Have you ever thought you’d be told to wait to pay off your student loans? Especially when you read about people who pay off anywhere from $48,000 to $90,000 in debt in an impossible amount of time. Not only is student loan debt the reason many Millennials aren’t buying homes, but it can be psychologically taxing, too. If you’re asking yourself “should I pay off my student loans?” then this article is for you.
Why Should I Pay Off My Student Loans Later?
You Have High-Interest Credit Card Debt
Have you looked at the annual percentage rates on your credit cards lately? You’re probably hovering anywhere from 13% to 21% (yikes!). That means you’re quickly owing more on your purchases than what you initially paid for them. Student loan interest rates average around 4% to 9%, which means it’s still smarter to pay off your credit cards first. Knowing how credit cards work will help you determine if its a good idea to pay them off before your student loan debt.
You Don’t Have Emergency Savings
Creating an emergency savings fund is crucial to cover surprise expenses like car repairs, medical bills or any other unexpected costly expense. A general rule of thumb is to have six months of expenses saved. If you’re just starting to save, then try to set aside 10% of your monthly income in a savings account. Include this as part of your budget by making automatic payments from your paycheck to your savings account each payday.
You Might Qualify for Loan Forgiveness
Don’t miss out on loan forgiveness programs if you’re eligible to apply for them. If you’re enrolled in an income-driven repayment plan, your debt can be forgiven in 20-25 years. Borrowers who work in public service such as for the government or for a non-profit institution can have their loans forgiven after 10 years of service. Full-time teachers who work in a low-income public school for at least 5 years are also eligible for forgiveness of up to $17,500. Waiting it out might pay off, in the end, thanks to these forgiveness programs.
You’ll Lose the Benefit of Having Installment Debt
A quick lesson in the two types of debt: installment debt and revolving debt. Installment debt is a loan repaid in regular installments. It’s generally repaid in monthly payments that include interest and principal. Installment debt is used for big-ticket items like a house, car or appliances. Your education counts as a big-ticket item, too. Installment debt usually has a lower interest rate than a credit card.
Revolving debt, on the other hand, is not issued in a certain amount. You’ll have a limit, but how much you use is up to you. This applies to credit cards and home equity lines of credit. Revolving debt tends to have a harsher effect on your credit score than installment debt, which isn’t factored in when accounting for your credit utilization. Having both installment debt and revolving debt contributes to a healthy credit report, because they are a variety of credit types. Eliminating your installment debt completely would limit the variety and could negatively impact your report.
Why Should I Pay Off My Student Loans Now?
You’ll Save Money
If you pay off your student loans faster, you’ll avoid paying more interest over time. Let’s say you have a $30,000 loan at an interest rate of 4.45% and pay $280 a month; you’ll end up paying over $8,000 in interest over 11 years. If you pay $350 a month instead, you’ll cut 3 years from your repayment and pay $2,000 less in interest. That’s more money in your pocket to pay for other things. Plus, making extra payments on your student loans will make sure you dont have capitalizing interest on the loan, which should be avoided at all costs.
You’ll Lower Your Debt to Income Ratio
Your student loans will make you less likely to qualify for a mortgage, because the higher your debt-to-income ratio, the more likely you are to run into trouble making monthly payments. By adding up your monthly debt payments and dividing by your gross monthly income, you’ll be able to find out your debt-to-income ratio.
For example, let’s say you earn $3,000 a month, pay $350 for an auto loan, $550 for your student loans and $400 for your credit card. Your monthly debt payments are $1,300, which is nearly 42% of your gross monthly income. This is 43.3%, which is higher than the 43% required in order to get a qualified mortgage. If you eliminate your student loan payments, you would drop your ratio down to 25%.
You’ll Relieve Mental and Physical Strain
Studies have found that student loan debt can cause increased stress and feelings of ill health. People with higher levels of relative debt, when compared to household assets, report more stress, depression, and worse overall health. Debt can raise blood pressure and increases your chances of stroke, too. Lifting the debt burden from your shoulders can relieve all of this strain to make you feel happier and healthier.
You’ll Avoid Problems Down the Road
Unlike other debt, student loan debt is virtually inescapable. Even bankruptcy is only available in very limited cases and it can be a complex, difficult process to go through. This can spell trouble if something happens to you financially later in life. If you have the ability to pay off your loans now and still live comfortably, then it might be wise to do so.
Choose the Best Path For You
Asking “should I pay off my student loans?” doesn’t have to feel like an impossible question. There are pros and cons to both paths. Some people choose to make “monster payments” to get rid of their loans as quickly as possible while others prefer the slow and steady approach to repayment. Neither approach is right or wrong. Whatever you do, make sure you choose the option that works the best for you right now and in the future.