Student Loans? Benefits of Paying Them Off Now!
Updated: Aug 10
Students graduating from college, whether with a bachelor's degree or an advanced degree, are under a crushing load of student loan debt. They might despair at ever paying it off before they die, but that's exactly what they should do. Paying off that debt should be one of the key facets of a student's ongoing financial plan. Here's why:
1. The interest is staggering.
Even assuming the lowest student-loan rate available right now, which is 4.53 percent, the interest piles up. Let's look at an example. Jim goes to the University of Michigan for four years and is not a Michigan resident. The 2020 tuition and fees, including room and board, come to about $66,000 annually. Over the course of four years, that's $264,000. Let's say Jim does work study and gets a small scholarship that bring the total down to $250,000, which he gets as a subsidized loan.
Doing the math over a 30-year term, it's $1,271 per month, which doesn't seem that bad, right? Well, the interest totals about 200 grand. Therefore, it behooves Jim to pay it off any way he can as fast as he can.
2. The tax breaks don't amount to much.
The IRS lets students deduct up to $2,500 of their student loan interest annually. But, Jim's 30-year loan averages out to nearly $7,000 of interest payments annually. The tax deduction is better than a kick in the pants, but not by much.
3. Lower your debt-to-income ratio.
Anyone who has gone to get a mortgage, car loan, or other such loan has learned about DTI (Debt-to-Income Ratio). Let's say Jim gets a good job and makes $70,000 annually right out of school. His education loan is $1,271. His car payment might be $250 per month, and his other bills could very well equal about $600 per month. His monthly income is $5,833.33. Jim's already at more than 36 percent DTI. Even without a mortgage, Jim is at the limit. The best way for him to lower that DTI is to pay off the education loan quicker.
4. If you start to go under, bankruptcy cannot save you in most cases.
It used to be impossible. Now, it's just near impossible. You have to have a lawyer, whom you most likely will have to pay more for the required "hoop jumping" regarding discharging a student loan obligation. This should not be taken as legal advice at face value. Of course, if you need to think about bankruptcy, you must contact a lawyer to protect your rights.
5. You can reduce your stress level.
Depression, anxiety, resentment, and anger are just some of the emotional states and conditions that can arise from owing too much money. You might be frustrated and even in denial. In extreme circumstances, you might even think about "taking the Willy Loman way out." Reducing debt can reduce stress, but you must keep in mind that if you are truly experiencing anxiety, depression, or other conditions, you should see your doctor immediately.