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Student loan debt is a big problem for those who incur one. According to the student loan debt statistics from the Education Data Initiative, 42.8 million Americans have a student loan debt. Student loans are a fact of life for many Americans.
Paying off student debt, especially with high student loan interest rates, can sometimes be impossible. For this reason, some people choose to pay off their student loans early. But is it really the right thing to do?
This article discusses the benefits of paying off student loans early and shows various ways to do so. It also lists down possible disadvantages of paying off student debt early.
Knowing the benefits of prioritizing paying off your student loans early can help you make informed financial decisions. While it’s difficult to consider making advance payments when you have other financial obligations, paying off your student loans earlier than expected can help you avoid more interest and fees.
Why Should You Pay Your Student Loans Early?
Here are some of the benefits you can enjoy when you pay off your loans early:
- You will pay less interest in the future. It is possible to save money on your student loans by paying them off early. The longer you take to pay off your student loan, the more interest you will pay.
- You can speed up your progress toward other financial goals. Student loan payments can make retirement savings or a down payment on your first home difficult.
With one less monthly payment, you can use the funds you would apply towards student loans elsewhere, like saving for a house or retirement or going on vacation.
- You can improve your debt-to-income ratio. A significant monthly payment could improve your debt-to-income ratio, which creditors use to determine whether you qualify for credit. Lenders are more likely to approve loans if you can reduce your debt and increase your income.
- You can avoid penalties. Early payment of student loans will not cost you anything. It does not increase the amount you need to pay, and there are no hidden fees.
- You can reduce or avoid financial anxiety. Student loans do not go away until they are paid off, even in bankruptcy cases. However, taking out the loan payment can reduce financial stress.
Ways to Quickly Pay Off Student Loans
Here are some suggestions for how you can repay your student loans sooner.
- Make payments that are more than the minimum each month. Paying more than the minimum on your student loans can help you pay off your balance faster. A student loan calculator can give you a sense of how much time you can save by making larger payments.
- You can change your repayment plan. When you want to pay off your student loans faster, switching to a shorter repayment term can help. However, the shorter the term of a loan, the higher the monthly payments. Before you switch, be sure your budget can handle the increase in payments.
- You can opt for a biweekly payment. If you make biweekly payments, you will make 26 half-payments within a year, considering that there are 52 weeks in a year. If that’s the case, you will make 13 payments on your loans each year instead of 12.
- Use your tax refund to pay down any student loans you still owe. Paying your student loan debt can be easier by redirecting a portion of your tax refund toward paying down that balance. The refund you received could have come from the tax deduction you got for having paid the interest on your student loans.
- Reduce your student loan payments by refinancing. If you could find a lower interest rate on your loan, that would help you pay off your debt faster. By reducing your interest charges, you may be able to pay off the balance of money owed on the loan.
The Drawbacks of Paying Student Loans Early
Early payment of student loans can be wise. But you should consider the disadvantages and weigh the pros and cons before deciding.
- You need to make larger monthly payments. If you are early in your career or earn little money, it may be challenging to pay off student loans quickly.
Suppose you can afford to pay more than your regular payments without making significant changes in your lifestyle. In that case, increasing the amount of money you are paying off a loan is smart.
- You will lose a tax deduction for paying off your student loans. If you make payments on your student loans, the interest you paid during that year is tax deductible up to a maximum of $2,500.
Regardless of whether you itemize, this deduction will decrease the income on which taxes are calculated. Once you pay off your student loans, this deduction will no longer be available. As a result, you have to pay slightly more taxes than expected.
- You will have to wait before building an emergency fund. People with insufficient money saved for emergencies could fall into debt if a car repair or other unexpected bills hit them.
You might need more money to save if you pay off your student loans aggressively. There are significant risks involved in making that choice.
Emergency funds are essential. Setting aside $1,000 before making extra loan payments is wise and helps ensure you have enough money for unexpected expenses.
Quickly paying off your student loans can significantly change your life. However, like all major financial decisions, it is important to consider the factors discussed above before deciding whether or not you should opt for earlier payment of student loans.
- Student Loan Debt Statistics
- Should I pay off my student loans early?
- 6 Ways to Pay Off Student Loans Fast
- 5 Ways to Pay Off Student Loans Faster