My last post discussed the categories of people who might not benefit from expediting student loan payments. I hope I didn’t scare too many people away from the blog! If your situation does not match any of the categories I mentioned, or you are still interested in paying off loans early, you might be wondering what the benefits of expediting student loan payments might be. There is a massive opportunity cost to expediting student loan payments, since this leaves less money to use in other parts of one’s life. However, there are a multitude of benefits to paying off student loans early that makes this strategy appropriate for many people.
One main reason you should pay off student loans early is that this will reduce the total amount of interest you will pay. Due to capitalizing interest, if student loans are allowed to accrue interest over a long period of time, you will eventually have to pay interest on the interest of your student loans. Furthermore, if you pay off student loans early you eliminate any interest payments you would have made had you paid student debt in later years. I estimate that I saved around $56,000 in interest payments by paying off my student loans in 46 months rather than over 10 years under the standard repayment plan. If I had been on an extended repayment plan, the interest I avoided paying would have been even greater, and this figure illustrates the power of paying off student loans early.
Furthermore, many people might not realize that paying off student loans early advances the due date of the loans. In other words, earlier payments on your debt will make it so that you are not required to make a payment on the loans for months or even years in the future. This is important to point out because advancing the due date of your student loans will give you a financial cushion in case some event in your life makes it difficult to pay student loans for an extended period of time. Of course, you could also apply for a forbearance in such a circumstance, but forbearances might only be allowed for a set period, and advancing the due date might provide extra security even if this option is available. This was one argument I used when explaining to my grandfather why paying off student loans early was better than leaving money in the bank in case of a life emergency. I explained that not only would my money paid toward student loans eliminate interest at a rate higher than many investments, but paying off student loans early provided this other layer of financial security. This is not to say that you should have no savings, and I’ll discuss in future posts how to strike a balance between saving for emergencies and paying off debt. However, many might not know that paying off student loans early advances the due dates on the loans, and this can be very beneficial.
Along similar lines, paying off student loans early provides one with more flexibility when choosing a job or making any number of life choices. Paying off student loans early will lower your monthly payments if you pick off smaller loans to pay off first, and I will discuss payment strategies in greater detail in future posts. Furthermore, the interest that accrues on your student loans per day will gradually go down as you make early payments, creating a more manageable student debt situation. This benefit was particularly important to me several years ago when the income from my main job decreased around 70 percent in a matter of months. However, I did not need to change my lifestyle in any way, since my student loan payments had diminished because I paid off my student loans early.
Furthermore, paying off student loans early will empower you to borrow other types of debt such as mortgages and cars loans. Most mortgage lenders prefer applicants who have a debt-to-income ratio below 35-43 percent, and student loans can make it difficult to meet this standard. This is especially true if you have credit card debt, car loans, or any other type of debt that could be included in this percentage. I will expand upon this point in future posts, but it is worth mentioning now that you should pay off higher interest credit card debt or other high interest loans before some student debt. However, all things being equal, paying off student loans earlier can improve your financial profile and enable you to borrow other types of “good” debt.
It should also be noted that paying off student loans early has an amazing psychological effect that is difficult to quantify in monetary terms. My student loans were a huge burden on me, and I thought about the loans constantly. I checked my outstanding loan balance on an almost daily basis, and I calculated the interest that was accruing on my debt just as frequently. Every time I put some money toward my student debt, I breathed a sigh of relief, and my student loans consumed a large amount of my mental energy. Paying off this debt really benefited me psychologically, and I view this feat as one of the biggest accomplishments of my life. If you are like me, and student debt particularly wears you down, it might make sense to expedite student loan payments even if the math does not quite work out in favor of taking this approach.
Lastly, it is worth mentioning that paying off student loans early will teach you how to a live a lifestyle that will lead to financial success even when your student loans are all paid off. By committing yourself to paying off student loans early, you will learn methods that will help you save money and increase your income when trying to attain other financial goals. As I will discuss in future posts, I used the same methods I utilized to pay off my student loans in order to begin saving for retirement and creating a nest egg. All told, committing yourself to paying off student loans can lead to much greater success when working toward other life goals.
In sum, there are many financial, psychological, and practical reasons for paying off student loans early. No matter what reason motivates you most to pay off your student loans, this website will provide you with the support and encouragement you need to conquer your student debt.