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.
Compare the Best Student Loan Refinance Rates
Here are our top student loan refinance picks for 2019
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.