You Won’t Be Rich When You Pay Off Your Student Loans

Surprised? You shouldn’t be. Student loans are a daunting, heavy, burden that feel like they weigh you down and prevent you from achieving your financial goals. Paying off your student loans will undoubtedly feel better than being strapped by all that debt, but getting your loan balance to $0 will not be enough to make you feel financially free. If you want to be financially free, you need to develop passive income streams while also decreasing your student loan balance. With that plan, you can achieve a great deal of financial freedom by the time you’re done paying your student loans.

Let’s look at a case study. I was talking with my boss the other day when we stumbled on the topic of milestone birthdays. She told me the story about when she turned 30, her strongest memory was that her and her husband couldn’t wait to have their student loans paid off. At 30, she felt like her loans were just dragging her down, and she couldn’t wait to get rid of that monthly payment. This is a common sentiment among people with student loans. Student loans are just different in nature to many other types of loans like mortgages or business loans. While they can provide a great amount of value, there isn’t a transferable asset attached to them. You are the asset attached to a student loan. That means that the loan is only providing value, while you are making an income. Congratulations on taking out a loan for the right to a job. We all did it, and getting your student loans paid off is great, but you won’t feel anymore free if your income is still tied down to other liabilities.

This was the case for my boss. When she made it to 40, and her loans were paid off, she didn’t feel like an enormous weight had been lifted. In fact, she didn’t feel anything at all. She said it didn’t impact her life in any noticeable way.  In fact, over that ten year span, her student loan payments stayed stagnant, while here income and expenses both increased meaningfully. As a percentage of her income, her monthly student loan payments actually decreased. For example, let’s say you have an annual income of $50,000 and a student loan balance of $38,000. With a monthly payment of $431, you would repay $5,172 each year, or 10.3% of your gross income.  Assuming your income increases by 2.5% each year, at the end of your 10 year repayment your income will have increased to $64,000 per year, while your student loan payment will still be $5,172 each year. That’s down to 8.1% of your gross income.

So paying off your student loans might be underwhelming. That’s not all bad. At least you can find comfort that your student loans won’t be as burdensome in a few years. I would caution though, that as your income increases, you use that extra cash to invest in appreciating assets, or increase your student loan payments to pay your loans down faster instead of increasing the cost of your lifestyle. If you absolutely feel like you must increase the cost of your lifestyle with a nicer car, or bigger house, then I suggest you do it modestly, and keep any additional expenses at 50% of your raise or less so you can apply the remaining amount to increasing your net worth.