Whether You Should Pay Off Your Student Loans Or Invest Depends On Your Financial Goals Interest Rates And Other Factors
Not sure if you should pay off your student loans or invest your money? Heres how to make the right choice for your situation.
Student loan debt is a burden for many Americans. In 2020, 30% of all adults reported that they had student debt, according to Federal Reserve data. Student loans can cause financial strain and make it hard to save for retirement or other goals.
If youre in this boat, you may be eager to pay off those student loans as quickly as possible. But in some cases, that might not be the right move.
If youre wondering whether to pay off your student loans or start investing now, this guide will help you weigh the pros and cons of each.
Consider refinancing your student loans to save money. With Credible, you can compare student loan refinance rates from various lenders.
Use The Grace Period To Your Advantage
Whether you have a grace period and how long it lasts with private student loans depends on the lender. The grace period is the time frame in which you arent required to make payments on your loans.
With federal student loans, the grace period typically lasts for the first six months after you leave school. With private loans and unsubsidized federal loans, keep in mind that interest is still charged during your grace period and will be capitalizedadded to the total amount you oweafter the grace period ends.
One way to make the grace period work for you is to make advance payments against your loans. Paying down some of the principal means less interest that accrues later. At the very least, try to make interest-only monthly payments in the grace period to cut down on what you owe.
Note that interest on student loans from federal agencies was temporarily suspended until May 1, 2022, which should help reduce the total amount you owe when you graduate. As of March 30, 2021, this relief was also extended to loans in the Federal Family Education Loan program.
Even with federal loans, it still makes sense to try to pay down federal loan principal during this period.
Refinance Your Student Loan
Refinancing offers shortcuts to some. With interest rates at low levels, a student loan refinanced with a private servicer may produce smaller payments and a shorter repayment time frame. If you choose a shorter term, it may actually increase your monthly payment, but your debt might be paid off faster and you might save money on interest.
The pros and cons to refinancing must be studied carefully. Once a federal loan is refinanced, you no longer qualify for federal loan forgiveness programs, both ones that exist now and ones that may be created in the future. Should President Joe Biden decide to grant student loan forgiveness to Americans holding debt $10,000 is the number often cited you would be ineligible for it.
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Graduate Student Loan Debt Repayment Timelines
Graduate and professional students, on average, borrow more for school than undergraduate students. Their income rates tend to be higher, as well.
- 4.3% is the interest rate for Direct Unsubsidized federal student loans to graduate or professional borrowers.
- 5.3% is the interest rate for Direct PLUS loans, which go to graduate or professional borrowers as well as parents of undergraduates borrowing on their behalf.
- $58,300 is the average student debt for a borrower who graduated from a public institution with a Masters degree.
- $96,700 is the average debt for masters degree holders who attended a private, for-profit institution.
- $101,200-$175,600 is the range of average debt for doctoral degree holders.
- $243,300 is the average debt for professional degree holders who attended private, nonprofit institutions.
- $77,800 is the average salary for a masters degree holder.
- $96,800 and $97,900 are the average respective salaries for people with professional and doctoral degrees.
|7 yrs, 4 mos|
What Are The Consequences Of Missed Payments Defaulting
Student loans never disappear. Theres no statute of limitations, and student loans are rarely discharged even in bankruptcy a fact reaffirmed in March by the U.S. Second Circuit Court of Appeals.
With few exceptions and pending direct relief from Washington your student loans will follow you until you pay them off.
When payment schedules resume, if there are no changes and you make a late payment on a federal student loan, you may be responsible for a late fee equal to 6% of the payment.
Defaulting on federal student loans results in more severe penalties. Before the CARES Act forbearance, you were considered delinquent when you havent made a payment in 90 days. When you havent made a payment in 270 days , you go into default and suffer plenty of consequences for it.
The government can garnish up to 15% of your wages and Social Security benefits, as well as offset income tax refunds. The government may also deduct 25% of each payment for collections fees, making the loan cost significantly more.
Late or missed payments also show up on your credit report and can harm your score.
If you cannot afford your payments, it is much better to contact your loan servicer and review your repayment options rather than simply not paying. Not paying and remaining silent is never a good combination.
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Option A: Continue Regular Payments
One option is to continue making regular payments on your loan if you have the financial ability and flexibility to do so. Since the accumulation of interest is paused right now, 100% of your payment will go directly to pay off your loan balances. That means that effectively you are making payments with a 0% interest rate. The major advantage to this option of paying off your student loans is that when interest begins accruing again, your principal will be much lower, and so the amount of interest that you’re charged will also be lower.
One disadvantage to continuing your regular student loan payments is that you might have better uses of that money. While you should make sure that you don’t just use the extra money for frivolous expenses, you may be able to put that money in other investments or to make smart financial moves like starting an emergency fund. Keep in mind that because of the CARES Act, you can get your payments refunded if you need to, which makes this a lower risk option.
The ideal candidate for continuing regular payments would be someone that has a higher-than-average debt balance and a healthy income that covers more than just their basic needs.
Average Undergrad Student Loan Payment
- Standard repayment plan $305
- Graduated repayment plan $344
- REPAYE $389
The average student loan debt for recent graduates with a bachelors degree is $29,000. Lets say youre paying the average student loan interest rate of 4.53% for undergrads and enroll in the standard 10-year repayment plan, your monthly payments will be $305.
|7 years, 9 months||$35,236|
|Monthly payments for bachelor’s degree debt of $29,000 at 4.79% average interest rate for undergraduates. REPAYE assumes starting salary of $55,660, the median for younger workers with bachelor’s degrees|
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Choose An Interest Rate Option Temporary Covid
You have 2 interest rate options to choose from for your Canada Student Loan:
- a floating interest rate equal to the prime rate, or
- a fixed interest rate of the prime rate + 2%
The prime rate comes from the rates of the 5 largest Canadian banks. The highest and the lowest prime rates are removed, then an average of the remaining 3 is used.
Interest rates can change as the prime rate varies. Please log in to your NSLSC account for more information about the current interest rates.
Your student loan has a floating interest rate by default. You can change to a fixed interest rate at any time after you enter repayment. If you switch to a fixed rate, you can not change back to a floating rate. To choose a fixed interest rate anytime during your repayment period, contact us.
Use the repayment estimator to see how interest rates affect your monthly payment.
If you have a provincial part to your loan, it may be under a different interest rate. Contact your province for your current rates.
The Debt Avalanche Method
Becky had a mix of Direct Unsubsidized, Subsidized, and Parent PLUS Loans, all federal loans. The Unsubsidized and Subsidized Loans had a much lower interest rate than the Parent PLUS Loans some were as low as 3.4%.
To pay off her debt as quickly as possible, Becky used the debt avalanche method. With this strategy, she listed all of her debt from the loans with the highest interest rate to the loans with the lowest. She kept making the minimum payments on all of her loans, but put any extra money she had toward the loans with the highest interest rate. By tackling the more expensive debt first, she was able to cut down on interest charges and save more money.
Ways To Pay Off Your Student Loans In One Year
The CARES Act of 2020 allowed borrowers to pause their payments on federal student loan debt without accruing any new interest. After several extensions, that deferment period is finally set to expire on May 1, which means millions of Americans will soon have to start sweating their student loan payments once again.
But instead of sweating, you could always strategize.
Its entirely possible to pay less than you owe and settle your debt well before your loan term expires in as little as a year, in the best of cases. The following is a collection of tips and strategies for ambitious borrowers with the lofty goal of settling their college debts in just 365 days.
Read More: The Hidden Costs of Education at Every Level
Reasons Not To Pay Off Student Loans Early
Getting out of debt fast sounds great, but it’s not always doable for everyone. Before you jump into a plan to decimate your student loan balance, take stock of your whole financial situation.
- If you don’t have enough saved up: A healthy emergency fund can help you avoid going into debt when life gives you an expensive surprise. Prioritize building a savings reserve of three to six months’ worth of your crucial expenses before aggressively paying down student loan debt.
- If you have other debt: Student loans have relatively low interest rates, compared with other forms of credit like personal loans and credit cards. Be sure to compare interest rates when deciding what debt to tackle firststudent loans probably won’t be 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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If You Are Seeking Public Service Loan Forgiveness
The automatic forbearance wont undo your progress toward Public Service Loan Forgiveness, or PSLF. As long as you are still working with a qualifying employer, months spent in forbearance will count toward PSLF.
Making payments during the automatic forbearance won’t get you ahead on payments. You’re in the same boat whether you pay or not.
Under normal circumstances only full payments count. You also wont lose credit for the payments you already made.
Should I Sell My House To Pay Off My Student Loans
By Dr. James M. Dahle, Emergency Physician, WCI Founder
Nobody was asking this question back in 2010, but after a decade of rising housing prices, those with heavy student loan burdens who happen to own a house are starting to look at that home equity and wonder if there is a better use for it. What factors should be considered when deciding whether to sell your home in order to get out from under your student loans?
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Average Graduate School Student Loan Payment
- Standard repayment plan $723
- Graduated repayment plan $824
- REPAYE $613
The average grad school debt is $84,300. But that number skews high because it includes costlier professional degrees in fields like law and medicine. So lets look at what monthly loan payment you might expect if you earned a masters degree and took on the typical level of debt for that degree .
Graduate students not only take on more debt, but typically pay higher interest rates. In addition to $29,000 in federal direct loans for undergraduates at 4.79% interest, lets say you have $37,000 in federal direct loans at 6.36%. Thats a weighted average of 5.7%.
|Monthly payments for $29,000 in undergraduate and $37,000 in graduate school debt at weighted average interest rate of 5.7%. REPAYE assumes starting salary of $62,491, the median for younger workers with master’s degrees.|
Increase Monthly Payments To Repay Your Loan Faster
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If You Dont Contribute To Your Retirement And Get The Max Employer Match
No, paying off your student loans early is not a good idea.
When you have student loans, future goals like retirement may not seem that important. But its important to invest now, while youre young. This gives your money time to grow so you can have a comfortable retirement.
Not all employers offer 401 matching, but many offer a match up to a certain amount or percentage. So at the minimum, its a good idea to contribute enough to employer-offered retirement plans to qualify for the full match before making extra payments on your debt.
Look Into Public Service Loan Forgiveness
The federal government already has forgiveness programs in place for certain subsets of borrowers, including the Public Service Loan Forgiveness program. PSLF forgives the debts of graduates employed in the public sector following a minimum of 10 years of service and 120 qualifying payments. Your particular job doesn’t matter, only that you work for a public service employer. There’s no limit to the amount of money that can be forgiven.
The Department of Education recently made significant changes to the program. Now, all repayment plans count toward loan forgiveness, and you can consolidate previously ineligible loans into Direct Loans to qualify. Read more about how the changes may impact you.
During forbearance, your $0 payments still count toward your qualifying monthly payments as if you had continued to pay down your loans during the pause, as long as you still work for an eligible employer. Counting from when the payment freeze started in March 2020, you can net almost two years of “free” qualifying payments, which gets you that much closer to loan forgiveness.
You’re better off paying as little as possible in this scenario and putting any extra cash towards an emergency fund, high-interest debt, or retirement savings.
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Weighted Average Interest Rate Calculator
Before you decide to consolidate or refinance multiple student loans, you’ll want to figure out what your debt as a whole is costing you. That number your weighted average interest rate will help you compare money-saving options.
Weighted average interest rate is the interest rate that represents the cost of all your loans combined. It is the weighted average of your current loans rounded up to the nearest one-eighth of one percent. The federal government uses the weighted average interest rate to determine your new interest rate if you decide to consolidate your federal student loans
For example, if you owe one student loan for $10,000 at an interest rate of 4% and another loan for $20,000 at 8%, you owe $30,000. The average interest rate would be 6%. But the weighted average interest rate which takes into consideration the balance you owe at each interest rate would be 6.67%.