Higher Ed Utah

A hot topic in the college student sphere today is the question of whether or not you should choose to pay off your student loans early. We’ve seen the question pop up online in forums and actually received a few questions ourselves on the matter via Twitter, so we’ve decided to post a helpful blog for students to refer to if they are ever unsure if it is a good idea to pay off those loans early.  While it is smart to pay off any sort of loan as quick as you can, keep in mind that it is simply the best idea to pay student loans off as early as possible and not a requirement.  If making payments that best suit your finances every month is the most feasible option available to you, then be sure you are making those payments on time to avoid any unnecessary problems and you’re doing great!

Facts to consider when deciding to pay your school loans early:

When you pay off your student loans or any loan/debt for that matter, you lower what is called your Debt to Income Ratio.  This is the percentage of a consumer’s monthly gross income that goes toward paying debts.  In this respect, you can start a ripple effect in your funds because if you pay off your school loans early, your debt to income ratio will improve, your credit score will then improve making way for better credit opportunities and of course you will no longer have a monthly student loan payment(s) to make so it will free up funds there as well.

Another reason why people might hold on to a school loan longer is to get the tax deduction for interest paid on that loan.  Realize that only $2500 of the interest can be deducted each year and the amount even starts to phase out if you are single and make more than $65k a year.  You will still end up paying money in either interest or taxes so this most definitely should not be a reason to keep a student loan open.  (Side Note: Since federal student loans do have extremely low interest rates in comparison to bank loans or credit cards, it is often best practice to put student loans at the bottom of your list of loans to pay off, focusing on debts with higher interest rates first.  This is called “debt snowballing.”)

The third reason to pay off that loan ASAP is the simple fact that it is costing you money each and every month!  Paying off a school loan early allows you to free yourself from that recurring monthly payment which you can even turn around and invest to start making money on interest instead of paying for it.

I hope this entry was helpful to you!  If you have any questions or comments, feel free to leave a comment on the blog, send a tweet with “@uheaa” in the body, or leave us a comment on our Facebook fan page!