Key Reasons Not to Pay Off Your Student Loans Now

By Ara Oghoorian

If you are like most professionals, you probably graduated with over $100,000 in student loans.

While that debt may feel like a monkey on your back, it was well worth it. Unlike credit card debt, which is used to fund consumption, your student loans financed your education and training and were an investment in your career.

Not only that, but it was also like receiving free money during a period when you weren’t earning anything. 

Now, you are earning money, and one of the most commonly asked questions I get is, “Should I pay off my student loans now?”

The short answer is that it depends on whether you are making the decision emotionally or purely from a financial perspective.

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Here are some things to consider before paying off your student loans.

Money Loses Value

Inflation is the erosion of the value of the dollar over time.

We have all heard someone say, “I remember when a new car cost….” Inflation is the reason why it cost $5 to see a movie when you were 18, but now it costs $12, or why $100 just doesn’t seem to buy as much as it did 10 years ago. If your loan is on a fixed rate, inflation is your friend.

Your fixed loan payment does not change for the duration of the loan, but the value of that payment decreases over time.

For example, if your current loan payment is $800 per month, in 10 years, the real cost of that loan payment would be equal to $595, assuming a 3% inflation rate.

Therefore, the purchasing power of that $800 will have declined in that 10-year period to just $595.

If the rate of inflation is higher than your fixed interest rate, you are essentially coming out ahead every year.

History Doesn’t Lie

Most current home buyers would cringe at a 5 percent home loan, but it wasn’t that long ago that 8 percent was the average. In fact, in 1981, the average mortgage rate was 16.63 percent (!

So, historically speaking, interest rates are now at an all-time low.

Interest rates on student loans are also currently at historical rates.

No one knows if interest rates will ever reach double digits again, but markets do tend to revert to their historical mean.

If you currently have a student loan with a very low fixed interest rate, it makes more economic sense to only pay the minimum payments because of the low fixed rate as well as inflation.

Your Emotions

For a variety of reasons, some people have an aversion to debt – maybe you grew up seeing your parents worry about debt, or maybe your grandparents, who lived through the Great Depression, influenced you.

Whatever the reason, if you are emotionally debt adverse, then it makes sense for you to aggressively pay down your debt, even if it’s financially prudent to pay only the minimum.

If you can’t sleep at night because you’re worrying about your student loans, then it’s probably wise to start paying off your debt early.

The conventional wisdom is that one should pay off debt as quickly as possible, and that all debt is bad. However, as illustrated above, there is such a thing as good debt, and it doesn’t always make sense to pay it off early.

Yes, credit cards are generally considered bad debt, but student loans are an investment in your future earnings potential and are deemed as good debt.

For those who approach student loans from a strictly financial perspective, now is not the time to pay-off your student loans.

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About the Author

Ara Oghoorian, CFA, CFP® is the president and founder of ACap Asset Management, Inc., a “fee-only” investment management firm located in Los Angeles, CA, specializing in helping doctors and physicians make sound financial decisions.

The firm was recently listed as one of the Top 13 Asset Managers in Los Angeles by AdvisoryHQ.

For more information or to get in touch, you can visit their new website at:

Have a question or need advice on how to manage your retirement accounts? Contact ACap Asset Management at [email protected] or 818-272-8511.

Note: This article was written and based on the author’s own personal opinion. Ara is not speaking on behalf of his firm or any professional body.

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