Should I pay off my student loans?

 

I’m surprised at how frequently this question comes up.  Normally it’s poor “I owe X dollars and that i have X dollars relaxing in the bank, must i use it all to repay my student loans?”

The answer to this is always to pay just off has given.  However, many people think they fall into some exception that makes their situation different.  Most people are wrong.

I’m going to haggle with my lender, offer to pay in a lump sum payment, and save some money-

No you are not.  You might have learned about people settling their debt for pennies on the dollar, but you’re likely within an entirely different situation.  Perhaps you have fallen behind in your student education loans?  Does your phone keep ringing off the hook?  Has your debt been sold to some collection agency?  Should you answer was no to all of those questions, then you’re in no position to “haggle” to obtain a lower payoff amount.

The ideal borrower within the eyes of the education loan lender is somebody that never pays more than the minimum, occasionally pays late fees, but doesn’t ever fall behind.  This is where the wages for companies like Sallie Mae is the highest.  If you’re swept up on your student education loans, this means they are making money on you each month in the form of interest.  The do not want you to pay off your loans having a lump sum payment, plus they certainly won’t be giving you a price reduction to do it.

I can earn more money on my small investments-

This might be true, but you are playing with fire.  I will be the first to admit that student loans have made me very debt averse.  Anytime I’m able to eliminate some debt, I’ll look to achieve this.  However, from a goal standpoint it is conceivable that your money could do more for you personally within an investment.

The issue is that you really don’t know.  Education loan interest is never lower than the interest on any banking or money market account, and you will almost never look for a CD which has a higher rate than your student loan.  Why is this significant?  It means that whatever investment you select calls for a hazard.

Suppose you anticipate to earn 8% within the stock exchange and you have student education loans at 6.8%.  You cannot just state that 8 is bigger than 6.8, so I’m going to invest.  The question is this, would you rather a possible gain of 8% or perhaps a guaranteed roi at 6.8%?

The proven fact that paying off has given is the equivalent of an assured roi makes it a very compelling decision- not to mention the psychological relief which comes from being student free of debt.

I’m saving for any home-

Being in a position to put a couple of money down is a great thing, however the the truth is that paying off your student loan debt will probably give you much more home buying power than a deposit.  If you have student education loans and also you want to buy a house, then you know how important it is to address your back end ratio.  If you’re able to wipe some debt from the books, your back end ratio will improve and your borrowing power increases dramatically.

Also, think about the interest.  Interest on the home loan is nearly always going to be less than it’s on the student loan.  Why can you spend money on your a low interest rate debt in front of your higher interest debt?  That would be like getting a huge payday loan to pay off your vehicle loan.  All you are doing is making sure that you unnecessarily waste your money on interest.

The best reason to put off paying down your student loans-

The most logical reason to not result in the huge one time payment happens because you won’t want to lose your rainy day fund.  It’s a good idea to possess a minimum of several months price of bills squirreled away.  Nobody intentions of being fired or running into huge hospital bills, but it happens every day.  If you wish to protect yourself a little, having one of these money set aside can be a wise decision.

How would you choose which is better?  Do the math.  Suppose you have $10,000 in student loans and you have $10,000 in the bank.  You would like that money in the event of an urgent situation, try not to know if it’s worth it.  Take a look at how much money you spend every month on student loan interest.  Suppose it is $50.  Are you prepared to spend $50 per month to possess those funds relaxing in the financial institution?

The Bottom Line

Student loans suck.  If you can get yours repaid, do.  Don’t make excuses, just take action.