The Truth about Paying Student Loans
If you are borrowing for your college education with Federal or private student loans, you have many options to handle their pay off. When applying for your loan, speak with your financial aid advisor or loan servicer for help choosing from different terms, payment schedules, deferment periods and more.
While payment plans that place a lighter load on you financially may be beneficial to you during different times in your life; there is also a huge benefit to putting in the effort and paying student loans off earlier.
3 Reasons to pay off your private and federal student loans faster
If you are debating whether to pocket your extra cash or apply it to your student loan payments, here are three reasons to go beyond your minimum payments and apply your money to the principal on student loans.
1. You will pay less for school in the long run.
When you make a monthly loan payment, your money is allocated first towards student loan interest rates and fees and then towards the principal. But when you pay over the minimum amount, you can specify that the excess is applied directly to the principal balance – the total amount due for you to pay off the loan. As this number decreases, so does the amount of interest you pay on the loan. So, when you make the effort to take a larger dent out of your principal, you are significantly reducing the amount of interest you owe overall and the amount of time it will take you to pay off federal or private student loans.
2. Earn interest rather than pay it on student loan interest rates
The reward for your college education is ideally the ability to secure a job and get on the road to financial stability. That being said, in the early years of employment after college, your overall personal financial obligations will likely be at their lowest level. If you make the smart decision and funnel extra income into paying student loans, you can get them paid down before things like a wedding, house and kids become the financial focus. Plus, once your debts are paid off, you can start putting your money into interest-bearing savings accounts – helping you meet your savings goals faster. Just remember, because the student loan interest rates are often better on Federal student loans, if you have private student loans as well, you will want to pay those down first.
3. There is no prepayment penalty
Thanks to the Higher Education Act of 1956, student loan lenders are unable to charge you anything at all for paying your student loans off as fast as you can. So, keep that in mind. If you can make payments now, even small ones, you’ll set yourself up for a better financial future.
The sooner the better when it comes to paying student loans
Getting out of debt can open you up to a world of possibility. Paying more on student loans, or even starting to pay them before graduation, gives you a head start on a secure financial future. Plus, the earlier you start showing a history of making consistent payments, the earlier you start building a positive credit history. It’s a win-win all around.
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Photo credit: College Degrees 360
All great points. I made it a point to pay off my loans quickly because I didn’t want them to dictate what I was going to do with my life. They monthly payment counts against you when qualifying for a house. I didn’t want to be in a situation where I couldn’t get a loan for a house because of my student loans.
Also, I wanted the option to maybe travel. With a monthly debt obligation, it makes traveling for months on end more difficult. Sure I could have possibly deferred payments, but interest would still be accruing and they would be there when I got back. I would rather just get rid of them and focus on my future.
My loans could be paid off if I hadn’t fallen victim to lifestyle inflation. They are going down soon though. Can’t wait to be free of them, actually.
It was a wonderful day for me, Kim….a wonderful day.
There is no question that paying off student loans at a faster rate than required will help you in the long run.
Several months ago I paid off the last of my student loans and although I feel very lucky to have accomplished that I fell into a common trap of lifestyle creep. Right after the student loans were paid off instead of investing the difference we saved up and did a bathroom remodel. Although this should add value to the house there is no way we would have done this while still putting that money to student loans.
Good post. Thanks for discussing this topic!