If you're able to repay has given in a single fell swoop, doing so may feel just like a no-brainer. Who wouldn't want to rid themselves of a large chunk of debt? But the truth is it doesn't always take advantage financial sense when examining the large picture. Factors like other debts, cash savings and monthly income all come up. If, for example, you might also need high-interest debt or lack a good emergency fund, your hard earned money might be offer better use elsewhere.
Eliminating your student debt having a single lump-sum payment isn't something can undo after the fact. It's wise to weigh the advantages and disadvantages beforehand to make sure it aligns with your overall financial health.
What Would be the Advantages of Paying Off Student Debt?
Let's move on using the advantages of paying down your student debt. To begin with, you would be eliminating a normal bill. The typical monthly student loan payment is roughly $460, based on the Education Data Initiative. Eliminating your payment could instantly create more room inside your budget and permit you to save for other financial goals.
Wiping out balance may also save you money in the long run. For the past 5 years, the average rate of interest for federal undergraduate student loans has been 4.11%. Private student education loans, however, average from 6% to 7%, based on the Education Data Initiative. Doing away with your balance might eliminate many years of charges, that could equal to significant savings.
Let's say you owe $10,000 on a private education loan having a five-year term along with a 7% rate of interest. By sticking to this repayment schedule, you'd spend over $1,880 in interest through the life of the loan. Paying down the loan entirely today enables you to sidestep these fees.
Is Paying down Education loan Debt Always a Good Idea?
Paying down education loan debt inside a lump sum payment isn't always financially prudent, particularly if it'll strain your financial well-being. If doing so will require you to deplete your emergency fund, you could be putting yourself inside a vulnerable situation. A widely used guideline is to set aside 3 to 6 months' worth of expenses inside a liquid cash checking account. Whenever your next financial surprise you come accross, you will have that back-up.
You will want to consider your retirement fund as well. Are you on the right track with long-term savings? Financial planners recommend the next benchmarks:
- Age 30: Have one year's worth of your present annual salary
- Age 40: Have 3 times your current annual salary
- Age 50: Have six times your current annual salary
If you are behind on retirement savings, then pouring excess cash to your student education loans might not make the most financial sense—particularly if your debt includes a reasonable interest rate. Expected investment returns play a role here.
Let's go back to the example we mentioned earlier and pretend you have an extra $10,000 on hand. Instead of putting that money toward an education loan with, say, a 4% interest rate, you may decide to fund your retirement accounts instead. The stock market has produced an average annual return of 10% because the 1920s. Past performance doesn't guarantee future returns, however it makes sense that investing might be a better way to grow your wealth with time.
You might also make use of a cash windfall to cross a big financial milestone, like creating a down payment on a home or paying off higher-interest debt. By the second quarter of 2023, the average charge card APR was 16.65%. Debt such as this can cost you more money in the long term than a lower-interest student loan.
How to create Student Loan Payments More Affordable
Should you decide not to pay off has given, you'll probably still find ways to payout your loan less expensive. Public student education loans, that are provided by the us government, offer certain protections for eligible borrowers. Including:
- Income-driven repayment plans: This could bring your payment per month right down to 10% to 20% of the discretionary income. Income-driven repayment plans can also extend your repayment term. If your finances are tight, it could assist you to secure a far more reasonable payment per month.
- Loan forgiveness programs: Certain borrowers may qualify for student loan forgiveness. Those who work with a government agency or eligible nonprofit, for instance, can explore public service education loan forgiveness. They have to work full time, make 120 qualifying payments with an income-driven repayment schedule and also have federal direct loans. Your remaining loan balance is going to be forgiven after meeting all these requirements. Similarly, teachers can have their loans forgiven when they meet certain eligibility criteria.
- Refinance your student loans: If you're tied to a higher interest rate, refinancing your student loans may be worth exploring. This requires taking out a new loan which has a lower rate of interest, then by using their to pay off your open balances. You may even decide to extend your repayment term and secure a lower payment per month. Just keep in mind that refinancing federal student loans will take income-driven repayment plans and loan forgiveness programs off the table.
- See in case your employer can help out: Check your employee benefits to see if your employer will kick in toward has given. Approximately 17% of employers currently offer student loan assistance, based on the Employee Benefit Research Institute. For instance, they might match some or all of your payments.
The Bottom Line
Paying off your student loans in a single lump sum can be a smart move, based on your financial situation along with other debts. In some cases, it might be preferable to keep your student debt and employ a cash windfall to achieve other financial milestones.
Regardless of what, maintaining strong credit is always key—consider it a core bit of financial wellness. Free credit monitoring with Experian could be a great resource, whether you have to pay off has given or not.