Why the pay later approach is bad for student loan borrowers

by Jovan Hackley | Nov 14, 2016

From political proposals to puffed up promises, the thought that you should “pay later” when it comes to student loans runs rampant at every level. So much so that today more than 40 percent of borrowers aren’t making payments, according to April 2016 data from the U.S. Department of Education.

While many people need help and emergency relief from a student loan payment, avoiding them can have real costly affect on a borrower’s financial wellness and life.

Here are three reasons the “pay later” strategy should be a last resort.


The biggest problem with paying down your student loans “later” is that later has serious bottom-line costs that are often seen as short-term “savings.”

A student loan for $50,000, borrowed at 6.8 percent interest and repaid over the 21 year average, will cost you more than $94,000 (around $44,000 in interest alone). If you delay starting your payments and let interest collect for five years, that $94,000 turns into almost $125,000 owed (an additional $31,000).

In contrast, if that additional $31,000 was invested by a 24 year old into a 401k fund with a four percent return, it turns into more than $150,000 at retirement. The hard truth is that avoiding in payments in the short-term really isn’t saving at all.


One of the most common attempts at “avoidance” is forbearance. After many have exhausted grace periods and deferments (which are different because interest doesn’t accrue on the most common loan type), they move on to the next option to avoid paying. This option is usually forbearance.

By design, forbearances are supposed to help borrowers struggling to make any loan payment due to an expected life event that affects your income (layoff, divorce, etc.). If you have regular income and are struggling because of a longer-lasting financial conundrum (e.g. you’re not making enough to afford the minimum), income-based repayment plans are a much better option.

With forbearance, your loans continue to accrue interest, essentially increasing the amount of money you owe. While there is relief in the short term, exhausting this option can result in thousands more owed or, even worse, not having this option when and if you really need it.


In his book, Breakfast with Socrates, psychology expert Robert Rowland Smith wrote, “The psyche will do anything to avoid pain, and when faced with something traumatic, like having to pay, its instinct is to put it off.”

Smith suggest that a mental deferral mimics pleasure and creates the delayed effect that “feels” good by softening the blow of an impactful event like parting with money. The problem with avoiding student loan payments is that avoiding doesn’t soften the blow, it sets you up for big trauma later – whether that’s having a hard time home buying or a default that could keep you from going back to school.


The biggest problem with the avoidance approach to student loans is that it isn’t necessary. Today, there are more than a few ways to get help tackling student debt. In addition to federal resources, many colleges and universities offer counseling and education through providers like SALT Money.

In addition, there are a fast growing number of employers who are offering student loan employee benefits and saving employees thousands on student loans.

The biggest reason paying later is bad is because there’s help today. To learn more about how to bring student loan benefits to your company, contact us below.


by Jovan Hackley | Nov 14, 2016

by Jovan Hackley | Nov 14, 2016

by Jovan Hackley | Nov 14, 2016