The cost of education is sky-rocketing, and no one can deny that. Tuition has consistently increased at rates well above that of inflation each year. Just 50 years ago when someone went to college, it might cost them about $300.00. Now it’s costing people $40,000 to go to college, and that’s at subsidized in-state tuition rates. For more expensive programs, it’s costing upwards of $100,000! For some of these programs, there is not enough financial aid in the world to pay for. Inevitably, most college students end up with some sort of student loan. Most of the time students get federal Stafford loans to help pay for their school, and often times get private loans on top of that to pay the remaining cost.
Recently there was an article telling you that you shouldn’t ever pay off your student loans early. They had a couple of rather thought provoking reasons for this. Their primary motivation was that in the event that you become permanently disabled or die before your student loans, you or your estate will not have to pay off your loans before you die. The article claimed that it was essentially a free disability and life insurance policy.
Is this a good reason to not pay off your student loans? The answer is no. The fact is that you are paying a lot of money for the privilege of this disability and life insurance policy. Let’s say you have $25,000 in student loans at the current federal rate of 6.8% This means that you are paying $1700 a year or $141.67 a month for a $25,000 life insurance policy. Not even term insurance is that bad! If term policies were offered for that little amount of money, you could get it for just a few dollars a month. In essence, you are paying 70 times the going rate for this term and life insurance policy!
If instead you pay off your student loans you are getting a guaranteed 7% rate of return on your money, and that’s a very good investment. Most other guaranteed investments are currently offering 4% or 5%, you are getting an addition 2% to 3% compared to any other guaranteed investments. It gets even better than that. You are not getting 7% back, you are getting 7% back per year for the life of your loan! This can often be ten or twenty years! The 7% turned into 386% after 20 years! When you pay money down on a loan, it is like you are saving the interest for the entire term of the loan!
Don’t fall for the myth that you should not pay on your student loan so that you can get some sort of interest rate on your money!