Bearing the Burden of Loan Payback
Working with our members, I absolutely love when people come to see me and they’re serious about paying down debt, and are doing it. In isolation, paying down debt is almost always smart. But, things are not so black and white when you have to plan over time. For instance, I’ve seen a number of members who are aggressively paying down student loan debt. While they’ve made significant progress, now they’re thinking about buying a home and have little saved by way of down payment. Paying off student loans only to turn around and need to borrow the same money again seldom makes sense.
Here are some reasons we like student loan debt (assuming you must have debt):
Interest is Tax Deductible – Up to $2500 is deductible if your modified adjusted gross income is less than $75,000 ($150,000 for joint filers). This is always deductible, regardless of whether you take the itemized or standard deduction on your taxes.
Source: IRS
Lower interest rates – Student loan debt often (but not always) comes with lower interest rates than many young professionals can get on new debt, especially if you have a weak credit history.
Loan Forgiveness – If you qualify for repayments based on income (payments are generally 15% of your discretionary income), you may be eligible to have your federally-backed student loan debt forgiven after 25 years. If you’re in public service (such as government and certain non-profits), it may be forgiven after 10 years. I often caution our members not to rely totally on loan forgiveness, as it’s an expensive government program that isn’t guaranteed to exist in the future. You also need to have a career that pays low enough that you continue to qualify for income-based repayment.
Source: Government loan website
You can’t borrow money for a house down payment – While paying off your student debt early can feel awesome, you may find yourself in a situation where you want to buy a house. You can’t borrow money for a down payment, and your dutiful early repayment of your student loans won’t help you over this hump.
A number of repayment options – Federally-backed student loans offer a number of repayment options, including plans scaled to income, graduated repayments, and different timelines. See an authoritative description of loan repayments.
This isn’t a recommendation to take out more student loans because they’ve got a lot of sex appeal as far as debt goes. All I’m suggesting is that we view student loans in light of your broader financial picture. The pay-down-debt dogma is a good one, but not always optimal.
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