Should You Pay Off Student Loans Early?

Weighing the pros of ridding yourself of student debt

To afford attending139989226_Featured college nowadays, more and more students are left with thousands in student debt that they’re responsible for paying back after graduating from college. In fact, between 2007 and 2012, student loan amounts increased 75 percent, according to a TransUnion study.

Student loans are, in fact, one of the biggest causes of debt. In 2010, student loan debt surpassed credit card debt for the first time, rising to more than $800 billion. And with so many people owing such large balances, that leaves the burning question for these students: “Is it better to pay off student loans early?”

While there are certainly reasons why paying a student debt early could be advantageous (i.e. no debt is better than debt). In some instances, however, paying the loans off early may not provide enough incentive. It really depends on your personal situation and where you stand in life.

Here is what you should know about paying down student loans ahead of time:

Pros
You may save money – If your student loan has a high interest rate (7 percent or higher), it’s a good idea to pay those off quicker than slower. Students who pay the minimum in student loans might feel like they’re saving in the present time, but as years pass, they’re actually paying much more than what the actual loan amount is. For instance, say you’re paying off a $10,000 student loan at an interest rate of 7 percent. If the loan term is 10 years, that means paying off the balance early would put approximately $3,932.94 in your pocket. So be sure to note your interest rate when deciding whether to pay them off early.

Lower your debt-to-income ratio – A debt-to-income ratio is the percentage of your income each month that goes toward paying off debt. Despite whether you can pay your loans off in full, if you up your monthly payments, it might still be worth it in the long run. Given the numbers in the previous example, if you’re making minimum payments to that hypothetical loan, you’re paying $116.11 per month. Adding another $100 each month to your payoff would make that $216.11 a month. And by paying that amount, you’d be able to pay off the loan in a little bit more than four and a half years, about half the time it would’ve originally taken you.

Peace of mind – Let’s face it: How good would it feel not having to pay each month toward your student loans? By just getting rid of it as quickly as possible, it’s something you won’t have to worry about. And that way, you can focus on saving for something big, like a house, or start investing for retirement. Think of it like cleaning: It has to get done somehow, so you may as well do it now (if it’s feasible) instead of waiting.

Before you give your loan office a call and rethink your financial plan, there are a few scenarios that need to be avoided when paying down your student loans.

Cons
You have debt with worse repercussions – “[Student loans] are typically unsecured loans that are not tied to collateral such as property, meaning your creditor will not likely repossess your personal assets, such as your home, if you are forced to delay repayment,” says Kent Kramer, chief investment officer and lead advisor at Foster Group. And while there are still consequences for not paying student loans on time, such as having your wages garnished, that still is considered better by most than having your house foreclosed or car repossessed. So Kramer notes if you do have the extra money to pay off your loans, it may be wiser to put it toward other debt before putting it toward student loans.

It would mean draining your bank account – Avoid paying down your student loans if it means you won’t have a dollar left to spare. It’s important to always have some cash set aside in case of an emergency — that will always trump getting your student debt paid off early. So if each month you’re left with nothing after putting money toward your student loans, it doesn’t make sense to try to pay the loan off early.

If you have any additional questions, be sure to contact us today and one of our representatives will help you.

Used with Permission. Published by IMN Bank Adviser Includes copyrighted material of IMakeNews, Inc. and its suppliers.

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