Should you save or pay off student loans early?

If you have student loans, you might be wondering whether to save or pay off them early. It is a financial tug of war between being debt free today, and saving for future. In this article, we’re going to look at the factors to consider when deciding whether to save or pay off the students loans early.

Saving for Retirement
You should determine if paying down the student loans prevents you from achieving some other crucial financial goals, such as saving for your retirement. Generally, investing in your retirement savings early on in your career will ultimately pay back larger dividends once you retire, than you’d have saved if you had put your money into paying off the student loans early. By beginning to save for your retirement early, you optimize the advantage of compounding; this means a retirement contribution that you make in your 20’s will be worth much more than a contribution that you make years later after you’ve paid off your student loans.

You might also benefit from the employers/companies who give out ‘free money’, which is hidden in features like, matching your savings and vesting. If your employer/company offers this kind of benefit, you should take advantage of it. If you put the money that you’d have put into a retirement account toward paying off the student loans, you will be rejecting free money.

Emergency Fund
You should consider building an emergency fund first so as to avoid costly personal loans. Try and build up a good emergency fund of 3 to 6 months of your income to cushion any unexpected financial blows, before you make any huge efforts to pay your student loans early. Remember, you should be able to access the emergency fund at any time in case need arises.

Interest Rates
Different types of debts can vary widely on just how much they cost. For instance, credit card debts are typically the most expensive with very high-interest rates, while student loan interest rates are usually relatively low. The interest rates for the undergraduate federal student loans which were disbursed in 2017 is at 4.45%, while the rates for the federal graduate student loans are at 6%. Compared to the average credit cards’ APR of about 15.59%, federal student loans are much cheaper. So, if you hurry to pay off the student loans, you will risk needing to borrow loans later at high commercial interest rates.

Tax Advantages
Student loans can be tax deductible, meaning a portion of the interests paid will be tax deductible, i.e depending on your annual income. With a few restrictions, the deduction lets you subtract some of the interests you paid on the student loans from your annual income when filing your taxes. This, in turn, reduces the interest rates on student loans, thus making them cheaper than they might appear.

Debt Forgiveness
Some federal student loan repayment plans may result in automatic debt forgiveness. If you happen to choose some plans like pay as you earn repayment, income-based repayment or income contingent repayment, the balance you owe on the federal student loans after 30 years will get automatically forgiven. So, clearing your debt early might mean paying up more than you actually needed to.

If you’re concerned about being in debt, you might be tempted to pay off your student loans early, however, the biggest mistake you can make is not saving for future. Building up a good retirement savings early, gives the funds the maximum period of time to grow, which leads to an impressive balance when you are ready to retire. Doing this will give you a much richer reward than paying off the student loans early would. You can learn more about  managing your student loans here