When Paying Off Your Student Loan Early May Not Be Advisable

Piggy bank standing over paper dollar bills.

Flickr user Pictures of Money

“When should I pay off my student loan after college?” “Should I take care of it right now or wait for a later date?” These are two of the more common questions that will run through most students’ minds after they graduate.  If you have a student loan hanging over your head you will be faced with the same dilemma and will have to make some tough decisions about how to pay off.

Most finance experts advise students to pay off their student loans as soon as possible. The reasoning for this is that the sooner you get rid of the loan, the lesser the amount you will have to pay overall. When you prolong your payment term, the accrued interest can accumulate substantially, adding to the overall cost of the loan. Although you cannot deny that this is very solid advice, there are certain circumstances when it may not be a good idea to pay off your student loan early.

You Need To Use The Money For Other Purposes That Cannot Wait

When you opt to pay your student loans early, you are in fact committing to paying more than the minimum payment towards your debt. Unless you are earning a fantastic salary, this would mean having to make a lot of sacrifices and holding back from other areas of your life.

Maybe you want to start your own business or perhaps you want to get married and start a family and invest in your very own home. To some people, these are priorities that they do not want to put on hold until several years into the future after they have paid off all their debts. If you feel strongly that these goals are a priority for you, you will have to find a way to balance both, your loan payment obligations and your dreams.

One way you can do this is by opting for an income-based repayment plan. Under the terms of income-payment repayment, you don’t pay a fixed amount every month. Instead, a certain percentage of your income is auto-debited and put towards your monthly loan payment. This helps to minimize your payments while leaving you with enough money to finance your other goals, as well.

Student Loan Refinancing Made Simple.

Fixed rates from 4.83% - 7.64% APR

Learn More

You Need The Money To Create An Emergency Fund

Creating an emergency fund should be an important component of your short and long term financial planning. However, if you put all of your available money into your monthly repayment, you will not be able to create that crucial emergency fund for at least a few years. This defeats the very purpose of creating an emergency fund. Emergencies rarely wait for you to have all your ducks in a row before they happen. You must start preparing for any eventually right at the outset and the only way to do this is by lowering your monthly payments and setting aside some funds every month.

You Need To Pay Off Other High-Interest Debts

The downside of being independent is that you have to fend for yourself in every way. You need to pay for your rent and a car and numerous other essentials. More likely than not, you will have to take a loan to buy all of these. If you’re not careful, you will also find yourself saddled with more credit-card debt than you hoped for.

Comparing the different interest rates will help you come to a decision about whether paying your student loan at an early stage is best for you. If funds are tight, it makes more financial sense to use any money you have available to pay off these high-interest loans first while taking the time to pay off the lower interest student loans.

It is always best to compare interests before choosing the right strategy for your situation.

The Additional Money Is Not Going Towards The Principal

Different repayment plans follow different approaches. Depending on your repayment plan, paying off your student loan early may or may not be favorable.

Some lenders apply any extra payment that comes in towards a future payment. While this may sound reasonable, it does not give you as much benefit as applying the extra payment to your principal. When the additional payment goes towards the principal, it reduces the overall balance that you need to repay considerably.

Before you make the decision to pay off early, it is important to check your repayment plan and discuss its implications with your lender. Find out exactly what the extra payments will go towards and then decide accordingly.

You Want To Enjoy The Money You Have Now

Different strokes for different folks. Not everyone wants to stay focused on their repayment to the exclusion of everything else. It may sound controversial to some that you want to enjoy life and don’t mind being in debt forever but if that is what you want, why not! There is no absolute right or wrong when it comes to paying off student debts as long as you do not do anything to damage your credit score or default on your loan entirely.

Paying off your student loan early or later on in life is a personal decision. The important thing is to decide what works for you and work with your lender to ensure that you are not flouting any terms and conditions that will create any problems for you down the road. Once you’ve got a payment plan in place, you’re free to do what you want with the rest of your money.

Keep An Eye On The Big Picture Before Making Any Decisions

Student loans don’t make up the entire financial picture. They are just a part of it. While it may be a relief to get them out of the way earlier rather than later, you need to look at the implications too.

Take into consideration emergencies and unexpected expenditures and make sure you have an emergency fund intact before you make a decision to pay off your student loan early. Ask yourself if you have any other debts besides student loans. If you do, it makes more financial sense to clear high-interest debts first and pay off low-interest student loans later. If you are struggling to make ends meet and pay your utilities every month, paying off just the minimum and nothing more towards your student loans will help reduce your stress levels and prevent overwhelming situations.

Use College Raptor to discover personalized college matches, cost estimates, acceptance odds, and potential financial aid for schools around the US—for FREE!

Leave a reply

Your email address will not be published. Required fields are marked *