Many students don’t worry about their student loans until about six months after they graduate. Deferring your student loans and paying them back at a later date is an option that works for some, but there are definite benefits to paying off a student loan sooner rather than later. Below are a few reasons why paying your loans earlier benefits you, if you can.
A Lowered Debt To Income Ratio
Your debt to income ratio is the amount of debt you have as compared to your overall income. When you pay off your loans early, your monthly payments are lower, which automatically lowers your debt to income ratio.
Having a lower debt to income ratio is preferable as it means you have more disposable income. That means you can make major purchases or start putting more money in your savings. Lenders also prefer lending money to those who have a lower debt to income ratio, so you will find it easier to get a loan to buy a house or a car.
Pay Less Overall
Interest accrues over time, so the sooner you pay off your student loans, the less interest you’ll have to pay in the long run. If possible, start paying off your loans while still in school. Different repayment plans work for different students, but ideally, you don’t want to be stuck with a long repayment period.
You Will Be Better Equipped To Handle Any Financial Crises That Comes Up Later On
A financial crisis may arise at any time. Your employer laid you off. You had a medical emergency. Regardless of your personal circumstances, you are still expected to pay back your loan on time. Any delay in the payments could attract a penalty, pushing you even further into debt. Worse still, you cannot escape a student loan even with bankruptcy.
Just wondering when a crisis may arise can leave you feeling extremely stressed, especially if you have a large amount of student loans to pay off. Paying off your student loans early can help tremendously. You will have a smaller debt to pay off and a financial crisis is less likely to derail you completely.
2 Things To Think About When Paying Off Your Student Loans Early
Getting the benefits of paying off a student loan early is great. However, it is important to pay it off right. Here are a few things to think about:
Pay off your most expensive loans first. The first loan cleared should be the one with the highest rate of interest. Clear the loan with the lowest rate of interest last.
Before putting your extra funds towards paying back your loans, make sure you have enough money to pay for your everyday expenses. Also, make sure you still have enough money to cover you in case of any emergency. Stretching your budget thin to pay off your student loans faster isn’t always a good idea.
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