Should You Save Money Or Pay Off Your Student Loans?
Are you looking to put some money into your savings account rather than paying off outstanding student loans?
This is a common choice that presents itself for many people.
So, what’s the right thing to do?
Let's say you have your hands on some extra cash and are considering putting it aside for later. In the meantime, you have an ongoing student loan.
The dilemma that arises is whether you should use the excess funds to clear the debt first or if you should put it aside for something else or a rainy day fund.
In this blog, we explore both the options to help you decide which might be the better choice depending on your financial circumstances.
Arguments For Saving
Savings can come handy in the following conditions:
- You’re looking to purchase any valuable asset. Saving would be a good way to own rather than rent an asset like a car or house. This can add to your emotional support levels.
- The prices of nearly all valuable items are increasing day-by-day. Hence saving would be the best way to own them with favorable interest rates and prices.
- The down payment would reduce the overall cost of your asset which is beneficial for saving compared to paying off the loan debt.
- You can avail benefits like income-based repayment plans or student loan forgiveness for reducing the monthly payments.
- The interest in an outstanding student loan is tax-deductible.
Arguments For Paying Off Loans
Paying off the student loan is a good choice because:
- The more time you take to pay off student loan debt, the greater the amount of interest you’ll have to pay. If interest rates are high, the savings from faster repayment will be immense.
- If the interest rate on your student loan is variable, it could fluctuate higher, ending up costing you more over the life of the loan.
- Paying off a student loan completely comes with a positive impact on your credit report. However, an unpaid student loan debt or missed payments will leave a negative impact on a report for as much as 7 years.
- Having unpaid debt can be an immense psychological and emotional drain for borrowers. Many people wish to buy new assets after clearing existing debts. Accordingly, paying off student debt can give borrowers added confidence knowing that they're more financially stable.
Which One Should I Do First?
When thinking about what to do first, you need to decide how determined you are to pay off the student loan early.
While some people are focused on paying off the loans to become debt-free as soon as possible, others want to make investments or purchases while simultaneously repaying debts.
If you think paying off debt would make you feel more relaxed compared to making hefty investments for your retirement, peace of mind is worthwhile.
However, if you’re thinking of clearing the debt early, you’d need to make considerably higher payments above the minimum amount. There are some lenders that provide multiple payment options every month automatically to encourage early repayment.
How To Do Both?
This is one of the most widely accepted decisions for borrowers with student loan balances. Still, there are some essential guidelines that need to be followed:
- List Out Your Debts - Making a list of outstanding debts is helpful for managing income and the repayments. The list should include credit card payments, car loans, student loans, and other borrowings. While listing out the debts, also include the interest rate, minimum monthly payment, principal amount, and duration.
- Give Priority To The High-Interest Loan(s) - While making the list, try and pay attention to the loans with the highest interest rates. If possible, make sure you pay more than the minimum amount due. After the debt’s cleared, move to the debt with the next highest rate and repeat the process.
- Save In Different Accounts - To avoid spending the amount saved for a down payment or other expensive purchases, save funds in different accounts. Explore savings accounts with high-interest rates or certificates of deposit (CDs) that usually feature higher rates if you intend to save for more than a year to make a down payment or a big purchase.
Ultimately, the ideal scenario is to save and add to existing debt repayments to reap the benefits of excess cash.
However, depending on your financial circumstances, make sure every point is considered when choosing between which option to pursue.
Also, bear in mind that the circumstances are sure to change, and something that is possible today might not be possible tomorrow.
Reevaluate your situation regularly and choose wisely to maximize the reach of your money.