When to Pay Off My Student Loan Debts And When To Wait?
Do you have student loan debts? Are you confused whether to pay off your student loan debts or to wait for forgiveness programs? Read on to know when should you consider paying off your student loan debts and when you should wait.
Updated by Shrestha Dey on 24th February 2020
Student loan debt is one of the reasons why many millenials are opting to stay in rented homes rather than buy one. Not only does student loan debt take a toll on your fiscal condition, but it is also mentally taxing. If you have student loan debt, then there will come a situation where you will be confused whether you should make early student loan repayments or wait on it. Although the wise decision would be to pay off your student loan debts as soon as possible, sometimes it is better to wait to pay for your student loan debts than rush with your monthly debt payments. In this article we will break it down to you the situations where you should pay for your student loan debts and where you should not.
Table of Contents:
When Should You Pay Off Your Student Loan Debt?
You should consider paying off your student loan debt in case of the following circumstances:
If you want to save more
When you pay off your student loan faster, the interest rates will decrease over time and you can save more with which you can make payments for other things.
Plus making extra payments on your student loan debt can prevent you from capitalizing interest on the loan which should be avoided at any cost.
If you will never qualify for Student Loan Forgiveness
In case of borrowers with private student loans, it may not be possible for you to qualify for any forgiveness program. If your income is too high to qualify for Income Driven Repayment and if you do not work in the public sector, it is unlikely to be eligible for Student Loan Forgiveness. In such cases it is better to pay off your student loan debt
Know more about Student Loan Forgiveness Programs here
If Your Student Loan Debt is at Variable Interest Rate
For borrowers with private student loan debt, it is most likely that the interest rate is variable and not fixed. In cases of variable interest rate, it is better to make early payments and pay off your student loan debt as early as possible because variable interest rates fluctuate depending on the economic conditions.
If You Want A Mortgage
If you are planning to buy a house, make sure you pay off your student debt loan as early as possible. Student loans make you less likely to qualify for mortgages. The higher your Debt To Income Ratio is, the harder it is for you to make monthly payments. High DTI means you most likely do not make enough to pay your debts off. High DTI ratio means your chances of other loans are almost nil. DTI ratio is calculated by dividing your total monthly debt payments by your gross monthly income
Know more about Debt-to-income ratio here
If You Want to Avoid Problems in the Future
The future is uncertain. If you are capable of paying off your student loans debts, you might as well do it now so as to avoid any problems in case of some financial constraints in the future. Student loan debt is virtually inescapable; bankruptcy being an extremely complicated and difficult process to go through and is permitted in rare cases.
Worried about about your college tuitions? Find the best Student Loans here
When Should You Wait to Pay Off your Student Loan Debts?
Under the following circumstances, you may wait to pay off your student loan debts:
If You Don’t Have Emergency Savings
Emergency savings comes handy in case of car repairs, payment of medical bills or for payment of any other unexpected costly expense. In case you don’t have emergency savings, it is important to start saving for emergencies. A general thumb rule is to have six months of expenses saved. One of the best ways to save for emergencies is by linking automatic payments from your monthly income cheque every pay day.
If You Qualify For Student Loan Forgiveness Programs
It is advised to never miss out on a student loan forgiveness program if you are eligible to apply for them. If you are enrolled in an Income Driven Repayment Program, your remaining student loan debt will be forgiven in 20-25 years depending on the specific repayment option. If IDR is keeping your monthly payments low, it could make sense to wait to pay your student loan debt.
Full time teachers who work in low income public schools for at least 5 years are eligible for forgiveness of upto $17,500.
If You Have High Interest Credit Card Debt
In case you have high interest to pay on your credit cards debt, it is only wise to pay off your credit card bills first. The annual percentage rate on high interest incurring credit cards hover between 13% to 21% which means you are owing more on a purchase at a faster rate than what you paid for it initially. In such cases, it is only a wise call to first pay off your credit card bills first and wait it out on student loan debt.
If You Work In Public Service and not enrolled in Standard Repayment Plan
Under the Public Service Loan Forgiveness Program, your remaining federal direct student loan debt can be forgiven after 120 qualifying monthly payments that is the remaining debt can be forgiven after 10 years. However to qualify for PSLF, you should be enrolled in an Income Driven Repayment Plan. Logically and technically, although you qualify for PSLF, there would be no debt left to be repaid. In such cases, it is better to not make quicker and extra payments towards your student loan debt and wait it out.
You’ll Lose Out On The Benefit of Having Installment Debt
Having both Installment Debt and Revolving Debt results in maintaining a good credit report. Installment debt is repaid in regular instalments like monthly payments that include interest and principle and usually has a lower interest rate than credit cards . Installment debt is used for big ticket items like your student loan debts, car, appliances etc. Revolving debts have a harsher effect on your credit report than installment debt. It has a variable interest rate and has no fixed amount to be paid every month.
If you pay off your student loan, you are eliminating your installment debt. Paying off all your installment debt can affect your credit report. A bad credit report will not help you in getting other loans.
In the end, know that everybody faces a different situation and it is you who have to make the payments after all. Some people make huge payments and get rid of student loan debts as early as possible while others take the slower and steady route. In the article above, we have discussed the pros and cons & situations where you should opt for early repayment or should wait for your debts to work its way upto loan forgiveness. It is advised that you weigh in on all the situations before making a final decision.