Does it seem your student loan debt never goes away? You keep sending monthly payments to chip away at your balance, but it doesn't seem to push the needle. Depending on your repayment plan, you could make payments for decades, possibly delaying other financial goals.
Paying off your loans early can help you move past your debt and move on to other goals. Whether you want to buy a home, move across the country, start your own business or a family, or pursue other goals, paying off your loans can free up the necessary funds to pursue those dreams. It can also save you money compared to sticking to your repayment schedule. Here's a look at some of the benefits of paying off your student loans early.
Your loans will cost less
Student loans accrue interest until they are completely paid off. You can save money by paying off your loans early by avoiding costly interest charges.
Let's say you have $20,000 in student loans that you are repaying over ten years with a 6.5% interest rate. If you took ten years to pay off your loans, you would end up paying $27,251.51 total with interest. If you paid an extra $150 monthly, you would pay off your student loans in five years and three months. You would also only pay $3,641.53 in interest charges over the life of your loan, a savings of over $3,600.
Lower your Debt-to-Income (DTI) ratio
Debt-to-income ratio compares how much you owe each month versus your monthly income. It's the percentage of your gross monthly income before taxes that go toward paying credit cards, your mortgage or rent, and other debt, including student loans.
By paying off your loan early, you will lower your overall debt and your DTI. Along with your credit score, lenders consider your debt-to-income ratio to determine whether you're financially responsible enough to pay off more debt. If you're planning on applying for new credit, improving your DTI can make you look more attractive (and less risky) to lenders.
Gives you much-needed peace of mind
Federal student loans come with a standard ten-year repayment plan. If you switch to an income-driven repayment plan, your repayment period jumps to 20 or 25 years. Repayment terms can vary on private student loans. If you borrowed money to pay for school, it can seem like you've been paying off loans for half of your life. Carrying debt is stressful and can become a financial and emotional burden. It can also affect how you plan your future and whether you have money to pursue other goals.
Some make the argument that you should invest any extra funds, especially if you have a low interest rate, but there's something to be said about the peace that comes from getting out from under a huge debt burden. Paying off loans can be a huge source of relief that can improve your mental and emotional health.
Move on to other financial goals
It's challenging to plan for the future when your finances are tied up paying off debt. Monthly student loan payments could be delaying other pursuits. Paying off loans early could free up more of your income for other life goals like:
- Saving for retirement
- Getting married
- Investing in your future
- Building a business
- Starting a family
- Furthering your education
- Buying a home
While you can pursue more than one financial goal simultaneously, doing so can sometimes delay you from achieving either goal.