5 Benefits of Paying Off Student Loans Early

Many college students graduate with student loan debt and carry it with them throughout their adult years. But that student loan debt may affect you more than you think.

You may be wondering if you should include your student loans in your debt repayment plan or if you should worry about paying off your student loans in advance. If you can, there are several good reasons to focus on paying off your student loans as quickly as possible.

1. Your debt to income ratio

A good reason to pay off your student loans is that it will lower your debt-to-income ratio (DTI). This measures how high your monthly debt payments are compared to your monthly income. If you pay off your student loans, not only will you be free of these monthly payments, but you will also be able to reach other financial goals more easily.

A lower debt-to-income ratio is also important if you plan to apply for new credit, especially a mortgage. Most creditors will see a lower DTI rating as a sign that you can take on and pay new debt responsibly. Typically, you'll need a DTI below 43% to qualify for a mortgage, for example, and even more DTI from 30% to 35% to really show that your debt is at a manageable level.

2. Tax reduction is not so good

A common misconception about student loans is that you should keep them for tax breaks, which may be reason enough to put student loans at the bottom of your repayment priorities.

But you must realize that the student loan tax deduction has its limitations. The tax deduction is limited to $ 2,500 of the student loan interest you pay. It also begins to decline when your income reaches $ 70,000 and drops to an Adjusted Gross Income (AGI) of $ 85,000 (or $ 140,000 and $ 170,000, respectively, if you file a joint return) per year.

Lastly, this deduction only indirectly reduces your tax bill, reducing your adjusted gross income.

This amount is nominal, and you can pay far more interest than you would save with tax cuts over the life of your loans. It's better to get rid of student loans than to stick with them for a tax break.

3. It is costing you

Even if you take advantage of the student loan tax exemption, you should consider how much money you are losing each month due to student loan payments and interest.

Student loan interest is charged as a percentage of your current outstanding balance. As you make additional payments and reduce your balance, the amount charged also decreases. Paying down your student loans also means that you will pay less total interest compared to your loan costs if you follow your normal repayment schedule.

Depending on how much student loan debt you have, your payment can make up a significant portion of your budget. If you pay off your student loans, you will get rid of that payment and free up your cash flow. Plus, you'll be able to reach other financial goals more quickly, like saving to pay for your first home, taking a trip, building an investment portfolio, or starting your own business.

4. It is practically inevitable

Many people who are burdened with student loan debt hope that bankruptcy can offer a solution to their problem. However, if you file for bankruptcy, it is rare for your student loans to be forgiven through this process. Borrowers must file a separate lawsuit to cancel student loans in bankruptcy and show that repayment would impose "undue hardship."

Besides filing for bankruptcy, there are a few ways to get rid of your student loans. Federal student loans and some private student loans are canceled in the event of the death or total disability of the borrower.

Federal student loans can also be forgiven by qualifying for certain student loan forgiveness programs, such as utility loan forgiveness.

Generally, the IRS considers a forgiven debt to be taxable income. However, if your student loan is forgiven between 2021 and 2025, the American Rescue Plan Act of 2021 states that you will not be required to pay income taxes.

But the fact is, for most borrowers, the best way to pay off student debt is to pay it off.

5. Get rid of financial worries

Student loans tend to be a major source of stress, preventing people from achieving financial stability. About a third of college graduates between the ages of 25 and 39 say they live comfortably economically, compared to 51% of graduates of the same age with no outstanding student loans, according to data from the Pew Research Center.

If you want to reduce your financial stress, you must work to pay off your student loans. Even if your student loans are nearing the end of your debt repayment schedule, you can still benefit from paying off your debts and reducing the amount you owe.

Reasons not to pay student loans early

Getting out of debt quickly sounds great, but it's not always doable for everyone. Before beginning a plan to decimate your student loan balance, take stock of your entire financial situation.

If you don't have enough savings: A healthy emergency fund can help you avoid going into debt when life offers a costly surprise. Prioritize building a three- to six-month savings reserve of your critical expenses before aggressively paying off student loan debt.

If you have other debt: Student loans have relatively low interest rates compared to other forms of credit, such as personal loans and credit cards. Be sure to compare interest rates when deciding which debt to tackle first; Student loans are probably not the first thing you want to get rid of if your main goal is to save money by getting out of debt.

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Source: Jarrad Morrow

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