Mr. Wonderful himself, Kevin O’Leary, has made a career out of giving financial advice to struggling entrepreneurs. As one of the mega-stars of ABC’s Shark Tank, O’Leary also frequents CNBC and Fox Business networks. Now, he has a word to share with millions of Americans suffering under the burden of student loans.
Recently, the amount of student loan debt has topped $1.5 trillion and growing with each passing year. It has become an epidemic of biblical proportions, higher than a credit card and auto loan debt. Only mortgage debt is higher. By 2023, it’s estimated that 40% of all student loans will default as it becomes unmanageable to borrowers.
So, what is O’Leary’s sage advice? Pay off your loans immediately.
“Get rid of that student debt right up front while you’re young and frisky, that’s the time to do it,” O’Leary told CNBC’s Make It. “You should pay that loan off in 36 months if you can do it.”
Paying Off Student Loans Should Be Your Priority
When students graduate college, their focus might be getting settled into a career and starting a family. They want to buy that house or a new car, but O’Leary thinks that’s a bad idea. Piling debt on top of debt is setting yourself up for a financial disaster later. Plus, having a large amount of student loans will make it more difficult to get other loans.
Instead, you should make paying off your student loan your main priority.
“It means you’re cutting back your lifestyle significantly. You’re spending up to 40 percent of your paycheck just to get rid of it. Why? Because it’s a very nasty thing to have hanging over your head for a very long period of time,” said O’Leary.
He makes a really good point. According to Experian in a 2017 study, even the generation known as Baby Boomers are still paying off their student loan debt. This generation is between 50-70 years old! The next generation down, 40-49-year old’s, still hold $229 billion in student debt. These loans do not just go away and can take decades to pay off.
Don’t Wait Because You Think It Will Be Easier
One strategy a lot of college students use is putting off their payments. They use forbearance and deferments, thinking it will be easier to pay off once they’re making more money. According to O’Leary, that’s not a good plan at all. In fact, it makes the problem larger and harder to deal with.
“The minute you establish a lifestyle and you start going out for dinner, and you start dating or you get married, all of a sudden, you have all kinds of other expenses, not necessarily just paying off your loan,” O’Leary says.
“That’s why you want to pay your loan off as fast as you can before your lifestyle starts to really creep in on you and make you spend more on things like vacations, and dating, and dinners, and when a child comes along, all of those expenses.”
Interest rates also play a huge part in this. When you start out, you might think the interest rates are great, but over the life of the student loans, paying decades later, the interest has really piled on thousands of extra dollars. Student loans are “generous at the beginning, but over the long term that interest really adds up,” O’Leary says.
If you have a $50,000 student loan with a 5% interest rate (which is the current rate), you’d add $14,473 in interest. This is only paying the minimum balance over a decade. On the other hand, if you pay $1,500 per month, you can get out from under your loan in three years, reducing the interest to $4,616.
“I know it sounds like a lot, but really smart people figure this out pretty quickly and they focus on getting rid of that debt,” O’Leary says.