Paying Off Student Loans Requires Some Smarts
Here’s our first guest post on the Schwab Talk blog – from Carrie Schwab-Pomerantz, President of Charles Schwab Foundation and author of the Ask Carrie column on Schwab.com. The question was one of several submitted through our Client Connection online community, powered by Communispace. Carrie will be dropping in over the next few weeks to answer more questions about kids and money.
Q: My daughter recently graduated from nursing school after attending a four year university and receiving a degree in psychology. She realized a psychology degree doesn’t put food on the table. She is now employed full time as a nurse and is making a decent income. My question for you is she has accumulated about $25,000 in student loans and doesn’t know if she should try to save and invest while paying off the loans over many years or try to pay the loans as fast as possible?—Donald M.
Thanks for the question, Donald. For whatever solace it can provide, the majority of students today are graduating with loans – so your daughter is in very good company.
And just to set a little context, $25,000 doesn’t sound like an unreasonable amount of debt for a new nurse. As a general guideline, I generally advise that students not borrow more than they can reasonable expect to earn in their first year out of school. Most likely your daughter’s salary is well above that level.
Deciding how fast to pay off any loan is largely financial, but also personal. Some people just hate carrying debt. It makes them uncomfortable, and they feel encumbered.
But from a strictly financial point of view, carrying a reasonably sized student loan is not a terrible thing -- provided she never misses a payment. If she defaults there will be serious consequences: significant fees and penalties, to say nothing of a huge ding in her credit score. However, simply having a student loan will not significantly impact her score.
Given this, if your daughter ever has a tight month and has to choose between making her loan payment and contributing to her retirement account, she should always make the loan payment. Beyond that, her trade-off will depend on the interest rate she’s being charged. Most student loan rates are pretty reasonable (and if not, she may be able to consolidate into a new loan with a lower rate; you can read my column What’s the Smartest Way to Pay Off Student Loans? for more details.)
Of course if your daughter can afford to sock some money away for retirement or other savings at the same time that she’s paying off her loans, that’s ideal. And especially if her employer offers a match on her retirement account, she should try to contribute enough to capture that.
Another thought is that as a nurse, she may (depending on her job) qualify for the federal loan forgiveness program designed to help those who go into public service. You can check out www.finaid.org for details. Or, if she qualifies, her payments may be reduced by the federal income-based repayment program; see www.ibrinfo.org for details.
And finally, please remind your daughter that she may be able to get some money back on her federal income tax return. Depending on her income, she can deduct up to $2,500 in student loan interest each year, even if she doesn’t itemize.
Hope this helps, Donald, and the best to you and your daughter.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.