Do You Want to Pay Your Student Loan Early?
The impact of student loan debt on the lives of Utahns (and all other Americans for that matter) has never been more serious than now. The millennials, the most influential group of consumers today, are the biggest victims.
Millennials have to put off major life events. They are too poor to spend a ton of money on a wedding with abandon and own one of the beautiful townhomes for sale in Eagle Mountain, Eureka, or Spanish Fork.
Understandably, many adults who still carry some student loan balance in their late 20s or 30s mull over prepayment, which comes with no penalty. Paying off your college debt ahead of schedule allows you to be more psychologically ready to take your first steps toward financial freedom.
But is it the best idea? Surprisingly, early repayment of your student loan debt might not put you at a disadvantageous position.
It Limits the Money You Can Save
Prepayment means putting more money in the pocket of your lender than what you are required to give every month. Doing so lets you drive down the principal, naturally shortens your student loan term and minimizes your overall interest expense.
However, choosing to feed your college debt can starve your other funds. Saving for a rainy day fund and an emergency fund is hard enough if you have a student loan, let alone if you are funneling more cash into it monthly.
While sufficient payment is not without an opportunity cost, it helps you be more financially flexible. If you have other debts with higher interest, you might want to use your extra money to pay them off first to ultimately save money.
It Hurts Your Credit
One of the benefits of being indebted is the opportunity to build your credit. Paying off your student loan early can shave some points off your FICO scores to a certain extent.
Once your college debt is repaid completely, its account is closed. It then becomes a less influential factor in credit scoring. Considering that you have carried it for many years, the average age of your accounts will drop when it is no longer active.
Moreover, your FICO scores might go down due to lack of credit mix if it is your only installment loan. Even worse, your credit will suffer if you miss payments on your other reported financial obligations, like credit card bills, just because you want to pay your student loan off more quickly.
It Keeps You From Investing More
It’s never too early to invest your money for retirement. You have to play the long game, and it is imperative not to rush into any decision, including early student loan repayment. Time is a tool for steady and consistent wealth building, so use it to your advantage to grow your money by buying stocks and other assets instead of focusing on little gains stemming from interest savings.
Paying off your college debt comes with merits, but it is not entirely practical. Analyze your financial situation and think about your long-term goals to decide whether or not you should pursue prepayment.