How Should I Approach My Student Loans?

This article will give you some clarity and help you find a strategy that better suits your needs if you ever asked yourself questions such as…

“How am I gonna pay off my loans?”

“Is it okay to only pay the monthly minimum?”

“Should I pay them up ASAP?”

“Should I refinance?”

Most students and graduates nowadays are either taking student loans to pay for college, planning to do so, or currently paying off their loans. Student loans have become a big financial burden, particularly for Americans. On average, each Millennial owes around $30K upon graduation.

Photo by rupixen.com on Unsplash

To become a physical therapist and occupational therapist, I paid about $700 per credit hour or $35K per year in tuition to a private graduate school. I have colleagues who went to an in-state public school with some grants and scholarships, which could lower their tuition by almost 50%. But I also often hear others paying almost double of what I paid for. Anyways, in our industry, it’s very common to accumulate 6-figure student loan debts.
But first off, let’s say that you accumulated $100K in student loans from 2.5 years of graduate school, with an interest of 4% annually and a 15-year term. Then, you got a full-time OT job right after graduation, and were able to bring home $3K each month after tax, with around $1K aside from living expenses that you can use however you want each month…

Based on these assumed numbers, here are a few ways that you could take to approach your student loans, with the two most commonly discussed and practiced presented below:

STRATEGY #1: Only Paying The Monthly Minimum And Investing The Rest

• You pay ~$741 per month as your monthly minimum (according to the Student Loan Payment Calculator from Nerdwallet).
• Then, each month you invest ~$259, the remaining of the $1K.
• You consistently practice this method for 15 years.

15 years later, you’ll pay off all of your loans, but your investment of $259 each month will also grow. Based on the historical return on investment rate of the S&P500 index — 7–10% annually, you will acquire a net worth of ~$82K-$108K.

STRATEGY #2: Paying Off The Loans As Soon As Possible

• You pay the entire $1K each month into your loans.
• You pay off your loans ~10 years later (precisely 122 months according to Nerdwallet). Afterwards, you start investing $1K per month for another five years.

At the 15-year mark with the same rate of return on investment, you will acquire a net worth of ~$73K-$79K in this case.

I am very sure that many of you who are reading this article have heard people taking sides on either one of these methods. So now you might want to ask…

“Which one is better?”

In a nutshell, it totally depends on your unique situation. To choose a strategy that better suits your needs, you’ll have to know your numbers well, such as:

• Your cash flow — incomes, expenses and taxes, consistency and patterns
• Your loans — the amount you owe, interest rates, duration
• Your upcoming purchase (if applicable) — car, house, wedding

You might even want to speak with a financial advisor, who will give you more specific and clear guidance relevant to your status and life/career goals. But here is a brief comparison of the two listed strategies…

• #1 makes more sense mathematically based on net worth, particularly for individuals who are very disciplined with budgeting and tracking their cash flow.
• #2 gives you a sense of freedom and peace of mind. This is extremely important for those who have a more complex financial situation, like taking care of multiple dependents, having various other debts, planning on buying a house or car soon, etc.
• Your payment on interests can be tax-deductible if qualified. For 2021, you may possibly deduct up to $2.5K. if you practice #1.
• #1 takes longer in time, which requires more self-discipline and perseverance on personal finances.

You can see that each strategy has its advantages and limitations. But now I would like to talk about another strategy that can help you take advantage of the benefits from both sides…

STRATEGY #3: Mixing The Two!

• You pay into your loans and invest at the same time.
• You pay more than your monthly minimum and invest less than #1. In this scenario, let’s say paying $900/month into your loans and investing $100/month.
• You invest in the same vehicles as the previous 2 strategies.
  But you can also choose certain “high-yield” or cash-generating investment vehicles (like dividend stocks, high-yield exchange-traded funds, etc.) that typically yield 3% annually aside from the value growth. In this case, you can choose to re-invest the dividends or take them out to help pay off your loans.

Over time, you will pay more and more into the principal of your loans, with less and less interest. You can still take some advantage of tax deduction while still paying interest.
In the middle of year 12, you will be debt-free. Also, it’s worth knowing that your dividend yields will surpass your interest payments around year 10–11 if you decide to invest in high-yield vehicles. You’ll still be a bit early on your timeline!

In addition to picking a strategy that works best for your finances, here are a few other things to consider:

1. There are always ways to generate more income — salary negotiation, picking up a few side gigs, donating plasma (if your health and personal beliefs/values allow), etc.
2. There are also ways to reduce your living expenses — relocation (if living circumstance allows), budgeting, taking advantage of your credit card benefits smartly, utilizing cash-back shopping apps (such as DOSH, Ibotta, and Ratuken), meal plans, etc.
3. If your financial goals and plans allow, you might want to look into ways to lower the interest rates on your loans — refinancing your loans, participating in loan repayment programs, strategically picking up a longer payment term and paying extra, etc.
4. If you are still a student, start finding ways to implement 1. and 2. to decrease the loan amount that you need to take out.
5. If you are applying for schools, find ways to lower your tuition — public schools, community colleges for generic credits, tests, or other ways to waive certain credits, scholarships, programs delivered in a hybrid format to save you a commute or even relocation, etc.

This article is not served as financial advice. But I hope that you have gained some clarity on and will no longer feel intimidated by student loans!