While reading a blog this week (can’t remember which, sorry!), saw a paraphrase of some advice from Suze Orman wherein she called student loans the most dangerous type of loan you can have and advised paying them off before paying off any other type of debt. Even though I’m not a Suze Orman consumer (the way I am with Dave Ramsey and Ric Edelman) and so I’m not familiar with her philosophy, I could hardly believe that this was an accurate portrayal.
But it was. Check out this short clip of her telling a questioner to pay off student loans first, regardless of interest rate.
I understand that it’s noteworthy that student loans aren’t bankruptable, but is the possibility of bankruptcy so immediate for so many borrowers that it becomes worthwhile to give everyone the advice to pay them off first, instead of following the debt snowball or debt avalanche method? I don’t think so. I mean, sure, if you’re descending into bankruptcy, you should definitely stop paying your non-student loan debts, but if you’re not approaching bankruptcy those credit card interest rates are probably hurting you a lot more than your student loans.
In fact, we’re keeping my student loans around much longer than we need to. Longtime readers will know our current strategy, but to review:
1) I have about $16,000 in federal student loans from undergrad that are subsidized and deferred. That means that as long as I am in school, no payments are due and the loans are effectively at 0% interest.
2) Since 2010, we have had the amount of money we need to fully pay off the student loans set aside for that eventual purpose.
3) In 2011, we invested the student loan payoff money into CDs, mutual funds, and ETFs so we could get a bit of a return and learn about short-term investing in taxable accounts. So far we’ve earned about $3,000! I think that’s pretty good considering how conservative we were in choosing investments.
4) We plan to sell our investments and pay off the student loans right before I graduate and the loans come out of deferment. (I recently realized that three of the four outstanding loans are at 1.75%, if they weren’t subsidized, and considered keeping the loans around even longer, but the idea of paying interest doesn’t sit well with us.)
I actually am happy to be keeping our student loans around for as long as it makes sense. As we have essentially collateralized the student loans with the payoff money, we are no closer to bankruptcy by keeping them vs. paying them off. And federal student loans have a lot of unique benefits that make them more attractive to keep around than other types of debt.
- Deferment: We’re taking advantage of that right now, but it’s not just for students. I also deferred my loans when I was working at the NIH because I was on an “educational fellowship.”
- Subsidy: Thank you, taxpayers, for paying the interest on my student loans. For those who can get it and while it last, this is a sweet deal.
- Repayment options: While they keep you in debt longer, there are flexible repayment plans such as income-based repayment for when your income is quite low. You could also qualify for a hardship forbearance, which would temporarily cease your payments.
- Forgiveness: We aren’t considering this for my loans but many of my MD friends are keeping an eye out for jobs that would qualify them for loan forgiveness after ten years of payments.
- Death and disability: My student loans are like a little life insurance policy. If I die or become disabled (certain kinds), my loans will be forgiven and Kyle can keep the payoff money. With all other debt, your estate is held responsible.
Really, the main reason we’re not getting rid of the loans now is because we’re getting a return on the payoff money we invested. But all these other benefits, particularly the death one, help confirm that it’s the best decision for us for the time being. And I really don’t understand why the non-bankruptable-ness is, in Suze Orman’s mind, so much weightier than all these other positive aspects!
Do you or did you have federal student loans and if so did you take advantage of any of the benefits? Do you think student loans should be first, last, or by balance or interest rate in your debt payoff prioritization?