. These people like to brag about how they never eat out or attend weddings or birthdays. Unfortunately, there’s something else they’re not doing: saving.

Pay off the past while working for the future

Yes, we all must pay off our debt. But we also need to simultaneously build short-term and long-term savings, even if it means taking a bit longer to get out of debt. Focusing exclusively on debt repayment is the worst thing you could do for your emotional, physical and financial self.

Spending years paying off debt without saving a dime will crush you in the long run. Sure, getting out of debt is a net positive experience. But if you’re sacrificing so much of your day-to-day life — and income — to pay off debt, you’ll have nothing to show for it once your debt is paid off. However long it takes, you’ll be waiting years before you can start putting anything away, and that can be a serious drag on your emotional and mental health.

I’ve seen clients who are so focused on getting out of debt that it clouds their ability to see the future, making them afraid to set goals and even talk about their finances. I often hear clients say, “I can't possibly think about the future when I'm in this much debt.” But here's the reality: Debt and your future have very little to do with each other. Having debt should not deter you  from making plans and living the life of your dreams.

Set some priorities

Here are some rules I give my clients when we discuss getting out of student loan debt:

1. If you don’t have an emergency fund, stop overpaying on your student loans. Focus on building at least three to six months of an emergency fund before you start paying more than your minimum monthly loan payment.

2. If you have credit card debt, focus on paying that off before putting extra money into your student loans. Start by paying off the card that has the highest interest debt.

3. If you have a high-interest rate on your student loans, work on improving your credit score to refinance for a lower interest rate. The best way to improve your credit score is to pay down credit card debt so you have a higher debt-to-credit ratio.

4. Start putting a small amount toward your retirement. Get into the habit of contributing a certain percentage of each paycheck. If you're building up your cash funds, start by contributing 1% of your income. Gradually work up to 2%, 5%, with an ultimate goal of at least 10%. 

If your monthly student loans payments exceed more than 10% of your income, it will be hard to save, pay off debt and live comfortably. Ask your provider if you can lower your monthly payments. If they refuse, shop around to other lenders and see what you can negotiate.

We can’t control our first reaction to seeing how much we owe in student loans. But we can control how we feel about it now. Student debt does not define your financial reality. It’s important to take a pause and plan your debt repayment strategy. Remember: You are in control of your wealth and financial wellbeing.

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