Paying Off Student Loans Early Doesn’t Always Pay Off
Paying off student loans early always seems like a good idea. You pay interest on debt, so it only makes sense to pay down the principal as quickly as possible. There are more than 44 million borrowers with $1.3 trillion in student loan debt in the United States alone, according to reports from financial website Make Lemonade. The average student in the Class of 2016 has $37,172 in student loan debt – but paying off student loan debt doesn’t always pay off.
In some cases, borrowers may be better off paying loans according to their current payment schedule. Here are situations where it’s smarter for borrowers to put their money elsewhere.
You Have Other Higher Interest Debt
Borrowers may benefit from paying other debts if the interest rates are higher. Student loans traditional have lower interest rates than other types of debt including credit cards. Financial experts suggest paying of high balance credit card balances or auto loans before student debt. “I believe you should look at all sources of debt you have first,” says financial adviser Rebecca Conner. Consider both the balance and the interest rate. Despite the lower interest, if your student loan balance is significant enough, it may still pay to pay it down first.
You Need to Build a Savings
If you live paycheck to paycheck, and don’t have enough funds to build a savings account – you could find yourself in big trouble. Financial experts suggest having an immediate savings goal of three to six months-worth of income in an emergency fund if you’re just hitting the job market or getting back on your feet financially. This savings can cover you in the event of unexpected medical expenses, job loss or other emergencies. Without an emergency fund, many people turn to credit cards or loans with high interest. Therefore, financial experts advise building a cash cushion before paying down student loans.
You’re Building an Investment Portfolio
If you have spare cash after paying your bills, you may want to consider investing it before paying down student loan debt. In some cases, the savings you would receive pay paying down your principal isn’t higher than the returns you would yield by investing more of your paycheck. “I don’t believe in putting other financial goals off just to get out of debt immediately, especially when dealing with a mortgage and with student loans,” financial adviser Jeremy Torgerson told CBS MoneyWatch. “The very low interest rate is often lower than they could earn investing some of their extra money toward other goals, like college savings or beefing up 401(k) or IRA contributions,” he said.
Paying off student loans isn’t a bad idea, especially if interest rates are high – but you may not need to rush to pay down student debt, especially if it hinders you from building a savings or yielding returns from investments. Consider your financial situation, and potential earnings before deciding where to invest your income.