Don’t Pay Off Your Student Loans
Use someone else’s money to pay them off for you
Last updated: April 27, 2022
The big number of $1.5 trillion in total outstanding student loan debt gets a lot of news these days. From actual analysis to clickbait headlines, everyone’s talking about what a big problem that out-of-control student loans have caused.
They have some good points. And some bad ones.
My point of view is that, on a national level, there is no student loan crisis.
To be clear, I understand that many individuals are in financial crisis due to their student loan burden, but the country’s financial system will not be threatened with collapse, a la The Great Recession, because of it.
As an overview, the majority of student loan debt is in the form of federally guaranteed loans. These loans have a vast array of repayment options, including deferment, forbearance, Income-Driven Repayment (IDR) plans, and forgiveness. It is this last one that is the focus of this article.
Repayment Options
Most advice on how to repay your student loans falls into one of four categories.
- Just do what everyone else did, don’t do any research, and use the standard 10-year repayment plan. (10 years)
- Break free from the debt, deny your material urges, and pay off your loans ASAP. (3-ish years)
- Pay as little as possible as long as possible and have your loans written off by the government via the multi-decade IDR loan forgiveness plan.
- Use someone else’s money to pay your loans for you by working at the right job for 10 years, but with super low payments.
To put it succinctly, options 2 and 4 are the best route for 80% of the population, with option 4 being viable for that 80% (or 64% of all student loan borrowers).
- If you can afford option 1, you can afford to bump up your payments and go for option 2.
- If you are going for option 3, get the correct job at the same salary and go for option 4.
Let’s review our options, then take a look at why option 4 is oftentimes the most appealing.
Option 1 — Standard Repayment
Back in the good old days when Old Economy Steve could pay back all of his undergraduate student loans by the end of his first year out of college (if he didn’t pay for college with the cash from a summer job), the standard 10-year repayment plan looked like a piece of cake.
However, since 1971, and adjusting for inflation, higher education costs have increased 145% while median household income has only gone up by 28%. This has made it almost impossible for a student to attend college without borrowing ever-increasing sums of money.
As a result, the monthly student loan repayment amount has taken a larger percentage of the graduate’s income, causing the 10-year repayment plan to soon become obsolete as a viable option.
To thwart this predicament, many borrowers have chosen to get radical and pay their debt off in just a few years. Enter the FIRE movement.
Option #2 — ASAP Repayment
The FIRE movement (Financial Independence, Retire Early) can be traced to the book Your Money or Your Life. Since then, the notions of passive income, side hustles, escaping the rat race, etc. have permeated throughout our lexicon, with the most disciplined adherents becoming debt-free and “retired” by 30.
Regardless of whether you subscribe to FIRE or just want to be done with this particular debt burden, paying off your student loans ASAP is a good option; if you can focus.
I touch on this in a previous article, but early student loan payoff is great if you meet all of the following criteria.
- You have relatively high, but most importantly stable income.
- You have relatively low, but most importantly stable expenses.
- You are childless, regardless of marital status.
To put a finer point on it, if you are considered a DINK (Dual Income, No Kids), you are in a perfect position to get rid of your debt fast.
Personally, my wife and I don’t fit these criteria.
- Our combined income is relatively high and stable.
- Our combined expenses are stable but relatively high.
- We have one child with another on the way.
So, if the 10-year and ASAP options have monthly payments that are too high, we need to reduce those payments as much as possible. This leads to using the IDR plans to pay as little as possible for as long as possible.
Option #3 — The Barbecue Plan
The economic recovery after the Great Recession has been coined the Barbecue Recovery, due to it’s low and slow nature. This option is similar.
As delicious a name as this is, I’m going to be blunt here. Option #3 is a loser option. Let me explain.
Depending on the type of loans you have, IDR plans can have repayment timelines of up to 25 years. Yes, the payments can be extremely low (as little as $0 given your income and family size), but who wants to pay on their student loans for that long?
Let’s looks at the best-case scenario versus reality.
In a perfect world, you will graduate at age 22, pay next to nothing for 20 years, then get the balance forgiven at age 42. That in and of itself is a long time.
In reality, you will graduate at 24, pay next to nothing for much longer than 20 years (assuming a couple of stints on deferment and/or forbearance), then get the balance forgiven around your 50th birthday; just in time to send your kids to college.
Or if you’re me, you will graduate at 29 (after dropping out at 21), get a crap job during a hellish recession, get your master’s degree at 33 (with more student loans), and pay next to nothing for more than 25 years (still assuming a couple of stints on deferment and/or forbearance). I’ll be pushing 60 if I use that plan!
And that’s if you actually repay your loans since 12% of federal student debt is in default.
If all of that sounds horrible, well, that’s because it is. So let’s look at our last choice, the short-term forgiveness route.
Option #4 — Use Other’s People’s Money
I’m not talking about going the Donald Trump route of using investors’ money to fund numerous real estate ventures, then having said ventures go bankrupt.
No, that would be too easy.
I’m also not talking about racking up student loans and then waiting for a progressive Democrat to push through a mass student loan forgiveness plan. I’ve already written about this false promise.
What I’m talking about is taking advantage of the myriad student loan forgiveness programs that currently exist. The “other people’s money” I refer to is taxpayer dollars, which fund these forgiveness programs.
There are too many of these programs to write about in a single article, so I’ll just go through the biggies.
Public Service Loan Forgiveness
The PSLF program is the biggest loan forgiveness program in the US right now. As of June 2019, more than 1.1 million borrowers have had some number of payments approved under the qualification guidelines. For more details about PSLF, check out the articles below.
As with any large program, there are bound to be problems, and PSLF is no different. While the headlines proclaiming a 99.5% rejection rate, don’t believe the hype. PSLF is still in beta testing, so if you’re a new or recent borrower (with loans starting in 2012-ish or later) you’ll be just fine as long as you follow the rules.
Also, keep an eye out for updates to PSLF. Some would give 50% forgiveness after 5 years, instead of the current all-or-nothing 10-year approach currently on the books.
Military Loan Repayment Programs
Enlisting to pay for college is a popular way for the military to recruit high schoolers, but what about college graduates? For them, the military branches have the loan repayment program.
These programs can pay up to $60,000 of your student loans given your length of contract. Double bonus, active duty also qualifies for the PSLF program.
If you’re a lifer, then the LRP doesn’t matter; PSLF will take care of everything.
If you just want to serve one cycle then hit the private sector, you can do so with a significant chunk of your loans gone.
Catastrophic Forgiveness
This category is a little morbid, but it’s good to know about.
There are some life situations where you can have your loans forgiven, such as death, disability, bankruptcy, or a closed school. Click here for the full list.
This isn’t something to plan on. Rather, it’s a backup to your primary option.
The Takeaway
I realize that there is no one-size-fits-all approach to student loan repayment. However, as Ramit Sethi has often said, “Most of us are mostly the same.”
If you are on the 10-year plan and meet the Option 2 criteria above, you can afford to lower some expenses and bump up your repayment schedule. Get a second job or a side hustle. Go all Dave Ramsey and “live like no one else now, so you can live like no one else later.”
If you are one the Barbecue Plan, find a forgiveness plan and work to meet that qualification rules. If your private sector job doesn’t provide enough to pay off your loans in 10 years, then a comparable public sector job won’t pay you any less. And you can shave 10–15 years off your repayment schedule.
In the end, how you pay back your student loans all comes down to your ability to predict the future given your current circumstances. Your income, family size, job type and stability, expenses, etc. all matter
Personally, I am going for PSLF. My income is decent, my job is stable, and my family size is set (unless we have an in-law move in with us).
I am 49 payments into the required 120, so by November of 2026, my $134,000 in student loans will be gone, while only paying 25% of that.
