Never pay off student loans early!

There are many good reasons not to pay off student loans any earlier than you have to. If you refinanced or consolidated your loans during the golden age of student loan interest rates, then you can easily make free money by investing in money market accounts(MMAs), CDs and/or savings accounts with higher returns than the loan interest rate. In addition, interest paid on student loans are tax deductible.

Both of those ideas are pretty well known, but I came across an interesting piece of information. According to the Higher Education Act of 1965 Section 437 (a):

If a student borrower who has received a loan described in subparagraph (A) or (B) of section 428(a)(1) dies or becomes permanently and totally disabled (as determined in accordance with regulations of the Secretary), then the Secretary shall discharge the borrower’s liability on the loan by repaying the amount owed on the loan.

What this means is that, if the unfortunate should ever happen, you are not responsible for paying your loans back. Of course the ethical implications of such a plan are a little sticky, but seriously, who plans on dying or becoming permanently disabled? Consider it more of a life insurance policy.

Let's say you have an extra $500 each month from frugal living and conscious budgeting. What do you do with it? Let's look at two examples.

Bob puts his towards his student loans, managing to pay off his student loan in 10 years after graduation. Unfortunately, the day after he pays off his student loans, he accidentally falls into an uncovered manhole on his way to his job and breaks his neck, making him a quadriplegic for the rest of his life. He doesn't have any student loans to pay off, but he has nothing saved up.

Rob, on the other hand, puts his money in some MMAs, CDs and/or savings accounts. It's 10 years post-graduation, and he still has 20 years of loan payments left. He goes off on a hiking expedition through the Himalayas, but unfortunately, he encounters a female Yeti who hasn't seen her male counterpart for over 5 years. He gets brutally ravaged, but survives to tell about it, sans genitalia and various other body parts. When he returns to the states, Uncle Sam deems him disabled, so his student loan is paid off, and the $500 a month he had been saving for 10 years has turned into a modest sum.

While these stories are obviously fictitious and very unlikely, it's to prove a point.

Never pay off your student loans early!

Tags: student loans