Is Student Loan Debt Bad?

[nicolemaciasParticipant]

I have around $60k left in student loans after finishing grad school in 2005. I consolidated right when I finished school and my interest rate is crazy low, like 2% or something. Someone told me that student loan debt is the best kind of debt because you set it to autopay and it gives you a credit history. However, will this debt hurt me down the line when I hope to buy a house?

My husband and I are currently in debt paydown mode and are down to $4k after paying off a $20k private loan, back taxes from a small business, and over $25k in credit cards. It feels amazing, so all our focus is going to paying off that remaining $4k and creating a savings so we are prepared for situations in the future (things like dr bills, life events, travel, dog illnesses are the things we’d always use cards for in the past…but never again!). I haven’t given any thought to trying to pay my student loans of faster. I’d rather set aside money for savings and pay the minimums on my student loans. Is that bad?

 

Thanks!

[TheHomelessBillionaireParticipant]

Hi Nicole,

Before I go into whether student loan debt is good or bad, I want to provide you with a hierarchy of stupid credit decisions that I’ve written about in my book Brassknucklefinance.
In our BKF classes, we teach that all debt should be avoided, however, there are some credit products that are far worse than others and that also make you believe you can afford many things you really cannot. Below is the official BKF hierarchy of debt stupidity. This is a list of most popularly stupid credit decisions in order of “most ridiculously stupid” to “not as bad but still stupid”. These decisions are as follows:

1. Using Overdraft Protection
2. Payday Loans/Cash Advances/Auto Title Loans
3. Credit Cards/Charge Cards
4. Borrowing from or against your retirement accounts
5. Personal Loans
6. Auto Loans
7. Home Equity Loans/Lines of Credit
8. Debt Consolidation Loans and Refinances
9. Mortgages
10. Student Loans
 

[TheHomelessBillionaireParticipant]

Now with that being said, the way you are paying your debt off, consumer debt first and from smallest to largest, is right on par with what we teach. I would continue to pay the remaining $4k balance off (which puts you in step 5) and then build up a full emergency fund of 3-6 months of expenses.

After you’ve done that, you can contribute to your 401k and do light investing while still actively paying down your student loan balance with any payments over the minimum you can make.

The interest rate isnt the issue on this, its the psychological effect of debt, the possibility of late fees, the hassle of having to make payments and the fact that not being debt free makes you believe you have more money than you do so you make purchases you wouldn’t have.

Which leads to your purchasing of property down the road. I’m going to assume you’re going to take out a mortgage (I would save cash myself especially with your dual household income), which will be determined by your debt to income ratio among other things. During the qualification process, what will be looked at within that ratio is what your monthly payments are to your income. If your student loan payments are small (read: not the total balance but the payments) you can look like a potential credit risk.

Another incentive to just knocking it out and staying , at the very least, debt free besides your mortgage.

[TheHomelessBillionaireParticipant]

The end of the my fourth paragraph should say “If your student loan payments are NOT small (read: not the total balance but the payments) then you can look like a potential credit risk.

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