Several college graduates with student loan debt did not fully recover from the debt all through their adulthood, and the hard part is that the student loan debt may actually be causing more harm to your finances than you really think. There are several benefits of paying off student loans early, and if you are wondering how you can speed up your loan repayment plan, there are strategies below to help you.
Can You Pay Off Student Loans Early?
Some loan prepayments exert penalties when loans are paid before schedule, and if you’re wondering, “are there penalties for paying off student loans early?”
Fortunately, both private and federal student loans have no prepayment penalties. This means that if you pay off your student loans early, you’ll not incur any extra expenses.
So, it may be a perfect life-changing goal to focus on getting rid of your student loan as quickly as possible. Aside from easing you off stress and improving your savings, there is a wide range of other benefits of paying student loans early.
Proven Strategies To Speed Up Payment Of Your Student Loans
Reduce your expenses
Making some changes to your lifestyle is very important to cut down how much you spend on regular needs to be able to speed up your student loan repayment. You may also want to get an extra job to increase your earnings; do a side hustle online, or get a roommate to share your rent payment with you.
Pay a little extra every month
A little addition to your regular monthly loan repayment would go a long way over time. Even if it is just an additional $20 or $30, it would help you cut down your huge student loan. Paying a little extra every month is a strategy that can help to speed up your repayment plan.
Refinance your student loans
You should consider refinancing student loans with a high interest rate for a reduced rate and speed up repayment. But it is important to consider some unique benefits that you may become ineligible to before taking the step.
Refinancing federal loans will make you unentitled to public service forgiveness or income-based repayment. If you are looking out to manage multiple federal student loans, consider consolidating before moving ahead to refinance. But if none of the benefits fit in your unique situation, then find out about your student loan refinancing options.
Benefits of Repaying Your Student Loans
It is important to review your goals and finances to see if repaying your student loans early is something you should consider. But generally, here are the benefits of repaying your student loans.
1. You’ll pay less over the life of a student loan
Just like other loans from other loan providers that accumulate interest over a period of time, you’ll be paying interest on your student loans which becomes reduced when you pay off the loan earlier, meaning you’ll end up paying less.
Student loan interest is charged based on the outstanding balance of your current loan. So, when you pay off quickly to reduce the amount, your interest rate will be reduced also, meaning you will not have to pay as high as you would have paid with your regular payment. And when you pay off quickly, you’ll be able to achieve other financial goals such as having your first home, vacationing in your favorite place, starting a business, or creating an investment portfolio.
2. Improve the debt-to-income ratio
Your debt-to-income ratio will improve when you pay off a major monthly payment. The debt-to-income ratio is what many lenders use to evaluate your credit qualifications. You may become eligible for improved interest rates on your loans when you have a better debt-to-income ratio.
For most lenders, with a lower debt-to-income ratio, you’ll be able to pay your debt responsibly. Generally, a DTI of 30% to 35% indicates that your debt is at a manageable level, and a DTI of 43% will qualify you for a mortgage. So, a lower DTI will make you considered for credit or loans, and also provide you with better future offers and rates.
3. Tax break doesn’t really worth it
People commonly think that a tax break is a great reason to keep student loans at the least of your repayment priorities, but student loan tax deduction comes with its own challenges.
The tax deduction is limited to $2,500 of student loan interest you pay. Once your income reaches $70,000, it starts phasing out and is removed totally at an $85,000 adjusted gross income (AGI), or $140,000 and $170,000 respectively if you file a joint return annually.
While this deduction only reduces your tax bill by lowering your adjusted gross income, you may still end up with much higher interest over the life of your loans than you have saved during tax break. In essence, a tax break isn’t a great reason not to clear off your student loan quickly.
4. No more financial worry
Repaying student loans can be quite stressful and serve as a hindrance to reaching financial stability. Only a very small fraction of college graduates affirm living comfortably compared to a larger number of graduates that fall within the same age category.
A benefit of paying student loans early is that it will reduce your financial stress. Create a debt payment plan and budget after graduating from college. This should guide you into clearing your debt in time and help you start focusing on better things in life.
Reasons You May Not Pay Off Student Loans Early
While it is a great idea to get out of debt early, not everyone can fit into the plan. So, you should consider your whole financial situation before jumping at the idea of paying student loans fast. Here are questions to ask yourself.
- Are there other debts I am paying?
Unlike other forms of credit, student loans are accompanied by relatively reduced interest rates. And when you have multiple loans to clear, it is better that you compare their interest rates when deciding. So, if you ultimately have a goal to save money and get out of debt fast, paying student loans quickly should not necessarily be at the forefront of your focus.
- Do you have enough to save up?
If you have a healthy emergency fund in place, you can avoid going into debt when faced with unplanned situations. Before you start getting aggressive with your student loan repayment, first of all, build a savings reserve of up to six months’ worth of your major expenses. This should serve as a backup and help you become less tense with your loan repayment.