Is it better to pay off student loans quickly?
Stefani from Philly asks: I’m graduating this June and I’m going to have about $40,000 in student loan debt. I want to pay off my student loans as quickly as I can even if it means sharing a room with someone else. I’m planning to take at least 50% of my pay check to go into repaying the student loans. This will come out to about $1000 per month, which allows me to pay off my loans in about 3 years. I’m normally a saver anyway and I can live cheaply if I have to. I would have just enough money left over for rent and living expenses. My rent would only be about $500 dollars per month. Plus, I have savings right now that would work as my emergency fund just like Dave Ramsey suggest. Is it better to pay off my student loans quickly? My thought is that it would save me on interest even though it would be hard for a few years, but I will be much better off in the long run. Any suggestions?
Student Loan Guru: Hi Stefani, sounds like you’re working on a great plan! Sadly, many college student never stop to think about the student loan debt they are running up when they’re in college. All they want to do is party and travel to Spring Break. Some even try to finance cars, homes and vacations with their student loans.
Then, about 6 months after they graduate, they discover they’ll be saddled with student loan debt for a decade or more. This can lead to a huge financial burden if they do not enter a field where they have the opportunity to pull down some major bucks. I’ve seen students run up over 100k in student loans then after graduation, get a job making 35k per year! (by the way, be sure to read our article “How to land a job after college“)
I have to ask myself, “Why in the hell did they go to college anyway?!” Any blue collar worker can get a job making that and many times more.
Given the choice between paying off the loans or buying a house to live in as an investment, it is always better to pay off your loans first. The loans will be a negative on your credit report are viewed as debt. Buying the house will cost, but the house may or may not appreciate at a rate faster than the interest will accrue on the student loans. This isn’t a risk someone burdened with student loan debt should be taken. Plus you have to add into the equation of repairs and upkeep to the home, taxes and insurance. It can get pretty pricey pretty quick. Don’t fall for the old wives tale that you’ll be saving rent. Sounds like you have cheap rent and you’lln ot likely find a house that you can buy for $500 a month. Normally I’m all about someone owning a home. But not when you have a mountain of debt and not when your career is just beginning. What happens if you want to move to a new job after a few months? You’ll never get your equity out of the home, especially in this economy!
In other words, it doesn’t matter what the interest rate is on any of your loans. Always start paying them off smallest to largest, but ensure that you can pay it off early without penalties. Some institutions do not permit early repayment, believe it or not. Save your money, make the required payments on your highest interest loan and pay extra on the lowest loan amount first until it’s paid for. Then start paying on the next biggest loan. Don’t worry about your credit rating, it will be fine. Paying on loans just for the sake of “improving your credit” is so stupid, I can’t even tell you how stupid it is! Only people without a clue would do something so totally stupid!
However, if you are thinking of making a big purchase soon, like a house, the money you have outstanding does affect what they refer to as your “debt service ratio”. In other words, they look at how much of your income goes towards servicing or repaying debts. You should talk to the institution and find out if you get any rebates for early re-payment.
I agree with you on paying the loans off as soon as possible. Why carry a debt for years and pay all of that interest?
But like you, I prefer to pay things off as soon as possible. When I got my 1st house (back in 1985), I almost passed out when I saw my amortization schedule. I was making a $600/month payment – but the amount owed was only reduced $25 (rest was interest). After a lot of argument, the bank finally agreed that I could make extra principle payments. I made 2 extra per month (About an extra $50 at first, but slowly go up each month). That house was paid for in less than 15 years (as oppose to the normal 30 years).
I’m now 45, and I’m looking at early retirement – I could’nt even think about this without the house and other loans being paid off.
The sooner you pay off your student loans and other debt, you can get into other things. So in a nut shell, yes, it is better to pay off student loans quickly!
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