Paying Off Student Debt: Two Approaches

For college seniors who need to start thinking about debt repayment, here are two approaches to consider:

  • Fast-forward way to pay off your student loans (USA Today):

The University of North Carolina at Chapel Hill alum found a full-time job in New York City, but an entry-level salary coupled with sky-high rent wasn’t making it easy to pay off his debt. So he set an aggressive budgeting strategy to combat his loans.  “I would always pay double the minimum,” he says. “Doing that wasn’t always easy. It’s a lot of being thrifty—not buying a lot for myself, not going out for drinks or buying lunch with people … and taking meager vacations.”

Williams freelanced on the side and used bonuses to increase his monthly payments.  “As tempting as it was to play with that extra money, I threw all of it at my loans,” he says.  Williams, now a public relations and social media manager at Alterna Professional Haircare, found himself debt-free three years later. It’s an enviable position.

  • Don’t pay off your student loans so quickly; use the savings to invest in the stock market (CNN Money):

One important concept that I came across was Opportunity Cost — the notion of quantifying what you give up when you chose one option over another. I asked myself: Why am I rushing to pay off loans with 3% to 6% interest rates when the S&P has historically returned 11%?

Which approach do students feel more comfortable with?  It is important to note that the stock market strategy benefited from a raging bull market.  What if the stock market declined while pursuing this strategy?