Why You Shouldn't Pay Off Your Student Loan

The current talk of the town is the massive student loan debt amounting to $1.5 trillion. News outlets, analysis, and even sensational headlines all buzz about the issue of runaway student loans.

While it's true that some valid arguments are made, others are flawed.

In my opinion, the student loan scenario is not a crisis at country level.

It's crucial to note that though several individuals face financial trouble due to student loans, the nation's financial stability won't suffer a significant blow similar to The Great Recession.

For context, most student loan debt is in the form of government-backed loans that offer an extensive range of repayment alternatives. Borrowers can opt for deferment, forbearance, Income-Driven Repayment plans, or even forgiveness. This article focuses on the last option.

Repayment Options

To repay your student loans, you have a variety of choices. Here are the four main options:

1. The common 10-year repayment plan, go with the flow and don't do extra research.
2. Pay off your debt quickly by cutting back on material desires and aiming to repay as soon as possible.
3. Make the bare minimum payments and let the government forgive the debt through the IDR loan forgiveness plan after many years.
4. Use someone else's money by working at a specific job with low payments over 10 years.

For most people, options 2 and 4 are the top choices, with option 4 being particularly suitable for 64% of all student loan borrowers.

If you're considering option 1, you can afford to increase payments and aim for option 2. If option 3 is your plan, secure the right job at the same salary and go for option 4.

Finally, let's take a look at why option 4 is often the most desirable solution.

Option 1 - The Conventional Route

In the past, when Old Economy Steve finished college, he had no trouble paying off his student loans within the first year. The 10-year repayment plan was simple.

But, things have changed since then. The cost of higher education has skyrocketed by 145% since 1971, while household income has only risen by 28% adjusting for inflation. This makes it almost impossible for students to pay for college without taking on massive debt.

Consequently, student loan repayments are taking up a larger chunk of a graduate's income, making the 10-year plan less achievable. To combat this, many borrowers are opting for a bold approach and paying off their debt in just a few short years. This is where the FIRE movement comes in.

Option 2 - Repayment ASAP

The FIRE movement, which aims for Financial Independence and Retiring Early, gained popularity after the publication of "Your Money or Your Life." Today, terms like passive income and side hustles have become common, with the most committed followers achieving debt-free retirements by age 30.

If you want to get rid of your student loan debt as soon as possible, paying it off ASAP is an excellent choice, as long as you have a focus on this goal. But, it requires you to meet certain conditions like having a stable income and expenses, and not having any children.

Unfortunately, my wife and I don't fit those criteria, as we have a high and stable income, stable but high expenses, and one child with another on the way. That's why we need to find a way to reduce our monthly payments to the lowest possible, which can be achieved through IDR plans.

Option 3 - Barbecue Plan

The "Barbecue Plan" is a term used to describe the slow and steady recovery from the Great Recession. But, this option is not the best choice, especially if you have IDR plans that can last up to 25 years.

In the best-case scenario, you might graduate at 22, pay very little for 20 years, and get the balance forgiven at 42. However, in reality, you might end up paying almost nothing for much longer, with the balance being forgiven only after you're 50 years old.

Therefore, the short-term forgiveness route might be a better option if you want to avoid paying on your student loans for too long.

Option 4 - Using the Money of Other People

Instead of following in the footsteps of former President Trump and risking investment funds in real estate ventures, leading to bankruptcy, I want to highlight a different path. It's not about relying on a progressive Democrat to forgive student loans either, as that is just a false hope.

My suggestion is to utilize the numerous student loan forgiveness programs already available, backed by taxpayer dollars. It's an opportunity to make use of "other people's money," in a way that benefits you.

There are numerous programs to consider, too many to mention in detail, so let's just focus on the most impactful.

Public Service Loan Forgiveness

PSLF is making a big impact as the top loan forgiveness program in the US. To learn more about the program, check out the resources available.

Although, like any program of this size, there may be some bumps in the road. Despite reports of a high rejection rate, don't let the rumors discourage you. PSLF is still being refined, and if you're a new or recent borrower with loans from 2012 or later, you'll be in good shape as long as you follow the guidelines.

Stay tuned for potential changes to PSLF as well. There have been proposals to offer 50% forgiveness after 5 years, rather than the current 10-year, all-or-nothing approach.

Military Loan Repayment Programs

Many high school students turn to enlisting in the military as a way to fund their college education, but what about college graduates?

The military branches offer a loan repayment program for these individuals, which can pay off up to $60,000 of student loan debt based on their contract length. Additionally, serving on active duty also qualifies for the PSLF program.

For those who plan on making a career in the military, the LRP is irrelevant as the PSLF program will cover all your student loan payments.

And, if you just want to serve one term before transitioning to the private sector, you can do so with the peace of mind of having a substantial portion of your student loans already taken care of.

Catastrophic Forgiveness

When it comes to loan relief, it's essential to be informed of all available options, even if the subject matter can be considered a bit grim. In the event of unforeseen circumstances such as death, disability, bankruptcy, or a school closure, certain loans may be eligible for forgiveness.

To see a comprehensive list, just click the link. It's important to remember that this information serves as a safety net, not a primary strategy.

Final Thoughts

It's clear that tackling student loans isn't a one-size-fits-all solution. But, as the famous quote goes, "most of us are mostly the same". If you're on the 10-year plan and can cut costs, try to boost your repayments.

Get a part-time job or start a side hustle. Follow the advice of Dave Ramsey and "live frugally now so you can live lavishly later".

On the other hand, if you're on the Barbecue Plan, explore forgiveness options and aim to meet their eligibility criteria. If your current job doesn't allow you to repay your loans in 10 years, a similar public sector job likely won't be any better. But, it could trim 10-15 years off your repayment schedule.

Ultimately, how you pay back your student loans depends on your ability to plan ahead, taking into account factors such as income, family size, job stability, expenses, and more.

For myself, I'm going for the Public Service Loan Forgiveness (PSLF) program. I have a stable job and a fixed family size, and my income is comfortable. I'm already 49 payments in and by 2026, my $134,000 student loan will be gone, with only 25% paid back.

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