Owing money to student loans can feel like a huge financial burden. After all, you have to send money to lenders each month, and your credit report shows tons of debt.
While you may be tempted to get rid of your student debt as quickly as possible by making additional payments and throwing as much money as you can, this may not be the best financial decision. In fact, there are a few important reasons why early repayment of your student loans might indeed be a bad idea. Here are four of them.
The debts of federal students are associated with a protection for borrowers that you can not achieve with other debts.
For most types of debt, lenders do not care if you run into financial difficulties – you have to pay back what you owe on time. And you can not just change your payment plan to reduce your payment to match your income, and you can not expect to lose part of your debt if you do a job that serves the public.
If you have a federal student loan debt, you have unrivaled borrower protection. Depending on your situation, these borrower hedges include:
- Eligibility to receive loans if you work in the public sector and make 120 on-time payments.
- The option to bring credits into indulgence or moratorium and to suspend payments when you go back to school, unemployed, employed in the military, joined the Peace Corps or met other requirements
- The ability to change repayment schedules and one Plan to choose which limits payments to a percentage of income
The government may even subsidize interest on some of your loans during times when payments are deferred.
It rarely makes sense to provide extra money for the repayment of loans with all these protections for borrowers. If you could pay a small percentage of your income for 10 years and get the rest of your credit because you work for the government or a nonprofit organization, why should you repay your loans early?
. 2 Interest rates on your student loan may be lower than on other debts.
Often, interest rates on federal student loans – and even on many student loans from private lenders – are lower than on other types of debt. The interest rate on student loans is usually well below the typical interest rate for a credit card. And it may even be below the rate you could qualify for a personal loan.
If you have debt at a higher interest rate, it makes sense to focus on paying off these other debts before you make additional student loan payments.
And if you take the risk of making other, more expensive types of debts, you should not do so if you also pay for student loans. If you do not have emergency credit, you can easily get into credit card debt if something goes wrong. It is probably better if you keep an emergency fund than to make additional student payments so you do not have a balance on a card at a high interest rate.
. 3 You could potentially get a better return on your money if you invest it.
If you pay student loans early, the return on your additional payments will be the same as the interest rate on your loans. Chances are, you could get a better return if you put your money into the market instead.
Why use more money on student loans if you could make more money for your money by investing that money? This is especially true if you could invest in a 401 (k) to earn an employer match (free money) with your cash. In a dollar-for-dollar match, your guaranteed return is 100%, well above the rate you would pay for any type of student loan.
You can also get tax breaks by investing in 401 (k). or IRA. The tax deduction you receive from the pension contributions reduces your taxable income. This guaranteed tax savings increases the chances that you will get a better return on your money by investing instead of using it for early student loan repayments.
Of course, if your student loans are private loans and you pay a high rate – close to 7% or 8% – the calculation changes. You still want to reach a maximum of 401 (k) to get the employer match. But if you've done that, it may make more sense to pay the student loan debt in addition to achieving that guaranteed return than taking the chance of actually outperforming that interest rate with an investment.
. 4 You give a tax deduction (if you qualify).
If you pay interest on qualified student loans, you may deduct up to $ 2,500 of this interest.
This Deduction Is Not Valid It is not necessary for you to post a line item to claim it, although your adjusted adjusted gross income must be less than $ 70,000 if you are registered as an individual, householder, or qualified widower. The deduction begins with a higher income phasing out. If you earn $ 85,000 in income with this login status, you will lose all your deductions. And if you file as a spouse, you lose the deduction on income of $ 140,000 and the total deduction as soon as your household income reaches $ 170,000.
The Student Debt Tax Deduction Reduces the Cost of Your Interests It is not a good idea to put extra money into student loans instead of paying higher interest debt (which does not normally have tax deductible interest) or investing (especially if you get tax breaks ).
Should you pay? early repayment of your student loan?
If you have private student loans instead of federal student loans, there's a stronger case for prepaying your student loans. After all, you do not get all the borrower protection measures that are available with the help of the federal government, and your loans may be higher than the debts of federal students. However, you must consider the opportunity cost – including the lost tax credit and the missed opportunity to make something more lucrative with your cash.
If you carefully examine all the options for using your money, you can decide whether or not early repayment of your student debt is the best way to get excess cash or to use the funds elsewhere, for example in yours Invest future. Only when you have taken this step should you decide if you want to repay your student debt.