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Paying Off Student Loans: The Good, the Bad, and the Ugly

When you’re in the thick of repayment, student loans can feel like the Wild West – or maybe more like Westworld, minus the robotics. It’s so rough and tiring to make all those payments, only to see your balance inch lower every month. And what a dangerous world it is, with default and unaffordable payments lurking around every corner. But once you’ve finished paying off student loans, you’re a triumphant cowboy atop the tallest cliff,  overseeing all that you’ve overcome.

Metaphors aside, paying off student loans is a huge accomplishment. But, much like everything else in life, this success has cons to go with all its pros. So, make sure you know the major consequences that go along with repaying your student loans. Because if there’s another similarity between student loans and the Wild West, it’s that the consequences of paying off student loans can fit into the good, the bad, and the ugly.

Paying Off Student Loans: The Good, the Bad, and the Ugly infographic

The Good

Paying off student loans = sweet freedom

The biggest benefit to repaying your student loans in full is that beautiful dream you’ve had since day one: freedom. No longer will you toil to make your payments or suffer from high student loan interest rates! The benefit of lowering your stress and anxiety caused by student debt is invaluable. The day you pay off your student loans in full is a joyful day. And since giving yourself a reward has been proven to improve self-control, make sure you celebrate right!

Buh-bye, built-up interest

When you make that final payment on your student loans, those dreaded interest accumulations will come to a screeching halt. By avoiding more built-up interest, you’ve saved yourself a good chunk of money. For instance, say you have $20,000 in student loans with a 10-year term at a 6% APR. If you make the 120 scheduled monthly payments of about $222, you’ll pay off your loan in 10 years and you’ll have paid about $6,645 in interest. But, if you pay $322 every month, you’ll only pay about $4,008 in interest. Adding just $100 to your monthly payments will get you out of debt faster and save you from about $2,637 in interest.

Hello, more achievable #lifegoals!

With your student loans paid off, your debt-to-income ratio will shrink. Having less debt will make it more likely that you’ll get approval for other lines of credit. So, if you’re dreaming about buying a new car or a new home, paying off your student loans will make it that much easier for you to achieve those life goals. And you can use the money that used to be for your monthly loan payments to start saving for a down payment. Finishing repayment can help you hit those big milestones ahead of you.

The Bad

Credit score dip in the road

If you were making your student loan payments on time, your credit score was likely improving. Once you pay your loans off, that credit boost comes to an end. And, because student loans are installment loans, they add variety to your credit portfolio. This variety accounts for 10 percent of your FICO score. Paying off your student loans (and thus removing the variety) lowers your credit score. So long as you maintain good credit-building habits, your credit should bounce back though.

Bid farewell to those tax breaks

If your modified adjusted gross income is less than $80,000 (or $165,000 if you’re filing jointly), you’re allowed a special tax deduction for your student loan interest payments. But when you pay off your student loans, you’re no longer able to capitalize on that awesome tax break. Since the amount you can deduct each year in interest is lesser of $2,500 (or the amount of interest you actually paid), you may honestly be better off repaying your student loans.

Pay-off money doesn’t grow like invested money

Investing may not be everyone’s cup of tea. But the fact of the matter remains: when you use your money to pay off your student loans, it doesn’t grow. While there’s no way to predict the market, you could grow that money by investing it instead. It also could help reduce stress about the future to put any extra money toward a retirement fund rather than toward student loan repayment. Still, paying off student loans is a sure thing. Investing is not. You could reap higher rewards investing, but you also could lose money.

The Ugly

Will you suffer the post-pay-off blues?

Paying off student loans can seem unattainable when you’re fresh out of school. When you do meet that goal, you should feel amazing and accomplished. But what if you don’t? This is called the arrival fallacy. It states that, as you work towards a goal (in this case, paying off your student loans), you grow to expect that you will reach it. That expectation triggers the brain’s reward centers before you reach your goal, which you eventually adjust to. So when you do pay off your student loans, it can be way less satisfying and more anticlimactic than you imagined. You can help manage these feelings by beginning to plan your next financial goal. And there’s nothing wrong with praising yourself and celebrating your accomplishment!

Neglected personal and credit debt shoved under the rug

Compared to other debt (like pricey credit card debt), student loans have much lower interest rates. Credit card debt also comes with a wild flurry of fees and charges. This is why people tend to refer to student loan debt as “good debt” and credit card debt as “bad debt.” Especially if you had federal student loans with lower interest rates, your best bet would be to pay back those higher interest rate debts back first. If you neglect personal or credit debt to pay off your student loans, you may dig yourself into a different but deeper debt ditch. 

Once you pay that money, you can’t get it back

You want to be responsible by paying off your student loans in full as early as possible. And that’s admirable. But the upsides of having liquid wealth – a.k.a. money at your fingertips – are innumerable. Having access to your money is important. Say you lose your job unexpectedly or fall into an emergency situation. You can’t turn to your loan servicer and ask them to return the money you sent them. If you haven’t left yourself an emergency fund or savings, paying off your student loans may have left you in an unfortunate and scary situation. You should always have extra cash set aside just in case.

None of the ugly or bad points are meant to dissuade you from paying back your student loans. This isn’t a stand-off between the good and the bad; paying off student loans frees you from debt, which is a good thing. But if you need to hold onto your cash for other reasons, it may not be necessary for you to pay off your student loans earlier than necessary. Talking to a professional about your student loan situation can help you determine what the best decision is for your situation.

Disclaimer: The viewpoints and information expressed are that of the author(s) and do not necessarily reflect the opinions, viewpoints, and official policies of any financial institution and/or government agency. All situations are unique and additional information can be obtained by contacting your loan servicer or a student loan professional.