Having student loan debt can seem overwhelming, especially when your loans have large balances, high interest and repayment time frames that can feel endless. What may be most disheartening to student loan borrowers is, unlike other types of loans based on tangible assets like cars and houses, all graduates have in exchange for all the debt is a diploma, a piece of paper that may or may not be helping them earn more money. There may not be many clear answers, however, here are some options to consider if you find yourself trying to map out your life while dealing with student loans.
People typically achieve a college degree to increase the trajectory of their income over an entire working career. Another way of looking at this is a college degree is a prerequisite to getting the ideal job, which is the case in more and more industries. The increase in income that comes with having a degree may not be realized for five, 10 or more years after your career really gets going. Remember your long-term goals when looking at your short- term concerns.
In the meantime, focus on making the debt payments on time and in full. Also, student loans are installment loans and they are considered good debt. That means the lender and the credit bureaus really want to see that loan paid off over the full length of the loan, not necessarily early.
Equifax, one of the three major credit reporting agencies, explained in a blog post how paying off an installment loan on schedule can help your credit: “An open account paid regularly is more beneficial to your credit score than a closed account, which is what your installment loan becomes once it’s paid off.” You can see how your student loans affect your credit by getting a free credit report summary on Credit.com, with updates every 14 days.
If the money is there to pay it off, that’s a personal decision. You would be saving on interest by paying off a loan early, but surely there would be competing uses for that money, as well.
Buy a House
People typically pay off debt in one of two ways: through their regular cash flow or with a lump sum they’ve somehow obtained. A newfound lump sum of money could be the result of an inheritance, a gift or a legal circumstance, though these occur rather rarely. Another example of finding a sum of money would be developing an asset that has value. Starting a business, perhaps? Starting a business is difficult, though, and developing equity in the business that can be extracted from it is even more difficult. Buying a house, on the other hand, is a natural step most people want to take anyway.
There is a generation of homebuyers in America now who represent a dramatic change from prior generations. This generation already has student loan debt on their record when qualifying for a home purchase. The data is mixed on whether this is holding back the housing market, but for student loan borrowers who are able to buy homes, the new asset presents an opportunity. As far as a planning strategy, once you have the house, unless you do an interest-only loan, every payment creates additional equity. As time goes by, houses generally go up in value. (Not always, as we have learned, but generally.) By making the payments on time and having good fortune with maintenance, among other factors, it’s possible over time to develop equity in that home.
If you find yourself in a position to have such an asset, it gives you options. You can sell the property and use the proceeds to pay off education debt. Or you can take an equity line at perhaps a lower interest rate than the student loan and pay off the student loan with it. It’s an unusual approach, but it could be an option for you.
There are a few ways in which federal student loans can be forgiven, canceled or discharged. One of the scenarios that might be a viable option is public service student loan forgiveness. You can read more about strategies for paying off student loans here.