When I graduated from law school with over $100,000 in student debt, paying off my loans became something of an obsession. I even briefly moved in with my parents so I could spend every dollar paying off the loan.
After refinancing my mortgage to pay off the last of my debt—and then obsessively repaying that extra amount I had borrowed so my student loans could disappear forever—I finally managed to pay off the debt after about five years.
Although I was relieved when that last student loan payment was made, I now wish I hadn’t paid it off sooner. There are a few main reasons for this.
1. I could have made more money by investing
My student loans had various interest rates ranging from around 4% to just over 6%. During the years that I was paying down my debt, here are the annual returns of the Dow Jones:
- 2009 — 18.82%
- 2010 — 11.02%
- 2011 — 5.53%
- 2012 — 7.26%
- 2013 — 26.50%
In all but one of those years, the feedback I might have received from invest in an index fund tracking the performance of the Dow Jones would have exceeded the savings I made by paying off my loans.
I was so focused on paying off my debt that I even waited to start investing for retirement – meaning I missed tax breaks for investing in an IRA. So my opportunity cost was even higher.
2. I tied up money that I could have used for something else
When I was spending every available dollar paying off student loans, there were plenty of other situations where I had too little money.
For example, when my husband and I bought our first home, we were only able to afford a 10% down payment instead of 20%. This meant that we were obligated to pay private mortgage insurance for three years until we sold this house.
There have also been other times over the past decade when I wish we had more money saved because we needed the money for another purpose – but we didn’t because that I had not contributed to our savings accounts.
Of course, I could borrow using a personal loan or make purchases on a credit card, but both of these borrowing methods would incur much higher interest rates than my student loans. If I hadn’t been so focused on paying them back, I would have had more money to do some of the things I missed.
3. I missed opportunities to make reimbursement more affordable
With so many people struggling to repay their student loans, it seems increasingly likely that the government will pass some sort of loan forgiveness legislation. If that happens, I will miss the chance to get some of my debt, even if other people with high loan balances have their debt erased or reduced.
I also repaid my loans before student loan refinancing has become the big business it is today. If I still had my loans, I probably could have refinanced them at an even lower rate. This means it would have made even more sense to hold on to that debt and slowly pay it off over time.
Make sure you don’t regret paying off your debt sooner
If you’re thinking about repaying your own student loans, be sure to consider the opportunity cost of doing so. Any extra money you put into prepaying low-interest student loans is money you can’t invest or use for anything else. While you may still determine that paying off your loans makes sense to you, don’t focus so much on that goal that you miss other better things you can do with your money.