Student Loan Debt: When it's OK to Pay it Last

Dori Zinn

By Dori Zinn
Dori Zinn covers personal finance for Student Loan Hero. Her work has been featured in Huffington Post, MSN, The Week, Quartz, and more.
Posted on 05/16/2018

Having thousands of dollars in student loan debt can be overwhelming, especially if you aren't sure how you'll ever pay it all back. But maybe you can calm your nerves by not repaying all of it — yet.

As of January 2018, student loan debt across the U.S. totaled nearly $1.5 trillion, and if some of that debt is yours, you might want to dedicate your financial resources to paying it off. But many student loans have low interest rates compared to other forms of debt, including credit cards.

Sure, it's important to continue making minimum payments on your student loans to avoid going into default. But you don't have to prioritize paying extra toward your loans right away.

It's important that you repay your debt on time. But not all student loans are created equal. If you have student loans with low interest rates, such as federal student loans for undergraduate students, you can put them last. That will give you a chance to put other financial priorities first.

Here are 4 financial goals you may prioritize ahead of paying down student debt:

1. Credit card debt

As of December 2017, credit card debt across the U.S. totaled more than $1 trillion.

The major difference between credit card debt and student loan debt is interest rates. As of April 2018, the interest rate on Direct Loans for undergraduates is 4.45%, according to the U.S. Department of Education. Average interest rates for credit cards are typically more than three times that, according to ValuePenguin.

The interest you'd pay on a credit card could end up costing you much more in the long run than student loans. To avoid paying more in interest, make minimum payments on your other bills (such as student loans) and make extra payments on your credit card every month. Once your credit card is paid off, you can use that cash to put toward your student loan payments.

2. Medical bills

Medical debt can be crippling. A 2016 Kaiser Family Foundation study showed that, regardless of coverage, Americans have trouble paying medical bills.

But there's good news. As of Sept. 15, 2017, there's a 180-day waiting period before the three major credit bureaus (Experian, Equifax and TransUnion) will include medical debt on your credit report. That gives you about six months to pay off your medical debt before it goes to collections (if unpaid).

During this time, you can make minimum payments on your student loans so you don't fall behind and put some of your extra money toward your medical bills to avoid default. If you do default, collections agencies will call, text, email, and send letters to request repayment. Your credit score also will suffer, as collections listings can stay on your credit report for up to seven years.

3. Auto loans

If you recentlypurchased or leased a car, you might be in the midst of paying back an auto loan. Average interest rates vary depending on your credit score, the loan term, and the type of car, but auto loan rates are usually between 3.00% and 10.00%.

Falling behind on your car payments can have serious and lasting effects. You could end up in default, and your car could be repossessed.

If your auto loan interest rate is higher than your student loan interest rate, it's probably advisable to prioritize paying down your car loan first. You should still make minimum payments on your student loans so you don't end up in default, however. When your car is paid in full, that money can go toward your student loans.

4. Retirement plans

Saving for retirement is crucial so you'll have money when you're no longer working. But almost half of families in the U.S. have little or no savings for retirement, according to the Economic Policy Institute.

While it's important to pay off your student loans and get out of debt, you also should make saving for retirement a priority. The less time you have to save for retirement, the less money you'll be able to contribute. If you don't save for retirement until your debt is paid off, you may have less cash after you stop working.

But right now you can do both — make your minimum student loan payments and save for retirement. Contributing to your employer's retirement plan or an Individual Retirement Account (IRA) can be a good place to start.

If you're already saving enough for retirement, boost your emergency fund or save toward another financial goal.

Don't let your student loan debt discourage you

Putting student loan debt at the bottom of your priority list isn't for everyone. It depends on your financial situation and your individual goals. If your interest rates aren't as low as they could be, try refinancing your student loans to get better rates and/or other benefits such as cash bonuses, which will help you put more money toward your other financial goals.