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Is Paying Off Student Loans Early a Good Decision?

Oct 20, 2007
Student loans have very cheap debt, in fact; technically you are not actually paying any 'real' interest, because the interest rate is set at the rate of inflation. Student loans are one of the cheapest forms of long-term dept possible. By paying them off early you risk needing more expensive borrowing elsewhere at a later date.

When it comes to paying off balances, your first goal should be to pay off your highest-rate, nondeductible debt. Mortgage Interest and Student Loan Interest are your so-called "Special Loans" and typically are the last debt you want to pay off. It makes no sense to speed up paying off low-interest, tax-deductible debt, if you have any other kind of debt at all.

Keep these two until the last to help when calculating with Uncle Sam and keeping that cost down. Since there is only so much cash to go around, a decision has to be made between paying the extra on bills or putting it into savings.

The current top savings account rate is roughly 6.3% interest and is higher than this year's student loan interest rate of 4.8%. You cannot get back the money you passed up or the value of time in helping your money grow. A smart concept is to pay off all high interest loans that you cannot use, make minimum payments on loans where interest you can use and the pay you the rest.

A friend of mine had an extra $250 and was trying to decide whether to pay off her car loan or fund a Roth IRA. If she used the monthly cash to accelerate payments on a $20,000, five-year loan, she could have it paid off in three years and save an interest of more than $1,000. In those three years, she would have forever missed the opportunity to contribute the maximum of $3,000 annually to a Roth.

Those contributions could grow to $78,000 in 30 years. How many cars would she have to buy over and over and over again in 30 years with nothing to show?

American households are staggering under near-record debt loads. We have less equity in our homes and larger balances on our credit cards than ever before.

Bankruptcies continue to hit new highs, foreclosures are setting modern records and a big chunk of our disposable incomes pay for items purchased a long time ago. Now is the time to rethink your financial situation and get your budget in order.
About the Author
Court provides information about federal direct student loans and helps people refine their small business internet marketing consultant.
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