CONSUMER RESOURCES – FINANCES:  The how’s and why’s of paying off student loan debt early


Photo:  Courtesy of 401(K) 2012

April 21, 2020
R J Weinger
Consumer Resources – Finances

Student loan debt has become so common that for many people, it barely registers as part of their debt load. They simply think of it as a monthly payment that they will be making for decades. However, there are some ways to pay it off more quickly and several good reasons for doing so.

Tips for Faster Repayment

In some cases, it’s the interest on student loans that is particularly onerous. Many people may not realize they could significantly reduce the monthly payment or the time they take to pay off the loan by refinancing, or they might assume they do not qualify. It’s worth shopping around with both online and brick-and-mortar lenders to see if this is the case. A refinance can shorten the repayment period and save a substantial amount of money. It’s also worthwhile to make a budget and look at other areas where you might save, allowing you to make bigger monthly payments.

Lowering Debt-To-Income Ratio

People often refer to student loans as a type of “good debt”. The idea is that, as is the case with a home mortgage, the value you are getting makes it worthwhile. In the case of a student loan, you are exchanging it for an education that usually leads to higher earnings. However, it is still a debt, and that can affect your credit rating. A better debt-to-income ratio improves your credit score and increases the likelihood that you will be eligible for more and better loans for other things, such as a home.

Financial Freedom

Unlike many other types of debt, student loans generally cannot be discharged in bankruptcy. You might have a great job and plenty of financial security now, but that could change at some point in the future. Therefore, if you have the means to pay more now and finish your repayment schedule early, you may better weather any future financial hiccups. You could also take the savings from the early repayment and use it for emergency savings and for investments, which could cushion you from future financial problems. Some people point to the tax break that is available to people making repayments, but in fact, the break is not very large, and you may well be paying more in interest.

Your Children’s Future

Paying off as many debts as possible frees up money you can use to save toward your children’s college education. Your kids may need to borrow as well, but if you have put away money in a 529 savings plan or another type of savings for them, you can significantly reduce how much they’ll need to ask lenders for. Another consideration is that once people reach middle age, many of them find themselves in a position in which they are helping both their parents and their children financially while also struggling to juggle their own finances. Many may be paying for their children’s college education while still paying off their own. Keeping debt as low as possible, even when it is “the good kind”, can help reduce the likelihood of this happening.


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