Student loans: Is paying them off early a good idea?
It鈥檚 easy to wipe out your savings account or your 401(k) to eliminate your student loans if you have the savings to do it. But there are other important and, yes, boring things you should do with your money.
It鈥檚 easy to wipe out your savings account or your 401(k) to eliminate your student loans if you have the savings to do it. But there are other important and, yes, boring things you should do with your money.
鈥淎sk Brianna鈥� is a Q&A column from NerdWallet for 20-somethings or anyone else starting out. I鈥檓 here to help you manage your money, find a job and pay off student loans 鈥� all the real-world stuff no one taught us how to do in college. Send your questions about postgrad life to聽askbrianna@nerdwallet.com.
This week鈥檚 question:
鈥淚 really want to get rid of my student loans. Should I use my savings to pay them off now?鈥�
I wish someone had told me before I went to college that student loans would be an emotional drain, not just a financial one. That monthly payment can feel like it鈥檚 going into a black hole, perhaps because what it鈥檚 gotten us is so abstract: We can鈥檛 host a dinner party at our education or take our friends for a ride in our transferable skills.
Scientists have even researched the inner turmoil loans can create. A聽2015 study聽published in the journal Social Science & Medicine found that the more money 25- to 31-year-olds borrowed to pay for school, the poorer psychological health they reported.
It鈥檚 easy to wipe out your savings account or your 401(k) to eliminate your loans if you have the savings to do it. But there are other important and, yes, boring things you should do with your money, especially if you鈥檙e earning an average income and have goals beyond kicking your loans to the curb.
So instead of throwing all your cash at your student loans, think of putting your money into buckets, says Betsy Mayotte, a student loan expert and director of consumer outreach and compliance at American Student Assistance, a nonprofit that provides student loan education.
鈥淓verybody should be contributing something to their emergency fund, something to retirement, and something to their debt, every single paycheck,鈥� she says. Here鈥檚 how to do it.
Solidify your savings
Before tackling your loans head-on, Mayotte suggests setting up an聽emergency fund. That鈥檚 because without any savings, you might put unforeseen expenses on a credit card 鈥� which likely carries a higher interest rate than your student loans 鈥� and not pay it off right away.
Start small and set aside $25 or $50 a month until you鈥檝e got at least $500. That pot of money will be there for you if, say, your car breaks down, and will keep you from going further into debt.
Plus, more than half of student loan borrowers say their debt keeps them from buying a house or starting a business, according to a聽December 2015 survey聽by American Student Assistance. You can鈥檛 do either without some money socked away, which would be hard to do if you follow the advice in articles with headlines like 鈥淗ow One Grad Paid Off $80,000 in Student Loans in One Year.鈥�
Next, start filling your retirement bucket. Contribute to your 401(k) at work, especially if your employer matches your contributions with its own money. Again, just $50 a month is better than nothing, but contribute as much as your employer match if it鈥檚 available to you. Consider a Roth IRA if you don鈥檛 have a 401(k) option.
Take advantage of student loan forgiveness
Before you focus on aggressively paying down your debt, check to see if you鈥檙e eligible for聽student loan forgiveness. These programs can lower the total balance you need to repay, which should factor into how much money you put toward your loans. It鈥檚 crucial to talk to your school or聽student loan servicer聽and to dig into your loan information, so you don鈥檛 miss out.
鈥淧art of it is, people don鈥檛 want to look at it, so they don鈥檛 know the options that are available,鈥� says Mark Struthers, a financial planner in Chanhassen, Minnesota.
Public Service Loan Forgiveness, for instance, will forgive your remaining federal student loan balance after you make 120 on-time monthly payments. It鈥檚 best to repay your loans on an聽income-driven repayment plan聽in the meantime. Those plans cut your monthly bill to 10 to 20 percent of your income, and you can send any extra money to savings instead of your loans. Teachers and borrowers of Perkins loans, which are for students with high financial need, have forgiveness options, too.
Automate your extra payments
If you鈥檝e got your emergency fund, you鈥檙e saving for retirement and you鈥檙e not counting on a forgiveness bonanza, you鈥檙e ready to crush that student loan balance with what鈥檚 left. Make additional payments online and target your highest-interest loans first to save money on interest.
Or ask your student loan servicer to increase the amount that鈥檚 automatically debited from your bank account every month.
No matter how you do it, paying extra toward your loans when you鈥檙e ready will get you a little closer to all the other ways you want to spend your money. If you鈥檙e like me, you鈥檝e had a list running for years. Cabin in Montana, here I come.
Brianna McGurran is a staff writer at NerdWallet, a personal finance website. Email:bmcgurran@nerdwallet.com. Twitter:聽@briannamcscribe.
This article was written by NerdWallet and was originally published by The Associated Press.
The article聽Ask Brianna: Should I Pay Off My Student Loans Early?聽originally appeared on聽NerdWallet.