Financially Fit: Student Loans


Disclaimer: The advice provided in the Financially Fit series is general advice only. It has been prepared without taking into account your objectives, financial situation or needs.

Things cost money. Experiences cost money. And, as some of us know all too well, education costs A LOT of money.

Tyler Ziebel is a senior analyst in the real estate industry. He graduated with over six figures of student debt … And he paid it off in two years.

So, naturally, Tyler has become my go-to financial guru on student loans. Though I’m sure he can write a novel on it, he helped me gather some advice on how to handle debt and student loans for this week’s Financially Fit.

That’s a lot of debt to pay off in less than three years. How did you do it?

There are really two schools of thought when it comes to student loans and they both have merit. The first, and this is was my preferred method in paying down my own student debt, is to pay the debt down as quickly as possible. This obviously means living well below your means [note: such as living with family if possible, even though independent city life seems appealing after college], setting aside a monthly payment amount that is greater than the minimum required payment, and getting ahead of your debt as quickly as possible.

The benefit here is that your debt gets paid down faster and the interest paid over the duration of your student loan is therefore less. The added benefit here is the peace of mind that comes with discharging said debt faster. When I graduated, having that student debt hanging over my head honestly bothered me so much that paying it off quickly became the priority.

Okay, so what’s the second school of thought then?

The second school of thought here is to make the minimum payments on your student debt and take the additional income that you would’ve put towards loans and invest them in some sort of interest bearing account (for this to work, the interest-bearing account needs to have a higher interest rate than your student loans). These interest-bearing accounts can be anything from stock market index accounts, to ETFs, to mutual funds.

The idea here is that the money you’ve invested will return a higher amount of interest than the amount of interest the student loan is costing you. Obviously, the downside here is that you’re somewhat at the mercy of the market and if the return on your investment falls below the interest rate on your loan, you end up losing money. On top of that, you’ve got to be disciplined enough to take what would be money in your pocket, invest it, and leave it to counter the interest accruing on your debt – which is way easier said than done.

Okay, so those are two different schools of thought to pay down your student debt. What other advice do you have for people dealing with student loans? 

I’ve always subscribed to two absolutes when it comes to paying down student loan debt:

  1. ALWAYS make your minimum payment. The worst thing you can do with student debt is allow interest charges to go unpaid and become part of your principal. Paying interest on interest will get you nowhere in the student debt game. Additionally, many student loan servicers offer reduced payment plans that allow you make payments lower than your minimum payment for a period of time. I discourage this route, as the only thing they succeed in doing is extending the amount of time that you’ll be in debt and the amount of interest that you’ll end up paying.
  1. ALWAYS pay down higher interest loans first. While this should be obvious, many times you need to go in and specify this with your student loan servicer. It’s not uncommon for student debt to be structured as a bundle of many different student loans, all of which carry different interest rates; the interest rates between subsidized, unsubsidized and other loans can vary significantly. With that said, you should focus on paying down the higher rate loans as fast as possible. This allows you to pay less interest in the long term, allowing money that would otherwise have gone to interest to be put towards principal (read: the meat and potatoes of what you owe).

Whichever route a person decides to go, it’s important to be vigilant with student loan debt. Let’s be honest – it sucks and it serves as a brutal way to delay future financial goals. It can’t be forgiven (so it’s not going anywhere, even in bankruptcy) and it’s got to be paid back regardless.

At the end of the day, you’ve got to just bite the bullet as quickly as possible and get your loans paid off.

You can do this.

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About Cass Gunderson

Cass hails from the southwest suburbs as a proud White Sox fan and a graduate of University of Illinois. By day, Cass is a full-time student at the University of Chicago's Booth Graduate Business School. Before deciding to throw away all her money to go back to school, Cass worked for a private equity firm that buys technology companies. Raised as the youngest in a family of older brothers, Cass grew up a tomboy and remains active in sports. To her mother’s satisfaction, Cass learned how to embrace her feminine side in college and has developed an interest for fitness activities that require spandex as opposed to knee-length basketball shorts. In her spare time, she runs a lot because it is cheaper than paying for real therapy. Cass has completed four marathons and one ultramarathon (she claims she'll never do this to herself again, but that's TBD). She can still be found on the basketball courts in Lincoln Park wearing knee-length basketball shorts.