5 Benefits of Paying Off Student Loans Early
Many college students graduate with student loan debt and carry that debt with them throughout adulthood. But that student loan debt may be hurting you.
You may be wondering if you should include your student loans in your debt payment plan or if you should worry about paying off your student loans early. If you're able, there are several good reasons to focus on paying off your student loans as soon as possible.
Your Debt -to-Income Ratio
One good reason to pay off your student loans is that it will lower your debt-to-income ratio. That means that you have more money available to you when it is time to buy a house or to borrow money for a car.
If you pay off your student loans, you will not only be free of those monthly payments, you'll also be able to reach your other financial goals more easily. Plus, you'll have the opportunity to invest the money you'd otherwise be sinking into your student loans. Then you'll really be able to focus on building wealth.
The Tax Break Isn't That Great
One common misconception about student loans is that you should keep them for the tax break. This may be enough reason to put the student loans at the end of your debt snowball, but you should realize that you can only deduct $2,500 off your taxable income. This deduction also begins to phase out when making between $75,000-$80,000 ($140,000 and $170,000 if you file a joint return) per year, and after that you are no longer eligible for the deduction.
This amount is nominal and you may pay much more in interest than you'd save via the tax break over the life of your loans. It's better to be rid of the student loans rather than hanging on to them for a tax break.
It's Costing You
Even if you take advantage of the student loan tax break, you should consider how much money you are losing each month due to both your student loan payment and interest. Depending on the amount of student loan debt you have, your payment may take up a sizable chunk of your budget.
If you pay off your student loans, you will be able to save up more quickly for other financial goals, such as saving up for a down payment on your first home, taking a trip, starting an investment portfolio, or opening your own business.
It's Virtually Unescapable
Many people who are overwhelmed by student loan debt hope that bankruptcy may offer a solution to their problem. However, if you declare bankruptcy, it's rare that your student loans will be discharged through that process. There are few ways you can get rid of your student loans—disability, death, or qualifying for certain student loan forgiveness programs.
That's why you should focus on paying off your student loans. There's really no getting out of it.
Get Rid of Financial Worry
If you want to reduce your financial stress, you should work on paying off your student loans. Even if your student loans are at the end of your debt payment plan, you can benefit by working on getting out of debt and reducing the amount that you owe.
Getting on a budget, and making a debt payment plan can help you clear up your debt and make it possible for you to stop worrying about money. It should be part of your plan when you first graduate from college.
Reasons to Not Pay Off Student Loans Early
Getting out of debt fast sounds great, but the reality is it's not doable for everyone. Before you jump into a plan to decimate your student loan balance, take stock of your whole financial situation.
You Don't Have Enough Saved Up
A healthy emergency fund can help you avoid going into debt when life gives you an expensive surprise. Prioritize building a savings reserve of three to six months' worth of your crucial expenses before aggressively paying down student loan debt.
You Have Other Debt
Student loans have relatively low interest rates, compared with other forms of credit like personal loans and credit cards. Compare the interest rates on your other debts when deciding what to tackle first—student loans probably won't be the first thing you want to get rid of if your main goal is to save money by getting out of debt.