Evidence isn’t clear on benefits of aggressively paying down over $15,000 in debt.
By Jillian Berman
May 10, 2017
There’s no shortage of headlines celebrating 20- or 30-somethings who scrimped, side-hustled and saved to pay off their five or six-figure student loans and are now living debt- and carefree. But according to a new study, there’s little evidence that those with high student debt levels actually benefit from rushing to pay off their loans.
For borrowers with $15,000 or less in student loans there appears to be an advantage to paying them off faster than the 10 years typically allotted for federal student loan borrowers, according to a recent paper included in “Understanding Student Debt: Implications for Federal Policy and Future Research,” a volume published by The Annals of the American Academy of Political and Social Science. But once those debt loads start to inch higher — about $24,000 or above, — there’s little evidence of any such benefit.
“We cannot say for certain that they should try to pay as soon as possible,” said Manuel González Canché, a professor at the University of Georgia’s Institute for Higher Education and the author of the study. “People with higher debt may benefit more by ascribing to the 10-year-repayment plan because (repaying quickly) may divert them from starting a family or getting married or enrolling in graduate school.”
And indeed, many personal finance experts advise borrowers with federal student loans to take advantage of their full repayment term, as long as their loan has a relatively low interest rate. That way they can use the extra cash to address debt with higher interest rates, like credit cards, save for an emergency fund, a home or even turn it into more money by investing it elsewhere. (Borrowers with private student loans that may have less generous terms or variable interest rates may want to take a different approach).
Even for borrowers with lower levels of debt, the benefits González Canché observed to paying it back quickly were relatively small. Borrowers with a four-year degree who repaid their loans quickly earned about 8% more a year than those who didn’t pay their debt back or those who didn’t borrow at all. That could be because they had higher salaries to begin with, González Canché admits, but even if that’s the case, it’s possible they were motivated to earn those higher salaries to pay off their debt more quickly, the study notes.
But other than a possible salary bump, the research didn’t point to any other advantages of rushing to pay back student loans, such as a greater likelihood for homeownership. Still, González Canché said his research indicates borrowers with smaller debt loads could benefit from more flexible repayment terms, such as a plan that limits the amount of interest that accrues in exchange for paying off their loans in five years.
For borrowers with high debt loads on the other hand, the evidence is much less clear that rushing to repay their loans offers any benefit. In fact, some personal finance experts suggest borrowers take their time paying off the loans. The psychological burden of student debt means that borrowers will sometimes rush to pay it off with a feverish intensity that precludes other financial goals, Shannon McLay, the owner of the Financial Gym, a financial planning company geared toward young adults, told MarketWatch last year.
“The number one thing I see is that people believe that their student loan debt prohibits them from leading a good life,” she said at the time. “There needs to be more of an acceptance of living with that debt for a period of time.”
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