Graduating with student loan debt is a common occurrence, and for many people, it will follow them into their adult lives. But your student loan debt may be harming you more than you imagine. When it comes to paying off your student loans, you may be wondering if you should include them in your debt repayment plan or if you should be concerned about paying them off as soon as possible. Paying off your student debts as quickly as you can is a smart financial move if you have the means.
#1 How Much Debt Do You Have Compared to Your Income?
You may reduce your debt-to-income (DTI) ratio by paying off your student loan debt. A debt-to-income ratio is calculated by dividing your monthly debt payments by your monthly income. Not only will you be relieved of the burden of your monthly student loan payments, but you’ll also be better positioned to pursue other financial objectives.
If you want to get a loan, especially a mortgage, you’ll need a lower debt-to-income ratio. Having a lower debt-to-income ratio indicates that you are financially capable of taking on additional debt and paying it back in a timely manner. A DTI of less than 43 percent is often required for a mortgage application, and even lower DTIs of 30 to 35 percentage points are required to fully demonstrate that your debt is under control.
#2 Not a Great Deal of a Tax Break
As a result of a popular misperception, many people prioritize student loans over other debts because of the tax benefits. However, this is not the case.
However, it’s important to keep in mind that the student loan deduction has its limits. Interest on student loans can be deducted up to $2,500. As your income rises beyond $70,000 per year, the deduction begins to phase off and is abolished at an adjusted gross income (AGI) of $85,000 per year.
To sum it up, this deduction only serves to reduce your taxable income in the long run.
This is a pittance, and you may end up paying far more in interest than you save in taxes over the course of your loan’s lifespan. Student loans should be repaid rather than held on to for tax purposes.
#3 You’re Paying for It
Consider how much money you are losing each month owing to your student loan payment and interest, even if you take advantage of the student loan tax deduction.
The interest you pay on your student loans is calculated as a proportion of the principal you owe. In order to decrease your interest rate, you’ll need to make more payments and pay down your debt more frequently. If you stick to your usual payment plan and pay off your student loans early, you’ll save money on interest.
For some who have a large amount of student loan debt, their monthly payment may be the largest piece of their income. In order to get rid of this monthly payment, you need pay off your student loan debt. Aside from the obvious benefits of saving for your down payment on a home or taking a vacation, you’ll also have more time to work on other financial objectives such as establishing your own business and investing.
#4 Nearly Impossible to Avoid It
People who are struggling to pay off their student loans often expect that bankruptcy would help them. If you file for bankruptcy, it’s unlikely that your student loans would be forgiven. In order to get student debts erased in bankruptcy, borrowers must file a separate case and demonstrate that payments would cause extreme burden.
Aside from filing bankruptcy, there aren’t many options for repaying your student debts. After the borrower’s death or total incapacity, federal and private student loans are forgiven.
It is possible to get federal student loans forgiven by meeting the requirements of specific student loan forgiveness programs, like Public Service Loan Forgiveness.
However, the reality is that repaying student loans is the best option for the majority of debtors.
#5 Stop Worrying About Your Money
In many cases, student debts are a major cause of anxiety, preventing borrowers from achieving financial security. Data from the Pew Research Center shows that just one-third of college graduates between the ages of 25 and 39 feel they are financially secure, compared to 51 percent of grads in the same age range who do not have any student loans.
Paying down your college debts will help alleviate some of your financial burden. Paying off student loans and lowering your overall balance might be beneficial even if your repayment plan is reaching its end.
Is Paying Off Student Loans Early Good Idea?
The idea of getting out of debt quickly is appealing, but it’s not always possible for everyone. Take a look at your whole financial status before attempting to reduce your student loan debt.
Having an adequate emergency fund can keep you out of debt in the event of an unexpected expense. A savings fund of between three and six months’ worth of your essential costs should take precedence over rapidly paying off your student loan debt.
A student loan’s interest rate is lower than the interest on other kinds of debt you may have, such as personal loans and credit cards. When determining which debt to pay off first, compare interest rates—student loans are definitely not the first thing you want to get rid of if your main objective is to save money by paying them off.
Finally, when do you begin paying back your student loans after graduating?
Repaying federal student loans begins six months after graduation, unenrollment, or dropping below half-time enrollment. The terms of your repayment may be different if you have private student loans; you may even have to make payments while you’re still in school, depending on your loan provider.