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What Are The Benefits of Prepaying My Student Loans

Susan Kelly

Nov 20, 2023

Paying off your student loans may seem like a no-brainer if you've been carrying a balance for a long time and have some extra cash. Paying off student loans might prevent you from achieving other financial goals, such as buying a home, although student loans often have lower interest rates than other forms of debt. One should consider their long-term financial objectives and current financial situation before deciding whether or not to prepay their student debts.

Should I Prepay Student Loans?

The decision to prepay student debts is very context-dependent. CEO of Your Money Line Peter Dunn argues that although it's great to be ahead of your loan payments, you shouldn't let it come at the price of other important long-term financial goals.

Pros

The quicker you pay off your student loan, the less interest you will pay. It reduces the time interest may be accrued on the debt, ultimately resulting in lower total interest payments.

Suppose you consolidate your student loans into a single, manageable payment. In that case, you'll free up money each month that may be used toward other goals, such as a down payment on a home, retirement savings, or even a vacation.

If you can get rid of a significant monthly payment, lenders will look better when calculating your debt-to-income ratio. Lower interest rates on loans, credit cards, and more may be available if your debt-to-income ratio improves.

Cons

Paying off your student debts might be difficult, especially if you are starting in your profession or if your income is low. You should only increase your student loan payments if you can do so without creating excessive hardship for yourself.

Student debt repayment may distract you from other important financial goals. Consider putting any unexpected funds toward an emergency fund first.

It will not make financial sense to prepay student loans if they are forgiven after a set period based on your chosen profession. It is in your best interest to keep paying the debt until it is finally discharged.

Advantages of Repaying Your Student Loans Early

In today's society, it is not uncommon for college grads to work their way out from under the weight of their student loan debt. However, they may feel the effects of their student loan debt more than they realize.

It's natural to ask if student loans belong in a debt repayment plan and whether or not you should stress over paying them off early. Paying off your student debts as quickly as possible is a worthy goal to strive for if at all feasible.

Your Ratio of Debt To Income

For this reason, it's a good idea to pay off your student loans as soon as possible because doing so will reduce your debt-to-income (DTI) ratio. This ratio compares your total monthly debt payments to your monthly income. Paying off your student loans will not only relieve you from making monthly payments but also put you in a better position financially.

Not A Big Tax Break

You may want to put off paying off your student loans until last because of the tax benefits they provide, which is contrary to popular belief. The student loan interest deduction is not unlimited. Only the first $2,500 of interest paid each year can be deducted from your taxes. If your annual income hits $70,000, it starts to decrease and completely disappears once it reaches $85,000.

Your Expenses Are Rising

You should calculate how much you lose each month owing to your student loan payment and interest even after taking advantage of the student loan tax deduction. Interest on student loans is calculated as a percentage of your principal debt.

When you pay more than the minimum each month, your interest rate will decrease along with your debt. If you stick to your regular payment schedule and pay off your student loans early, you will save money on interest payments throughout the life of the loan.

Almost Nobody Can Avoid It

Bankruptcy is seen by many who are drowning in student loan debt as a possible way out. However, it's not common for student loans to be forgiven in bankruptcy. Borrowers must demonstrate that repaying their student loans will cause them "undue hardship" in a separate action filed in conjunction with a bankruptcy filing, which is one of the few options to get rid of student debts.


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