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Why Pay Off Student Loans Early

Why Pay Off Student Loans Early

An ongoing debate on paying off students loans early has created confusion in the minds of many graduates, who have recently passed out from colleges and are enjoying a professional life.
Kundan Pandey
Education costs have increased to unprecedented levels in the last couple of decades. Therefore, student loans come in handy for people with financial constraints. Majority of us have to opt for loans during our college years to fund our education. Paying them off is a responsibility, that cannot be shirked. Many people who work for a couple of years, after finishing graduation, keep their student debt.

Instead of paying it off early, many people make it a part of their larger debt payment plan. If you have been doing likewise, you need to think carefully about the entire scenario. If at all you're unable to do the math regarding the money, consult a financial adviser.

Why You Should Pay Off Your Student Loan Early

People have all sorts of misconceptions about repayment of student loans. Some try to keep them for tax breaks, while some believe it will help them in their debt payment plans. While arguments for both sides can seem justifiable in individual circumstances, here are some very fundamental and practical reasons for paying them off early.

Improvement in Debt-to-Income Ratio
Some simple math will help you to understand that lowering your debt-to-income ratio can easily help you save some money for your future financial commitments. If you pay off your loan early, you'll have more money available for yourself, as you won't be having any such commitments in the future. The same amount that is being used for repayment, can be invested in better options.

Isn't the Student Loan an Additional Payment?
Every month, you're bound to withdraw some money to pay off the loan. This is in itself an extra payment deducted from your earnings. Moreover, if you're planning to keep your student debt for a tax break, then give it a second thought after studying the federal income tax laws. Mostly, only USD 2500 of the interest can be deducted every year. Added to this, if you start earning a decent amount (say USD 70,000) per year and you're unmarried, your tax break amount may be phased out. Eventually, you'll either pay more interest or more tax, so ideally, it is better to pay off student loans as quickly as possible.

Think of Better Investment Plans
Mutual funds and similar investment options are ideal for people who want their money to be managed by professionals. Such investment opportunities are also extremely beneficial as they have high growth rates. Why not repay the debt early, and use this amount to invest in mutual funds? That will be the best utilization of the earning potential of that amount.

Repaying Loans is Inevitable
There is a saying that no one can escape death or loans, and it is quite true. Escaping from student loans is virtually impossible, as even in the worst case scenario of filing for bankruptcy, you're still required to pay off the debt. Moreover, any financial crises you may encounter in the distant future, may be less of a problem, if you have lesser financial commitments. Hence, repaying early seems to be the most ideal solution for avoiding any headaches in the future.

It doesn't make any sense to get loans for four years of college and then repay it for the next 20 years. It is smarter to repay your loans faster, by following some fixed strategy. To really understand the difficulty of repaying in later years of life, meet some of your senior friends or elders who're facing the same situation. Anybody who has faced the torture of not repaying loans on time, will advise you to be smart. Fixing an appointment with a financial adviser and discussing loan consolidation programs can be of immense help to students in achieving long-term financial satisfaction.

DISCLAIMER: This article is meant for informative purposes only. It is not intended to be a substitute for professional financial advice.