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College is often seen as one of the best years of your life. And for good reason. From the academic experience to the recreational activities and of course the long-term career benefits, a four-year degree is undoubtedly very valuable.
Unfortunately, that once-in-a-lifetime experience often comes with a hefty price tag. In 2022, the average cost of a four-year college degree will be $122,000. To pay for this, 70% of Americans take out student loans. Today, one in eight Americans has student debt, with a staggering total of $1.74 trillion nationwide.
On an individual level, the average student loan holder has a balance of $38,792 with an interest rate of about 5.8%. Taking on a loan of that magnitude in your late teens or early twenties is a daunting prospect, and many won’t realize the weight of their debt until they graduate and have to start paying.
On average, it takes most people about 20 to 30 years to pay off their student loan. When you consider such statistics, it may seem that the financial investment is not worth it.
To invest: Start investing small
Here’s the good news. Taking a focused approach to paying off debt doesn’t have to rule your life or hinder your financial future.
It’s important to start early and tackle the debt aggressively before the interest starts to pile up, even if it’s something small. The monthly pressure that debt puts on your budget significantly hinders your ability to build long-term wealth through savings and investments.
Many young adults think investing early should be a priority before paying off their student loans. The rationale behind this is that (hopefully) the investment return will be higher than the interest on the loans.
But let me suggest an alternative.
What if student loan holders aggressively pay off student loans and interrupt all other financial goals?
It’s not uncommon for those who follow this method to pay off their student debt in as little as 18 to 24 months — a significantly better plan than making minimum payments and carrying the loan for 20 to 30 years.
But I thought I could earn more by investing in the long term?
While you CAN probably earn more with your money by investing (at least in the long run), the difference isn’t that much. If you could earn 3% higher investing (8.8% compared to 5.8%) with an average student loan balance of $38,000, the actual amount earned over 10 years is only about $19,000. That is before tax with no guaranteed return.
What are the advantages of early repayment?
You can be done with it. You can be done with the debt and done with being tied to a required payment.
You can move on. You can continue to build wealth and have the freedom to save, spend, invest and give as you please.
You can concentrate. Your sole purpose may be to provide for your family, be generous to others, and build wealth.
About 73% of Americans consider their finances to be their number one source of stress. The faster you pay off your debt, the faster that burden will be lifted off your shoulders and you can focus on more exciting goals.
If this seems like a daunting task, remember that you can always start small. And if necessary, you can contact an advisor to assess your situation and help you on your way to financial freedom.
Hunter Yarbrough, CPA, CFP, is executive vice president and financial advisor at CapWealth. He is passionate about taking a holistic view of personal finance, including investments, taxes, pensions, education, estate planning and insurance. For more information about Hunter and CapWealth, visit capwealthgroup.com.
Mason Everett, an accounting and finance student at the University of Mississippi, is from Tennessee and was CapWealth’s summer intern in 2022.
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