Do You Really Need to Pay Off that Debt Right Now?

by Miranda Marquit · 13 comments

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There’s a lot to be said for paying off your debt and living debt free. But should you really work hard to pay off all of your debt right now?

High Interest Consumer Debt vs. Other Debt

Too often, we lump all debt together and call it “bad.” And while there is an argument that there’s no such thing as good debt, the truth is that some debt is worse than other debt.

High interest consumer debt is the worst type of debt. This is money owed on things that we consume — things that don’t retain value and don’t provide the hope of income or some type of solid return later. Not only do you pay for something that won’t have the same value a year from now (or that might be totally gone a year from now), but you also pay a high rate of interest on it.

Credit cards are a good example of this, since credit card debt often (but not always) results from purchases made for consumer items like clothes and electronics. High interest consumer debt doesn’t offer you the chance to build assets, and you almost definitely won’t receive any sort of return; you’ll just be paying high interest charges into someone else’s pocket.

Other types of debt aren’t quite so terrible. While there’s a growing concern over student loans, and student loan debt can keep you down, it isn’t the worst thing out there. In fact, when used carefully and judiciously, student loans can help you get the education and skills you need to boost your earning power over time. Student loans often come with lower interest rates than consumer loans, which means you pay less for the privilege of borrowing.

Depending on how you use low interest debt, you can see a return, whether it’s a mortgage or a business loan. But you have to be careful not to get carried away to the point that your low interest debt turns into a burden, rather than a benefit.

Choosing to Put Off Paying a Debt

Not too long ago, my mom asked me why I wasn’t putting as much as I possibly could toward my student loan debt. My answer was this: the fixed interest rate on my student loans is below 2% (I consolidated in 2005). I’ve been able to manage better returns than that on my investments. My annualized returns on my conservative retirement account have even beat that — recession and all.

From my small P2P loan portfolio to my taxable account (used as my emergency fund) to my Roth IRA, my money is better used earning an annualized return of 5.5% to 7% (depending on the account) than it is paying down a debt that isn’t even costing me 2%.

At least that’s my opinion.

At some point, when my husband gets a full-time job as a professor, I might consider tackling the student loan debt a little more aggressively. But for now, it doesn’t make a lot of sense to me.

Some debts are a little more urgent than others. You’re probably not going to earn 18.99% on your investments, so paying down credit card debt makes sense. But if you have low interest, non-consumer debt, you might think twice before retiring it.

What do you think? Should all debt be paid off immediately? Or are some debts worth waiting on?

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{ 13 comments… read them below or add one }

John S @ Frugal Rules May 21, 2013 at 6:12 am

I think it is a personal choice and should be based off of your specific situation. In regards to consumer debt I think that should be paid off as soon as possible. For student loan debt I would say the same thing, in general. So many are carrying tens of thousands of dollars of debt and will take years to pay off if they just do the minimum. Of course, that also needs to be balanced with the need to be investing at the same time.

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Emily @ Financial Money Tips May 21, 2013 at 6:21 am

I was hard pressed to actually pay off the student loan debt because for some reason I considered it a badge of honor or something – yes, I went to college, and yes, I’m with the rest of the pack in having some amazing debt. Then, well, I got over that whole thing and decided to pay off the debts. You know what? It eels better not having that obligation. But, we saved the student loan debt for the very very VERY last thing.

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Debt Blag May 21, 2013 at 7:42 am

Yup. I agree.

What makes debt “bad” isn’t how responsible the thing you bought was; it’s how high the interest rate is, how much it affects your credit score, and how it’s treated in bankruptcy.

One other thing I’d throw in would be to look at post-tax rates. For example, if I did Lending Club (I don’t), I’d have to pay taxes on my earnings whereas the interest paid on a credit card wouldn’t be tax-deductible.

And you’re also right that there is a lot of personal preference involved here. Sometimes, getting rid of debt is about more than the interest they have to pay on it.

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Christian L. May 21, 2013 at 7:43 am

Miranda,
I loathe having any amount of debt and I equally dislike paying interest (I’ve only paid $3.50 in interest my whole life). So personally, I strive to keep my name clear of all debts. But I understand not everybody is in the same financial situation as me.

Generally I’d still suggest avoiding debt as much as possible and not letting it accrue. Overall, it comes down to curtailing your spending and planning for unexpected expenses.

-Christian L. @ Smart Military Money

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KM May 21, 2013 at 8:27 am

My rule of thumb is to pay off what will hurt you most first. For example, all our credit cards are paid off every month since we just use them for the rewards and stay within our budget. I take my sweet time paying off the medical bill from a year ago because as annoying as it is to pay every month (there is no automatic payment feature), there is no interest and it doesn’t change anything whether I pay the minimum or in full. I always pay more into a mortgage to reduce the interest and pay it off sooner, but obviously it’s not something that can be paid off immediately.

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zimmy@moneyandpotatoes.com May 21, 2013 at 6:04 pm

I never had the displeasure of accumulating any student loan debt and can’t imagine what a daunting task paying off 100k or more must be for a recent college graduate. I say spend less on your education and learn a trade at your local community college. I worked with someone recently that is paying back about 35k in debt and it will cost her $365.00 a month for 20 years… If you have to payback closer to 1k per month, that is a rent payment.

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Bucksprout May 23, 2013 at 11:09 am

Agreed consumer debt should be paid off immediately. Student debt I think should be more of a priority. Aside from a mortgage it’s most likely the largest debt. And those with a large amount of student debt feel the pressure of the $300 plus monthly payments. Getting rid of that burden should be priority.

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Property Marbella May 24, 2013 at 2:27 am

Student loan is an investment in yourself and use the money right (study hard and good grades) you will get a great return on your studentloan.

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David May 24, 2013 at 3:17 pm

Yes, student loan is an investment in oneself, but there are exceptions. For ex, does it really make sense to borrow $$,$$$. for a Bachelors in Humanities or other major that has no job opportunities?? I speak partly from experience; my B.A. was in Religion, which is similar to Philosophy. Do u know what the employment upside is for a B.A. in religion/ philosophy? The choices for me were fast food or a temporary jobs in factories.
Now, I did go to seminary to earn a M. Divinity to be ordained as a protestant minister & have had many yrs of blessings along w/ some yrs of financial struggles. By the way, if u know someone who works for a non- profit, u may want to warn them that most non-profits don’t pay into unemployment, & thus their employees do not qualify for unemployment. I learned that the hard way, when we had 2 children under age 5.

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Tim May 24, 2013 at 3:20 pm

One other thing: Don’t rely on college recruiting staff to give accurate info about the possible job market. They won’t be around to help u land a job when u finish ur degree, & some are unethical. Do your own due dilligence on the job market for the type of educational program u’re thinking of starting.

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Lee May 24, 2013 at 3:09 pm

My wife & I married in ’83 -30 yrs ago. Within 5-6 yrs, we were up to our necks in credit card, consumer, car loan, & student loans; I mean scraping by to make the min payments. At one pt, our car died, & our bank rejected our car loan app, until I could prove I had only 2 mths to pay on 1 student loan. It was miserable.
For 10 yrs, we tried to live as modestly as possible & make regular payments. & in ’99, at age 39, we finally made it – debt-free – let me tell u there is no BETTER FEELING in the world, than to owe no one anything. It gave us the freedom to afford almost anything, but w/ the learned discipline to say No to almost everything. We’ve had to take out a few car loans since, & have occasionally carried more than we’d like on a credit card. But our debt-income ratio is still very good.
A certain amount of debt is manageable, but our society makes it so easy for people to get upside down, which is a kind of financial servitude. This might be controversial, but I also believe that bankruptcy has become too easy in the US. We need to go back to the days of absolutely NO credit for 7 yrs after bankruptcy.

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Anton Ivanov | Dreams Cash True May 25, 2013 at 10:23 am

I agree – the feeling of being debt free and having no monthly payments to weigh you down are great. I don’t separate “good” debt from “bad”. To me, it’s all debt, it all needs to get paid off one day or another and I would rather do it sooner than later.

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Denis June 15, 2013 at 12:27 am

I hate the idea of anyone going back into any debt after a bankruptcy. Have you not learned your lesson? Many people do not, and within 5 years are right back, wallets crammed with credit cards with maxed limits.

Here in Canada, I have not been able to rent a truck to move with without having a credit card, so I have one. Not that I usually want one but I have it. Since I have had it, I have maxed it out, once for an airline ticket, and once for car repairs. ($1000.00 limit does not go far these days!) the rest of the time has been minimal use, such as once a month to buy a meal at a restaurant. Not once has there been interest charged though. Ya, they probably don’t like my purchasing methods much but TOUGH! They charge enough of an annual fee! To me, there is no good debt, as ANY debt carries risk, and we don’t evaluate risk well with our hearts!

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