Don’t Worry About Your Student Loan Debt

Too many young people graduate laden with debts that take years, if not decades, to pay off. 

-Robert Reich

Posts recommending “paying off student loans” do not present a plan.  

Paying off debt may be part of a plan, but it is not a complete plan.  Would you tell me that your favorite sports team won on defense alone, not needing any offense?  I didn’t think so. 

Being debt-free is a very short-term, near-sighted plan.  

You might want to retain debts with low after-tax interest rates to invest more excess cash flow.  If you have a mortgage with an interest rate of 4% and earn an annualized 7% on retirement investments, you should not be accelerating the payoff of that mortgage.  Doing so is giving up the 7% return in favor of the 4% return, which clearly is not wise. 

Similarly, budgeting or other means by which you reduce spending now to increase savings may be good – or it may involve living foolishly frugal.  Deciding which depends on your overall long-term goals.

Merely reducing spending to increase cash reserves does not mean you are necessarily better off.  It means you are frugal, have a lower standard of living and have cash in the bank.  If it makes you happy, I just hope it makes you equally as happy 10, 20, and 30 or more years from now. 

The same goes for blog posts on the need to create an emergency fund.  Stashing away cash that earns less than the rate of inflation, on an after-tax basis, is rarely prudent. 

If you planned well and bought a home, you may have enough equity in your home to set up an equity line of credit.  You will just need a plan to pay off any debt if you draw on the equity line. 

Alternatively, there are many emergencies for which insurance is far more effective than amassing cash.  You don’t amass cash for the possibility of having a catastrophic illness or the risk of being sued as a homeowner, do you? 

With a complete plan, you’ll be far better off than “debt-free” and “emergency fund” bloggers. 

The point is that a comprehensive financial plan uses ALL tools, cash management, debt management and more to provide a reasonable quality of life now and for the future.

Leave a Reply

Your email address will not be published. Required fields are marked *