Should I Pay Off My Student Loan Early

Save Now, Spend Now?

Many students presume that by paying student loans sooner and more quickly, they can start saving for the future and invest in building wealth. But unlike most loans, student loans are best paid slowly at lower interest rates. The rule of the thumb is this: the lower the interest rate on the loan, the better it is to pay just the minimum and nothing else. Prudent and conscientious savers can use student loans as an advantage.

There are actually two main options to consider: make extra payments on the loan every month or pay the minimum amount and save the rest. The answer lies in the ability and willingness of the borrower.

If the charging interest for the loan you try to pay off is more than the return on investment in stocks, then, in makes better sense to pay more interest than earning on investments. The money will be spent more wisely in high-interest loans and investing sooner but not later. It is wiser to prioritize loans with the highest interest rate and start paying them off.

The other option is to pay the minimum amount and save the rest for investments. This works if the charging interest for the loan you try to pay off is lesser than the return on investment on stocks. This means that it is wiser to save with low-interest loans than investing later.

This model works if you consider that student loans are tax deductible. Tax deductions mean that the government is subsidizing your loan. The faster you pay the principal amount, the quicker you lose the tax deduction. This is why paying the minimum would be a better option.

The “unsaid” option is the spread – the compromise between the two options. This would mean that if the charging interest of your loan is between 6-8% and the return on investment in stock is 8%, it would be good to save some money for investing while paying off your student loan.

How to Pay Off Student Loans Faster

You should come up with a loan repayment strategy to pay off student loans quickly but in order to do that, you should need to: learn about your loan and have a steady flow of money.

All loans work by a repayment plan and these plans vary in the time frame you would pay your loan, amount of money you could own and the interest rates. It is good to be familiar with these factors before getting a loan. Some grants make you pay off student loans faster than others. It is also important to know these the moment you have the loan because this familiarizes you with the amount you will pay every month. You may also have the option to go for consolidation, deferment, forbearances and tax deductions in some loans.

It is also important to “sign up to money” by getting a part-time job. Once started on a job, examine your company’s benefits to cover up student loans, etc. Augment your income with sidelines and online businesses to pay off student loans faster.