We are all very acquainted with the unfortunate reality of student debt. Today, 70% of scholars will graduate with significant debt which will take an average of 20 years to pay back. While I have about $65,000 to go, I plan on having them paid off within seven years. Thankfully, my wife didn't accrue any loans therefore we can tackle my loans together.
Being a first generation college student, I was not prepared for this monster. But through hard work, research, and also the right support system, I have been in a position to figure it out and create a repayment schedule.
What keeps me focused is the fact that they will be repaid with no longer an albatross around my neck. Not everybody feels by doing this, though. Actually, some people even consider keeping some student education loans to take advantage of the tax benefits.
While it seems logical to do that, financial advisors would strongly advise to knock those debts off as fast as possible. Not only does it release money for other budget categories, it simply makes everything much easier to know you're no more paying on your education.
Beyond creating more money and elimination some financial pressure, here are three major financial advantages to paying down student loans.
Why It’s Wise to Repay Your Student Loans
Debt-to-Income Ratio
In America, we rely heavily on our credit score heavily if we want to finance large purchases like a home or car.
Your credit rating consists of the following components:
- Payment History – 35%
- Debt-to-Income Ratio – 30%
- Credit History Age – 15%
- Types of Credit On Report – 10%
- Number of Credit Inquiries – 10%
As you can see, the most important is paying your debts promptly. Next is debt-to-income ratio (DTI).
Debt-to-income ratio is really a formula comprised of two parts:
- How much debt you currently hold (student loans, charge cards, auto loan, etc.), the ratio of credit utilization (credit card balances vs. charge card limits), as well as your total loan balances with regards to the original amount of the loan
- Your income
Those two numbers are then compared against each other to produce your debt-to-income ratio.
Paying off student loans is an excellent method to enhance your DTI. However, should you only make minimum payments, your DTI will take much longer to go down. And also the higher your debt-to-income ratio is, the greater the impact on your credit score, which in turn impacts your other major purchases and financial decisions.
However, one way to enhance your finances whilst paying down has given is to save for a “rainy day”. If your student education loans are extremely large, that may 't be possible
Establishing An urgent situation Fund
Most experts will tell you to place away money for any day you need it – an emergency fund. Unfortunately, large education loan payments make saving for an emergency fund difficult. Actually, nearly 40% of Americans don't have the ability to even cover a $1,000 emergency.
While student loans might not be the sole cause of this, it is a factor. The unfortunate part is that this insufficient emergency fund can trickle into much more debt.
Let's say your car needs an urgent situation repair that's $500. If you don't have available cash, that money will typically come from a credit card which will start to accrue interest. That $500 repair can now cost closer to $1,200.
Paying off student loans means you can put aside money into an urgent situation fund for your unexpected car repair or medical bill.
While I do have student education loans, my wife and I managed to get a priority to build our savings and emergency fund first. If you possess the capability to achieve this, I suggest establishing an urgent situation fund with a minimum of $500.
Knowing you've that cushion staying with you makes it easier to tackle has given making extra payments with confidence
Building A Savings Account
A savings account has become unrealistic for many people paying off student loans. While paying student loans, it is not easy to budget money aside for a savings account. While the overall American savings accounts and rates look healthy, 29% of Americans still have a checking account with less than $1,000 inside it.
Again, student loans may not be entirely guilty of this, however it does play a role.
However, like an emergency fund, it's necessary to begin saving once you can. Using a savings account provides several benefits.
First, it gives you security when an unexpected expense pops up. This really is similar to an emergency fund, but ideally it might be for bigger expenses as an unexpected home repair.
Second, it offers a superior asset protection. Even though many people may tie their money in assets such as real estate or bonds, a checking account is liquid cash that typically could be accessed quickly.
While the potential make money from a savings account is a lot smaller, it is comforting to know you've immediate access to that particular money if you want it.
Third, it provides room for unexpected work at home opportunities. If your perfect chance to make money arises, having liquid cash can come in handy.
The Objective of Paying Off Student Loans
The ultimate objective of paying down student loans is to get your financial life right into a healthier place.
While it is incredibly hard, it can be done. Andrew could pay his way through school and graduate nearly debt free!
The financial benefits of paying off student loans are staggering.
Getting from underneath the burden of student education loans is incredibly stress-relieving – I can't wait to get there myself!
Once you can get that monkey off your back, the opportunity to build an urgent situation fund and build your savings can completely improve your lifestyle, and allows the possibility of further possibilities to be in easy reach.
CONNECT WITH OTHER PARENTS TRYING TO FIGURE OUT HOW TO PAY FOR COLLEGE
JOIN ONE OR Our FACEBOOK GROUPS:
PAYING FOR COLLEGE 101
HOW To locate MERIT SCHOLARSHIPS