How You Should Pay Off Your Student Loan

We realize that this is a long post, but for anyone struggling with student loan debt, it is worth the read.

For recent graduates, the stress of paying off a student loan can become nerve-wracking. As we mentioned in last week’s post, some student loans are interest-free for the first six months. If your income can allow you to do so, then paying them off quickly might not be a bad idea.

With that being said, how many recent college grads are in the position to pay off student loans in six months?  I do not know any.  Let’s think about student loans differently.  I’m going to suggest that paying off student loans systematically over the term of the loan (generally 10 years) is actually an okay way to go!  How can this be true?  Because not all debt is bad.  In truth, student loans are long-term loans – and are generally inexpensive with the interest rate being fairly low. Paying off this debt systematically over a period of time can actually help build your credit score. A good credit score is a big help if you want to purchase a car or house, rent an apartment, and even get a job.

If you are in the position to pay more than the minimum payment each month, how can you evaluate whether it is a good choice? When you do have a little extra money, should you save and invest it? Or should you put it towards the payment of your student loans? You can ask yourself a couple of questions to decide what may be the best choice for you:

  1. Do you have money put away for an emergency? If you run over a box of nails and have to purchase two new tires, do you have the money saved to do it? Or would you have to charge the tires to a high-interest credit card? If you don’t have any emergency funds, creating one may be more important than paying off your student loans more quickly.
  2. Are you able to save and invest the money at a higher rate of return than the interest rate being charged on your student loan? If you can save and earn 9%, and your student loan is at a lower interest rate, then maybe saving the extra money makes more sense.

As a final consideration, if the stress of a student loan debt is keeping you up at night, then you this process might not be ideal for you. Paying off your loan quickly might be your best route.  But as you can see, debt isn’t always a bad thing. It could actually be very beneficial to some recent grads because they can have the opportunity to build credit and earn money off investments. In order to make the best financial decision, we suggest that everyone learn about their loans and their options before committing to a personal payment plan.

One thought on “How You Should Pay Off Your Student Loan

  1. Depending on how a student loan is structured, repaying it over the life of the loan is probably the best course of action. Given that student loans should be considered an investment, we borrow money knowing that we will pay substantial interest over the ten-year repayment period that follows. That’s part of investing. What is clear, though, and should factor into any consideration of the timeframe for repaying loans, is that your investment is going to start paying out as soon as you land a higher-paying job because of your degree. Keeping money set aside for those unplanned emergencies is a far better choice than simply paying down your balances as quickly as possible. After all, you know how long it will take to pay off the debt before you borrow in the first place.

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