When I graduated from law school with over $100,000 in student debt, paying off my loans became something of an obsession. I even moved back home with my parents briefly so I could devote every dollar to loan repayment.
After refinancing my mortgage to pay off the last of my debt -- and then obsessively paying down that extra amount I'd borrowed so my student loans could be gone for good -- I finally succeeded in retiring the debt after around five years.
While I was relieved when that final student loan payment was made, I now wish I hadn't repaid it early. There are a few key reasons why.
1. I could've made more money by investing
My student loans had various interest rates ranging from around 4% to just over 6%. During the years I was repaying my debt, these were the yearly returns for 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 returns I could've received from investing in an index fund that tracks the performance of the Dow 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 -- which meant I missed out on tax breaks for investing in an IRA. So my opportunity cost was even higher.
2. I tied up money I could've used for other things
When I was devoting every spare dollar to paying off student loans, there were lots of other situations where I had too little cash.
For example, when my husband and I bought our first house, we were only able to pay a 10% down payment instead of 20%. This meant we got stuck with paying private mortgage insurance for three years until we sold that house.
There have also been other times in the past decade when I wished we had more money saved because we needed cash for some other goal -- but we didn't because I hadn't contributed to our savings accounts.
Sure, I could borrow using a personal loan or put purchases on a credit card, but both of these borrowing methods would come at much higher interest rates than my student loans. If I hadn't been so focused on paying them off, I would've had more money to do some of the things I missed out on.
3. I've missed out on opportunities to make repayment more affordable
With so many people struggling to repay student loans, it seems increasingly likely that the government will pass some type of loan forgiveness legislation. If that happens, I'll miss out on the chance to get some of my debt forgiven -- even as others with high loan balances see their debt wiped away or reduced.
I also paid off my loans before student loan refinancing became the big business it is today. If I still had my loans, I likely would have been able to refinance them at an even lower rate. This means it would've made even more sense to keep this debt and pay it off slowly over time.
Make sure you don't regret paying off your debt early
If you're thinking about paying off your own student loans, be sure you consider the opportunity cost of this choice. Any extra money you put towards early repayment of 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 for you, don't get so focused on this goal that you miss out on other, better things you can do with your money.