Why Rushing Repayment of Student Loan Debt Is a Terrible Idea

Young female college graduate flashing cashA quick online search about whether or not speeding up the arduous task of paying off student loan debt is in a borrower’s best interest will return thousands of conflicting “expert” answers. Each article retrieved from the almighty web will have someone’s personal take on why expediting repayment is the best decision. The truth is, while student debt accounts for hundreds if not thousands of dollars out of the budget each month for millions of borrowers, the rushing to repay doesn’t always result in magical results. If you’re considering ramping up your student loan repayment, here’s are a few things evaluate first.

Your Minimum Monthly Payment

The average student loan balance comes in slightly more than $30,000 per borrower, and on a standard 10-year repayment plan, carries a hefty monthly payment of just over $300. For borrowers with close to six figures in student debt – and there are plenty – the minimum monthly payment exceeds $1,000 each and every month. While it may seem beneficial to pay down the loan balance quickly, paying more than the minimum may not be a realistic option.

If you are just getting started in your career and earning potential, kicking in an additional amount above and beyond your required monthly payment may mean your cash is tight from one paycheck to the next. That can start a vicious cycle of taking on other consumer debts, like credit cards or short-term loans, to cover basic living expenses. For those who do have extra income to throw toward student debt, it’s important to review how the other buckets in your financial life are being filled. If the emergency savings isn’t quite full or there are high-interest rate debts that need to be paid, focus your extra income there, first, before attempting to chip away at your student loans.

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Your Interest Rate

Compared to other consumer debts, student loans carry relatively low interest rates. Federal student loan interest rates range from 3.76% to 7%, and private student loans fall within the same range for the most qualified borrowers. On the other hand, personal loan interest rates can reach up to double digits, and most credit cards carry a rate of 15% or higher. Expediting the payoff of student loan debt with a comparatively low interest rate makes little sense when you have outstanding credit card debts or other interest-accruing obligations. Your hard-earned money will serve you much better if you are able to put a sizeable dent in high-interest debts first.

Your Forgiveness Eligibility

In the last decade, borrowers with federal student loans have been afforded the opportunity to structure a repayment plan based on the discretionary income they have left over each month. The minimum monthly payment for these programs is typically less than a standard repayment plan, and it can be extended for up to 30 years, depending on the amount owed. Income-based repayment programs are not only beneficial to borrowers who are currently earning an entry-level salary, or those who work in a field with low earning potential, but they also give borrowers access to loan forgiveness in the future. After making consistent payments for 10, 20, or 25 years, any remaining student loan balance is forgiven. For borrowers with substantial student debt, speeding up repayment may not be as beneficial as loan forgiveness in the future. It is important to speak with a tax advisor or financial planner when considering the pros and cons of student loan forgiveness, however.

Your Financial Goals

Although making noticeable headway in paying down student loan debt may feel like an accomplishment, you may be delaying or altogether giving up other financial objectives to do so. When all your extra income is going toward student loan repayment, it is near impossible to set aside money for goals like establishing an emergency fund, saving for a down payment on a home, and creating a long-term investment earmarked for retirement. Each of these common financial needs takes saving early, and often; if you are solely focused on eliminating student loan debt, you are likely to leave these accounts empty.

Student loan debt is a means to an end for financing higher education costs, but managing repayment of loans long after graduation can feel like a never-ending fight. If you’re considering speeding up the pay down of your loans, be sure to spot check your ability to make additional payments, your interest rate compared to other debts, and your forgiveness eligibility. Above all else, take the time to understand your other financial needs and wants for both and short- and long-term before throwing extra cash toward your student loan debt.

Posted on August 28, 2017 by in Personal Loans, Student Loans

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