Most people would agree that credit card debt should be paid quickly, since the minimum payment won’t get you anywhere fast(except maybe more debt). Exceptions may be made for balance transfers with zero interestoffers for careful users. Credit card debit is a considered one of the riskier kinds of debt.
What about student loans which typically have a much lower interest rate and needs-based deferment plans? Is there any reason you shouldn’t pay them down quickly? Some people choose to pay just the minimum even when they could pay more.
Let’s look at the alternatives to paying off student loans quickly and talk about what your preference is and why. For each alternative, I’ll explain why we are still planning to pay off our student loansas quickly as we can!
Alternatives to paying off student loansfast
*and whythey don’t work for us
1. Hope for forgiveness
With the many repayment plans offered for federal loans, there are loan forgiveness possibilities that come into play after anywhere from 10 to 30 years of regular payments. Some people avoid paying more than the minimum on their loans in hopes of having their loans forgiven.
*We actually WANT to pay our debt. We don’t want to stick around long enough to see how theloan forgiveness programspan out. Therisks of the public service loan forgiveness programapply at least in part to the other repayment programs that offer forgiveness. We want to be responsible for our student loan debt. After all, we did borrow the money and give our word that we would repay it.
Between suggestions from readers and multiple articles and comments I’ve read lately, I’ve learned that some people preferto pay just the minimum on student loans and invest any extra in the stock market. If you are paying 6.8% interest on student loan money but can earn 8-10% in the market, you could come out ahead. Here’s a look at that perspective.
*While the numbers might entice some to invest extra income while making minimum payments on student loans, I am not interested in going this route. Part of the reason is that it’s additional risk I’m not willing to take. Historically, the stock market has performed well enough over the long term to support this theory. Over a period of just a few years, though, you could as easily lose 10% as gain 10%, leaving you short when it comes time to use that money you’ve invested. For most people, returns on investment are also subject to taxes, eating up part of that higher interest rate. We want to have our debt over and done with in a couple years and not have to wait for the stock market to perform favorably to pay off our student loans.
Even though this method has potential to earn money we could put toward student loans, I prefer the safer, surer method.
3. Slow and steady will eventually finish the race.
There are hundred of other priorities that could be put above paying down student loans, so many people are comfortable coasting along paying the minimum payment on their student loans. Maybe you would prefer to put money toward other financial goals. Perhaps you are barely scraping by paying the minimum. Maybe your student loan debt has an especially low interest rate. Perhaps you have other debt that has a higher interest rate. The scenarios are nearly as numerous as the borrowers. Personal finance is personal and that’s fine!
*For us our top financial priority is getting out of debt. We are waiting to buy a house (or even rent one) until our debt is paid off. Thanks to our living arrangement, our expenses will never be as low as they are right now. For us, NOW is the best time to crack down and destroy our student loans. We aren’t actively saving for retirement right now, but we also aren’t touching the retirement we have already put away. Focusing on a single goal allows us to make progress faster and increases our motivation.
In addition, the faster we pay off our debt, the less we’ll pay in interest.Even our little ones understand the urgency that having to pay interest gives us. Comparing the total amount we would pay in interestdepending on how quickly we paid off the loan, like we did when we first set our goal, is really eye-opening!
Of course this all assumes that you are in a position to make achoice between just paying the minimum or working to pay off student loans fast. If you haven’t started your debt repayment journey or you don’t know where to start to tackle your debt, then check out How to Get Started Paying Off Debt.
How about you?
Are you tryingto pay offstudent loans fastor are you happy with making the minimum payments?
What are the major factors that have influenced your decision?
Do you (or would you consider) paying the minimum and investing the extra in hopes of coming out ahead?
You should pay off loans unless you have something better to do with the money. For example, buying a house may have a better return than student loans (and give you a place to live). If you don't have anything better to do than pay off debt, you should pay off the loans with the highest after-tax interest rate.
Pay less over the life of the loan: Because your student loan, like most other debt, accrues interest when you carry a balance, it's cheaper if you pay off the loan earlier. It gives the debt less time to accumulate interest, meaning you'll pay less in the long run.
Paying more than the minimum helps reduce debt faster while saving you money on interest. For example, if you had $50,000 in student loan debt with a 10-year term and a 6% rate, adding an extra $100 to your monthly payment could save you $3,479 and shave off nearly two years from the repayment term.
When it comes to how to pay for college, most people think the only option is to take out mountains of student loans. Student loans are a source of funding for most students but they should actually be your last option. Student loans accrue a lot of interest and take years to pay off.
Does paying off a loan early hurt your credit? Although paying off a loan is typically cause for celebration, your FICO Score will likely take a minor, temporary hit. This is because your credit score is based on your credit utilization, payment history, credit mix and length of credit history.
Consider making student loan payments during your grace period or while you're still in school, even if you're not required to do so. If you can, try to pay at least enough to cover the amount of interest you're accruing each month.
If you are financially able to do so, it may make sense for you to pay off your student loans early to save money on interest. Lenders typically call this “prepayment in full.” Generally, there are no penalties involved in paying off your student loans early. However, make sure you know how much you currently owe.
Under the Standard Repayment Plan, you'll make fixed monthly payments of at least $50 for a period of up to 10 years for all loan types except Direct Consolidation Loans and FFEL Consolidation Loans. Learn about Standard Repayment Plan monthly payment amounts for consolidation loans. Was this page helpful?
If a sizable part of your monthly payment is getting eaten up by interest each month, paying off a big chunk of your loans in one go will save you money in the long run.
There's a general rule floating around stating that your total student loan balance should not exceed your expected starting salary out of college. So if, based on your desired profession, you anticipate making $50,000 your first year after college, you wouldn't want your student loan balance to exceed $50,000.
To pay off $50,000 in student loans with a 5.8% interest rate in five years, you'd have to pay $962 per month. By the end of your repayment term, you'd pay a total of $57,720.
If you're a recent college graduate with a mountain of student loan debt — say $100,000 or more — paying off such a large amount could be a major struggle. For example, if you're making payments on federal student loans under the standard 10-year repayment plan, your minimum monthly payment might be quite daunting.
Depending on your interest rate and how much you owe, it might make more sense to put your money toward paying your student debt before saving for a house. Let's say you owe $15,000 and have a 10% interest rate. Accelerating your payments could help you get debt-free faster—and save you thousands in interest.
Credit cards typically carry higher interest rates than student loans, and can often exceed 20%. Federal student loan interest usually falls below 10%. Some students may qualify for federal subsidized loans, where the loan is interest-free while the student is in school.
But the data clearly show that incurring a carefully calculated amount of student debt to earn a marketable degree and enter a well-compensated, in-demand profession is very likely to pay off. In the end, it's a personal choice.
On average, people with student loans have spent just over 21 years paying back their loans. Federal student loans offer repayment plans that last from 10 to 30 years. Private student loan repayment terms vary.
You may prepay all or part of your federal student loan at any time without penalty. Any extra amount you pay in addition to your regular required monthly payment is applied to any outstanding interest before being applied to your outstanding principal balance.
On the one hand, you save money on accruing interest when you pay off a debt early, and your debt-to-income ratio will go down. However, some lenders charge a prepayment penalty for early payments, and using your spare income to pay off your loan early means it won't be available for other expenses.
Which Student Loans Should You Pay First: Subsidized or Unsubsidized? It's a good idea to start paying back unsubsidized student loans first, since you're more likely to have a higher balance that accrues interest much faster.
Introduction: My name is Duane Harber, I am a modern, clever, handsome, fair, agreeable, inexpensive, beautiful person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
