Don't Blindly Follow the Financial Advice of Previous Generations

There seems to be a lot of sentiment around freedom from debt. Specifically reaching a point where all of your debt is paid off. While paying off all of your debt is a noble goal, it won't make you rich. I'm not advocating for carrying balances on high interest credit cards, or large amounts of consumer debt, but be cautious when aggressively paying down student loan and mortgage debt. If your financial goals completely stop at being free of debt, then go ahead and pay down your loans as fast as possible. 

But if you're truly considering financial freedom, there are better ways to increase your net worth, and decrease your dependency on the income from your job. If your student loan debt is significantly larger than your annual income, or projected annual income, you're almost assuredly better off financially paying on an income-driven repayment plan (IDR), maxing our your 401k and HSA, and seeking student loan forgiveness after 10 or 20 years of payments. Is there some inherent risk when working towards student loan forgiveness? Of course. But it would be unprecedented for the government to retroactively prevent students who are currently working towards student loan forgiveness from benefiting from it. 

Even if you are required to make income-driven repayments for 20 years, you can easily come out ahead financially by maxing out your 401k and saving up for the eventual tax burden. 

Here's an example using my situation at graduation:

*Assuming average return rate of 7% on savings

As you can see, with a payment + savings rate of $3,179 in both examples, I will come have over $240,000 more by opting for IDR with forgiveness, and that's even after accounting for a potential tax burden of over $122,000. The point is, unless you have large amounts of private student loan debt, or are highly adverse to debt in general, don't simply pay down your loans as fast as you can. Take the time to work through a few different scenarios. Understand what your financial goals are, and create your plan for you how to get there. 


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