Most people who graduate from a college or university with student loan debt will want to pay off their loans as soon as possible. There are, however, some critical factors you need to consider before making this decision for yourself. It can have a ripple effect that makes things like getting a personal loan pre-approval or a competitive mortgage rate difficult.
The times when it’s a good idea to keep your student loan debt
The benefits of keeping your student loan debt low can be significant. For one, it can improve your credit score by adding to your mix of credit, making it easier to get a mortgage or personal loan in the future.
It can also mean that you have more money to invest and divert towards retirement savings or a home purchase. Federal student loans often have low-interest rates, so keeping them as long as possible can make sense while paying off other high-interest debt first.
There’s also the consideration of whether or not you might get your student loan debt forgiven. In 2022, President Biden announced that the government would start offering forgiveness for student loan debt in certain cases. If your student loan debt is under $10,000 (or $20,000 if you’ve received a Pell Grant), your loan debt may be canceled altogether, allowing you to move the money budgeted for those payments over to something else.
Finally, if you have difficulty making monthly payments on your student loans, paying them off slowly can help reduce the amount of interest that you’re paying each month.
Situations where it’s a better idea to pay off your student loans quickly
There are a few reasons why it may make sense to pay off your student loans as quickly as possible. For one, you may have received a low-interest promotional rate when you borrowed the money. If you wait too long to pay off your loan, the interest you’re paying will quickly add up, potentially resulting in a higher total bill than if you had paid off your debt sooner.
Another reason to pay off your student loan as quickly as possible is if you want to consolidate or refinance. If your interest rates are high and variable, it can make more sense to pay off your loans all at once rather than taking smaller amounts out over time and getting hit with higher interest charges each time.
Suppose your student loans are privately funded and not federal student aid. In that case, the likelihood your debt will be canceled is slim, so if you’re waiting for loan forgiveness, it’s probably better to work on paying off your debt now and not waiting for federal intervention.
It’s important to weigh both of these options carefully before making a decision – doing so can help ensure that you’re getting the most out of your money and achieving your financial goals.
The bottom line
While it can be tempting to pay off your student loans as quickly as possible, doing so could cost you more in the long run. Consider both options carefully before making any decisions that can help you get the most out of your money and reach your financial goals.
Name: Michael Bertini
Job Title: Consultant
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