• Margaret Curtis, MD

3 Reasons to Pay Your Student Loans Early

I know better than to join in debates on social media, but sometimes I just can't stop myself from wading into the fray. The gist of a recent discussion on a forum for physician finance:

Post: I have a bunch of student loans. Should I pay them off early?

Respondent #1: No! Just pay the minimum every month! Live Life To The Fullest! Who cares if you still have student loans when you are seventy!

Me: You will care if you still have student loans when you are seventy. You will care a lot.

I was then dismissed as an old biddy who does not Live Life To The Fullest. But my advice about the student loans was spot on. Here is why:

1. Having a monthly debt payment is psychologically draining. If you pay the minimum every month you will never have the satisfaction of watching your loan principal shrink. Even the most debt-inured will get tired of this year after year.

2. Student loan debt will keep you tied to the wrong job or the wrong place. If that's frustrating when you are 30, it's devastating when you are 70.

3. Most importantly, as long as you are carrying student loans, compound interest is working against you rather than for you. For example:

If you have $200,000 in student loans (which is actually below the average), paying 4.8% annually (again, below the average for private loans) paid over a term of 20 years, you will end up paying $311,500, which includes the original principal plus $111,500 in interest. Stretch it out even longer, say to 30 years, and you have paid $177, 759 in interest.

Now imagine you paid off your loans early and invested the saved interest. How much could you earn? $100,000 invested conservatively over 20 years comes out to ...a lot of money, but since you won't actually get to invest all that interest money you saved in one lump sum, a more realistic model is this: imagine you pay off your loans in 10 years, cutting your interest payments by more than half to $52,217. As soon as your loans are paid off you invest your monthly payments of $2,101 per month. Over the next ten years, if you get a 4.8% growth rate (a conservative estimate, and the same as the rate you were paying on your loan), you will end up with $317,365. Even if you only invest the amount you would have paid toward interest ($435/month), after ten years you would have $68,243. You come out $16,206 ahead instead of $111,500 behind. You might actually be able to retire.

So, Respondent #1, that is why you were dead wrong about student loan repayment. And for the record: I am a middle-aged biddy, and I am more than halfway through season 3 of the Great British Bake-off. Life to the fullest, indeed.

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