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If you have disposable income, you may be asking, ‘Can (or should) I pay more than the minimum on monthly student loans? The truth is there is no single answer to this question that’s right for all student loan borrowers. Paying more than the minimum on monthly student loan repayments does have some great benefits. But it also has a few drawbacks that could derail your financial goals. Understanding the pros and cons of repaying more per month will help you determine whether this is the best option for you.
Benefits Of Paying More Than The Minimum On Monthly Student Loan Repayments
1. You can pay off your loan faster
Paying more than the minimum amount every month can help you lower the outstanding balance and finish paying off your loan faster. The earlier you get out of debt, the earlier you’ll free up cash to spend on other endeavors without worrying about monthly loan repayments.
2. You save money over time
Paying off your student loans earlier also ends up saving you a considerable amount of money on the accrued interest. Student loans accrue interest when you carry a balance. Reducing the life of the loan gives the interest less time to accrue, so you pay less in interest. This can make a significant difference to the cost of your loan in the long run.
3. You can be Debt Free Sooner
Getting debt-free earlier also lets you get a head start on your other financial goals. You can use the freed-up funds that would otherwise go toward your student loan payments for any other purpose you wish. Start saving for your own home or, if you have a mortgage, use the money to pay it off. Save some of the money for retirement and some of it for a vacation.
4. Improves your Debt-to-income Ratio
Last but not least, having one less loan to pay off helps to improve your debt-to-income ratio. This is a measure that compares the amount of debt you have compared to your monthly income. Lenders and credit card issuers use this ratio to evaluate whether or not you qualify for credit. A lower debt-to-income ratio will help you get approved more easily. With a lower ratio, you may also be eligible for better interest rates on credit cards, personal and vehicle loans, mortgages, and more.
In most cases, it’s a good idea to go for it and pay more than the minimum whenever you have some extra cash on hand. Moreover, you don’t need to have hundreds of dollars in extra cash every month to make a difference. Paying even a small amount more than the minimum on monthly student loan repayments can help reduce interest charges considerably.
However, while paying more than the minimum is generally a good idea, it may not always be the best option for everybody. These are a few to consider if you choose this option.
Drawbacks Of Paying More Than The Minimum On Monthly Student Loan Repayments
1. You’ll have a higher monthly Payment
The higher monthly payments can be a major drawback if you’re not making much money. There are several other expenses that also need to be taken care of every month. If you’re already struggling to make ends meet, any additional payments can put additional stress on your finances.
2. It may put other financial Goals on HOld
Another drawback of choosing this option is that it puts your other financial goals on hold. Some things, such as building up an emergency fund, must be prioritized over anything else. You never know when you may need funds to cover a medical emergency or home or vehicle repairs. Building an emergency fund ensures that you can afford to pay out-of-pocket costs if and when an emergency arises.
3. You could lose Eligibility for Student Loan Forgiveness
Additionally, you could lose your eligibility for student loan forgiveness if you pay off your loans early. You have to spend a certain amount of time in a qualifying career to be eligible for loan forgiveness. Paying more than the minimum and clearing your debt before completing the stipulated amount of time could disqualify you. You must make sure to complete the specified amount of time in an eligible career and apply for forgiveness before you start to pay more than the minimum on student loans.
Should I Pay More Than Minimum On Student Loans?
In most cases, it’s a good idea to go for it and pay more than the minimum whenever you have some extra cash on hand. Really, you don’t need to have hundreds of dollars in extra cash every month to make a difference. Paying even a small amount more than the minimum on monthly student loan repayments can help reduce interest charges considerably.
However, while paying more than the minimum is generally a good idea, it may not always be the best option for everybody. Ask yourself these questions to help you decide whether or not you should pay more than the minimum on your monthly student loan repayments.
Have I set aside an emergency fund?
No one thinks of setting up an emergency fund when things are going well. Unfortunately, by its very definition, an emergency can arise when you least expect it. Whether it’s a natural disaster, an accident, a medical crisis or even home or car repairs. You need to have money to cover these exigencies. Paying every extra dollar towards prepaying your loan and ignoring your emergency fund can be a huge mistake. Make sure you and your loved ones are protected before contributing extra towards your loan repayments.
Do I have other higher-interest debts or loans that also need to be paid off?
If you have multiple loans or debts, start by making a list going from the highest interest rate to the lowest. For example, private student loans have higher interest rates than federal student loans. And credit cards have the highest interest rate of all. If you have spare cash, put that money towards repaying your more expensive loans first. Prioritize paying your credit card bills in full.
When repaying any loans. One important thing to remember is to instruct the lender to put it towards the principal and not the interest. Paying off the principal immediately reduces the amount of interest that accrues in the ensuing months and lowers the overall cost of your loan.
Am I Eligible For Public Service Loan Forgiveness?
You may be eligible for public service loan forgiveness on your federal student loans if you work full-time for a government agency, certain types of nonprofit organizations, or as a teacher in a school in a low-income area. If you think you may qualify for loan forgiveness it does not make sense to pay more than the minimum on your monthly student loan repayments. This is because every extra payment that you make lowers the amount of forgiveness that you qualify for.
Check out the eligibility requirements for public service loan forgiveness and plan your payments in such a way that you get the maximum amount of forgiveness.
Paying more than the minimum and paying off your student loans early can feel liberating. But before you choose to do this, take time to determine whether this is the right decision given your financial circumstances and goals.
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