One of the most frequently asked questions I hear from clients has to do with student loans. Whether I’m speaking with a current student, recent graduate, or someone seven years or more into their career, everyone wants to pay off those pesky student loans... yesterday!
A graduate of professional training can quickly forget that the loans weren’t just handed out - they had to be applied for. As a student, you chose the loans to enable you to acquire the education needed for your chosen career. How wonderful that someone was there to loan you the money! With that wonderful thought in mind, I choose to view student loans as an investment and not as the burden they are so often considered to be.
Without student loans, so many professionals like yourself would not be able to pursue their dream careers. But as quickly as training is completed, the worry about paying the loans off quickly sets in. What is forgotten in this premature anxiety is what you have in return for the loans. There can be a significant rate of return on student loans. Most do not recognize that the income they will receive throughout their career is because of the original investment in student loans. For example: if someone completes their education with $150,000 in student loans and begins a career making $100,000 annually, in 10 years, even without any raises or bonuses, they will have earned $1,000,000 on the original $150,000 investment. That is an incredible rate of return!
Granted, it’s still true – however great the return, the loans still have to be repaid. When is it most optimal to become aggressive towards paying off student loans? Is the best time when you’re fresh out of school and still used to living a student’s lifestyle? Or could it be 8, 9, 10 or 12 years into your career? I would advise choosing the latter timing.
At the beginning of your career, there is one financial factor in your favor: time. Many people underestimate the power of time when it comes to their financial situation. Likewise, they overestimate the ideal of being debt-free in their understanding of the “American Dream.” However, if you place all of your money and emphasis on eliminating debt, whether student loans, a mortgage, credit cards, car loans, etc., you might realize years later in life that not enough attention was put towards saving for retirement; or a child’s college education; or any of the other dreams you might have had when starting your career. The “American Dream” isn’t solely about being debt-free, but about being free to have overall financial independence. Such independence comes through making wise choices. And one high-impact choice you can make now is the strategic decision to approach debt with a systematic, unemotional, balanced plan.
There will always be many different factors pulling you in many different financial directions. It makes good sense, then, to take the time early in your career to develop a balanced plan that considers your need to build savings; set aside fixed amounts for retirement; and be prepared for expected and unexpected expenses. Such a balanced approach may affect the speed with which you pay off your student loans – but it gives you the ability to take care of your other financial necessities, while also paying on your loans. Don’t set yourself up for anxiety about your financial needs later in life by being overly-anxious about only one immediate need now.
Remember – your loans have already given you a great return by providing the career you trained for. That return can only increase when you allow the “forgotten financial factor of time” to free up dollars for other important parts of your balanced financial picture.
I look forward to helping you find that balanced financial picture for your life.
Written by Kelly Hugghins, CFP®, Financial Advisor
Kelly is a registered representative and investment advisor representative of CRI Securities, LLC and Securian Financial Services, Inc. 2517093/DOFU 5-2019