If you think that your student loans are making you anxious or preventing you from pursuing other important goals, you may want to pay them off early.
As soon as you get rid of your student loan debt, you’ll experience a sense of freedom that you have never felt before. Paying off your student loans will also help you avoid a college tuition collection agency.
Before considering paying back your students loans early, it’s a good idea to make sure that you have done the following:
Established An Emergency Fund
When you need money for dental work, a car repair, or another unexpected crisis, an emergency fund will definitely come in handy. Most financial experts believe that this type of important fund should have three to six months of expenses.
If you send all of your extra money to your student loans, you would probably have to pay for unexpected expenses with a credit card if you don’t already have an emergency fund. Placing unexpected expenses on a credit card will cost you more money in the long run.
Until you have an emergency fund, you should hold off paying your student loans off early and put any extra cash toward your savings.
Paid Off Credit Card Debt
According to much research, credit cards have an average interest rate of 16.97 percent. Credit cards usually have higher interest rates than student loans, so paying off your credit card before your student loans will save you money.
Consider the following three scenarios:
- Greg has a credit card with an interest rate of 16.97 percent. Over the course of ten years, he will pay $4,915 in interest.
- Susan took out a graduate student loan to attend pharmacy school. The interest on the student loan is 6.08 percent. In ten years, she will pay $1,005 in interest.
- Anna attended college with an undergraduate student loan that has an interest rate of 4.53 percent. The interest will amount to $743 in ten years.
These examples show that you will save more money by paying off your credit card balance first in most cases.
Contribute To Your Retirement
Although retirement may seem like a long time away, you’ll want to invest now so that your money has time to grow.
Before paying off your student loans, make sure that you save for retirement, whether it’s with a 401(K), IRA, or both. Many companies offer 401(K) matching, so you should definitely contribute enough to qualify for the full match.
Save For Other Life Goals
While you can technically start paying off your student loans early now, you may want to think about saving money for important life goals before tackling your student loan debt.
Here are some long-term goals that you may want to contribute money to first:
- Paying off other high-interest debt
- Save money for a house
Saving money for a long-term goal will ensure that you pursue some of the things in life that matter to you most while getting you ready to tackle your student loan debt.
Pay Off Student Loan Debt Early
When it’s time to pay off student loan debt, there are several options to consider:
- In order to keep the balance from growing exponentially, consider tackling any interest that has accrued during the grace period.
- Save more money in the long run by refinancing your student loans. If you have good credit and a steady income, a private lender could offer you a new loan at a reduced interest rate. Many private lenders will provide you a new loan with a five-year term, but you can make extra payments to pay off the loan quicker.
- Making extra payments, whether weekly or bi-weekly, can definitely help pay your student loans off early. Some lenders will let you apply the extra payment to certain loans.
- Ask your employer if the company can make payments toward your student loans as a workplace benefit. Sign up if you’re eligible to take advantage of your company’s generosity.
Consider using a student loan payoff calculator to determine how much money these effective tips can save you.