Ahhh those 2-10 years spent in College; the 8am classes, cramming for finals, the friends and the memories are all unforgettable, and for most of us, come at a hefty cost.
An estimated 70% of bachelor degree graduates have student loan debt by the time they finish undergrad.
Majority of students are forced to choose between going/staying in school or stopping their degree to earn cash to pay for school. Meaning.. Most students who withdraw a student loan don’t truly understand it. Most say “I’ll pay it back when I’m employed” or “the government will forgive them if I work for a NFP organization for 10 years”” or my favorite “if the loan isn’t due until I graduate.. I’ll stay in school until I die”.
With the covid forbearance coming to a halt shortly, you may be considering paying off your student loans in full, making additional principal payments or setting up monthly payments. Before you make the financial jump, consider what paying them off early really means.
I graduated in 2015, so my subsidized loans started accruing interest/requiring payment early 2016. I was a new grad, working for pennies and could hardly afford my rent and wimpy grocery list, so I applied for the pay-as-you-earn program with my service lender. I was approved, for $0 monthly payments, a lower interest rate and reapplied every year.
It wasn’t until 2019 that I no longer qualified for that plan and was required to start making payments. Luckily my monthly payments were very low, I’ve heard plenty of horror stories of how high some graduates monthly payments are making them financially crippling.
I recently decided to pay off my student loans in full because my pay-as-you-go plan expired right before covid-19 and the relief forbearance (0% interest and $0 monthly payment) period is almost over, meaning I will soon owe interest on my loans. Now, my loans were not set up to ‘balloon’ the interest of the last two years, however some loans are (fine print is very important).
Anyways, during the forbearance period for student loans, I chose to continue saving to pay them off, but decided to hold onto those in a savings account as cash reserves should something awful arise due to the pandemic. Now that the forbearance is coming to an end… I decided to look into my loans again, weighed the pros and cons, and decided to pay them off before the interest begins again.
Pros of paying off student loans early:
-no more stress about it
-no more interest accruing
-increase monthly cashflow (if you were making monthly payments)
-lower your DTI (some loans/lines you apply for do not account for student loans in your DTI though so if this is your primary reason to pay off a loan, your cash may be better used towards a line/loan that is contributing to your DTI.
Con’s of paying off student loans early:
-will show as a closed (and paid in full) loan on your credit report. Why is this a con? Because creditors like to see that your credit profile is diverse, that you have a history of paying on time (and maybe more importantly, that you pay interest). Although this is typically not a reason to keep a loan longer than you financially need to.
-decreased cash reserves to pay for higher interest debts
-decreased cash reserves to add to safety funds/retirement etc. also not necessarily a bad thing, just something to consider when running your numbers.
Ultimately, paying off a debt is a long term good plan. However, everyone’s financial situation is very different. Please run your own numbers, and consult your financial advisors before making any money moves. I am in no way giving you financial advice and highly encourage you to seek your own counsel for your specific situation. Check out the blog on Velocity Banking to learn how you can quickly pay off high dollar debts without changing your income or spending plan!
I’m rooting for you babe,
Coffee & Chaos 