Should I pay off my student loans or save money? Both are crucial, so how can you determine which to pursue?
At the least, keeping track of your student loan payments is a good idea since this may avoid late charges or perhaps defaulting on your loans.
However, if you have excess money at the end of the month, you must decide whether to make additional payments on your student debt or invest it in savings and assets.
We’ll go through 6 questions you should ask yourself to decide whether to take out student loans or savings.
- 6 Questions to Ask Before Deciding Whether Paying For your Student Loan or Save It
- 1. Is Focusing On a Single Objective Helpful In Achieving the Other?
- 2. What Is my Highest Priority?
- 3. Is It Necessary to Save for Any Major Life Events?
- 4. Is It Possible to Save and Repay Student Loans At the Same Time?
- 5. How Much are my Interest Rates?
- 6. Should I Save for Retirement or Pay Off my Student Loans?
- Frequently Asked Questions
6 Questions to Ask Before Deciding Whether Paying For your Student Loan or Save It
1. Is Focusing On a Single Objective Helpful In Achieving the Other?
Consider how your objectives of saving and repaying student loans might fit together.
Money-saving tips may help you save money while simultaneously helping you find additional funds to put towards student debt repayment.
For example, refinancing student loans might help you save money on interest or lower your monthly payments.
You may apply for an income-based repayment plan to lower your monthly payments and save money for a retirement account.
You could find out that you can pay one of your student loans off in 6 months if you crunch the numbers.
You may also save money that you would otherwise spend on your monthly payment by paying off your debt.
You have a lot of financial goals, life events, and major purchases to think about. Taking some time to think about more than just your finances may help you make the best decision for yourself.
2. What Is my Highest Priority?
The financial component and return on investment are only 2 aspects of the equation.
Another aspect to consider in any financial decision is whether or not to save money or pay off educational debt. In particular:
- What is the most essential aspect of your life?
- What are your long-term objectives and aspirations?
- How at ease are you with the prospect of owing money?
- What kind of living do you want to lead?
- What are you prepared to give up in order to accomplish this?
You might have certain aspirations or accomplishments that are more important to you than paying off your student loan.
You may feel that debt is a major source of stress, and the prospect of owning it makes you melancholy.
Pay more on student loans if paying off student loans ranks higher than saving for a house for you.
3. Is It Necessary to Save for Any Major Life Events?
Consider how you’ll use the money when considering major life events that will need cash.
These are expected and prepared, unlike circumstances, and may include a wedding, starting a business, or starting a family.
Consider how much time you’ll have to pay your student debts and major life events while deciding whether to pay them off or save.
But don’t lose sight of the financial aspect of things. Consider how far these large expenditures may delay your student loan repayment.
You may also like: Using a Personal Loan to Invest: Is It Make sense?
4. Is It Possible to Save and Repay Student Loans At the Same Time?
It’s conceivable, and it can even be beneficial, to work toward repaying student loans while also lowering costs.
Assume you have $500 a month to spend on financial goals. With all of this cash, you may either save or pay off your student loan. However, it’s also feasible to distribute it between the two.
It may be tempting to combine temptation with your student debt repayment. For example, if you put extra money toward your student debt each time you make a payment, include some funds for something you enjoy.
Perhaps you set aside $50 for every extra $300 paid toward student loans by putting it in a vacation account.
5. How Much are my Interest Rates?
If your student loan interest rates are excessively high, you might want to pay them off early.
However, if your rates are low, your student loans should not be at the top of your priority list.
If you have a large amount of credit card debt, it’s good practice to settle it first.
You don’t have to be concerned about future loan rates rising if your student loans are fixed.
If your variable rates continue to climb, student loans may take precedence over other debt, whether paying them off quickly or refinancing them to a fixed interest rate.
6. Should I Save for Retirement or Pay Off my Student Loans?
Retirement may seem distant when you’re required to pay student loans on a monthly basis.
However, there’s no replacement for getting started early when it comes to saving for retirement.
Small investments could end up being worth thousands of dollars in retirement, with decades to compound interest between now and then.
You may reduce the amount of money you pay in taxes by contributing to tax-advantaged retirement accounts.
Your investment returns may sometimes be higher than the interest rates on your student loans.
It’s a smart idea to take this bet since the overall profit is greater than the cost of student loan interest.
It’s also a good idea to take advantage of any retirement savings bonus offered by your employer.
Frequently Asked Questions
If your student loan interest rates are higher than 6%, paying them off and avoiding interest expenses will save you more money than investing.
If your student loan interest rates are below 6%, you might consider putting funds toward retirement or a non-retirement investment brokerage account.
If the interest rate on borrowed funds is greater than what you may get in a savings account, therefore the best advice is to pay off your student loans and educational debt as soon as possible.
Marie got her journalism degree from the University of California and is an award-winning financial journalist, who’s responsible for collecting and analyzing information concerning students and young adults within the world of finance.
Marie has spent her career with more than 5 years writing for unique media outlets like Yahoo finance, GoBankingRates, and CNBC. She also teaches them how to plan strategically to get out of loan debts easily.
Her goal is to educate students about the different stages in life that involve finances so they can get their money’s worth.