Should You Really Be Freaking Out About Your Student Loans?

April 19, 2019

I’ve talked to several people lately who were freaking out about their student loans. They were feeling like they were failing at money and this debt was going to be the death of their chances at financial security. Yet when we looked into the details of their budget, I couldn’t find the technical issue.

They were making their payments on time according to the pay-off plan and were able to afford the other necessities of their life without falling into credit card debt. They were even able to save enough to capture the full match in their retirement plans and generally speaking, they were doing great at money.

Student debt payments can be crippling for many, but not in these cases. This post is for those people who are able to make their payments but are stressed about having them in the first place.

Are we being brainwashed?

I realized that the psychological impact of the loans is what’s causing most of the stress, not the payments themselves. People become fixated on the total balance of the outstanding debt and lament how little impact payments have on a monthly basis.

And because they are bombarded with messages in the media about the “student loan crisis,” they feel like they should be in crisis. It’s true that student loan debt is our nation’s fastest growing category of debt, but the average payment has not kept up that pace and in most cases, the payment is manageable for borrowers. And when it’s not, there are ways to lower it.

It’s like a mortgage on your future

I’ve heard plenty of people comment on the fact that some students graduate with student loan balances as big as a mortgage, and it’s typically in the tone of, “Can you believe that???” And while I won’t argue that the cost of higher education can be appalling, I’d like to point out that investing in your education and investing in housing by taking on debt could actually be classified in the same category: both offer you the opportunity to get something you would be unlikely to afford for many decades if you had to save up, and both generally offer the opportunity to improve your lot in life if you make good decisions about what to invest in.

The thing is, no one ever calls me freaking out about how they need to pay off their mortgage ASAP. They recognize that it’s “good debt,” where you’ll enjoy the benefits of the debt for many years beyond when it’s been paid off. The same is true of your college education, perhaps even more so, assuming you chose a field that offers great career opportunities, as most of the people I’m thinking have done. The average college grad makes $17,500 more per year than someone with just a high school diploma, so I’d say it’s worth it.

When you still just want to make them go away

“That’s all good and well,” you say, “but I still hate having these loans.” I get it. When my loans kicked in, I had to get a roommate and push back some of my savings goals because I underestimated my living expenses and the impact of taxes when I signed my first lease and purchased my first car. But as the years passed, I continued to make those payments on schedule and their impact eased on my overall financial picture as I received increases in income and paid off other debts. Clicking ‘Submit’ on that last payment in the summer of 2014 was a financial milestone for sure.

In the meantime, here are some other things to think about and ways to prioritize to help take some of that psychological stress off yourself.

1. Make sure you’re first getting the match in your 401(k) as well as any matching dollars in a health savings account, even if it’s a stretch. A 100% or even 50% return on your savings outweighs the 7% or so you’re paying on your loan. This article by Ron Lieber from the New York Times makes a great case for saving while paying down loans. It can make a 6-figure difference in your end balance.

2. Before you choose your employer based on a student loan benefit, look at the whole picture. Is the salary lower? What effect will that benefit have on your overall financial picture? Is the amount the employer is willing to pay really going to make a huge difference in your payoff timeline? Are there better benefits at your other offers like a higher match, better healthcare options or free financial coaching to help you make a plan?

3. Reframe your thinking about your loan payment. Put it in the housing payment category as just another bill. The good news is that unless you spread your payments out over your whole life, it’s a bill that will go away sooner than a mortgage in most cases.

4. Think twice before you refinance and give up benefits that come with federal loans. It’s true that refinancing can lower your interest rate and therefore decrease the total amount of interest you’ll pay over the life of the loan, but be aware that you’re turning it into a private loan and giving up benefits like income-based repayment plans or even loan forgiveness if you work in certain public service jobs.

It’s worth noting that I refinanced my loans in order to lock in an interest rate that was less than half of what I was paying, therefore cutting my payment in half while also saving me thousands in interest. So refinancing isn’t bad as long as you know what you’re giving up.

The bottom line is to stop beating yourself up just because you HAVE loans. Instead, try to focus on what else you wouldn’t have if you didn’t have the education those loans funded and then just stick with the plan. It gets better. I promise.