Trouble With Student Loans? This Overlooked Factor Might Be the Reason


How good of a driver are you? If you had to rate yourself below average, average, or above average on your people skills, what rating would you give? How honest would you say you are compared to most people?

These are questions that Tali Sharot, associate professor of cognitive neuroscience at University College London, posed to her audience in a TED talk about a phenomenon called “optimism bias.” In Sharot’s words, optimism bias is, “our tendency to overestimate our likelihood of experiencing good events in our lives and underestimate our likelihood of experiencing bad events.”

She says a firefighter in California once told her that fatality investigations done by the fire department “often include ‘We didn’t think the fire was going to do that,’ even when all of the available information was there to make safe decisions.”

In other words, “we’re more optimistic than realistic, but we are oblivious to the fact,” Sharot says.

So what does this have to do with student loan payoff? A lot, it turns out. Read on to learn more about optimism bias and what you need to do to prevent it from derailing your strategic financial plans.

How optimism bias affects your finances

First of all, it’s important to note that you can have an optimism bias even if you don’t feel like you’re a particularly optimistic person. You might simply have this bias if you tend to view the future as something that will have a better outcome than your past or present.

As a whole, there’s nothing inherently wrong with optimism or optimism bias. Without this bias, Sharot, who also wrote a book on this topic, says “we would all be slightly depressed.” But feeling as though we can always beat the average, or even that we’re invincible, can have serious consequences.


When I asked Sharot what she thought the most dangerous thing about this bias might be in relation to finances, she mentioned retirement savings, or the lack thereof. If we feel confident that we’ll be able to save more later, it might be easier to put it off today.

Sharot says this bias can lead us to think that projects will cost less and take less time — something that can blow the budget of wedding planners and house renovators. And, in general, we might spend more than we can afford because we imagine a big bonus or promotion that will help us pay it down later.

All in all, Sharot cautions, this bias can lead to poor planning. And in the case of student loan debt, it could lead to borrowing more than we should, due to the belief that we’ll easily earn enough later to pay it all back.

As for people already in student loan repayment, it’s possible that this bias can prevent them from strategically approaching their payoff. For example, they might stick to payment plans that barely keep their loans above water — the idea being that even if they can afford to pay more now, there’s no need because they can always pay more later.

But even borrowers who don’t feel optimistic about their debt might exhibit similar procrastination. Author and psychotherapist Will Meyerhofer has many clients facing large amounts of student loan debt. And he noticed that they sometimes feel it’s “pointless to try to pay them down” and “better to live for today.”

In other words, some might be YOLO-ing their student loan debt payoff, which can have dangerous effects on their finances. Here’s what can be done about it, whether it’s born of optimism or pessimism.

How to prevent bias from derailing your student loan payoff

So what’s the secret to preventing optimism bias (or any bias) from getting in the way of our goals? According to Sharot, it all comes down to awareness.

“Being aware of it means we can change our decisions. It doesn’t mean we have to change our bias.”

In fact, she says, it might be impossible to change our bias. So rather than worrying about transforming a core aspect of who we are, we can simply understand it and then use it to our advantage when we can, and work around it when we need to.

And for those in student loan debt who have optimism bias, Sharot says “it’s best to take a safer route,” even if your bias leads you to believe you don’t need to.

That might mean paying extra on your student loans when you can. Or it might simply mean staying on top of your payments even if it doesn’t seem important or seems like something you can handle later.

For his part, Meyerhofer takes a pretty extreme view: He thinks of student loans as cancer. “If I ever stopped the ‘treatment’ (paying off as much money as I possibly could), the tumor would start to grow again,” Meyerhofer says.

He calls this approach dramatic, but one that helps his clients see the danger of ignoring student loan debt.

Whichever way you look at it, viewing the future as the best time to handle something as important as student loan debt can be dangerous. Defaulting on your student loans — if it comes to that — can damage your credit for up to seven years. Plus, the fees and interest that add up while in default can drastically increase the cost of your debt.

And if you’re coasting on payments but could do more, you may end up paying more than you have to over the long run. On the other hand, making lump sum extra payments on your student loans once a year with your tax refund or holiday bonus can make a huge difference.

Awareness and planning for the win

As unchangeable as things like our biases can sometimes seem, the fact that awareness can make such a big difference is great news for those who have an optimism bias. And those of us might be a lot — Sharot says in her TED Talk that 80 percent of people have this bias.

Tie your awareness into planning for a future that might look like today — even if you’re hopeful that it will be much better — so you can create a strong financial plan. If you do hit a financial bump in the road, this planning could help you be better prepared (such as by having an emergency fund on hand).

And if things only get better, then you’ve lost nothing from the careful planning — only gained habits that will help you for a lifetime.

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