A college education gives you grand memories and a foot in the door to a good career, but for many those are paid for with a ton of student loan debt. While this debt is money well spent, paying it off would take a huge amount of pressure off your finances. A better credit standing and more disposable income are just two of the advantages to paying off your student debt.
Student loan payments take a bite out of your paycheck each month, which stresses your budget. When you eliminate your student debt, you free up extra cash that can be saved or used for just about anything -- having children, buying a house, retirement, a vacation or many other needs or wants. For example, if your student loan payments are $150 per month, you'd have $1,800 a year in the pot to spend or save as you wish if you pay off the loan.
Reduce Dollars Spent on Interest
The interest you pay on student debt can amount to a significant chunk of change over the life of a loan, especially if you opt for a long-term payment plan. The sooner you pay off your student loan, the less interest you will pay. Reducing this interest sheds thousands of dollars from the overall cost of your college education.
Improve Credit Score
Paying off a student loan can score you some extra points with credit reporting agencies -- literally. When you wipe out a student loan, its balance drops to zero on your credit report, and you demonstrate that you can pay back money you owe. Credit reporting agencies view both of these factors positively, which can add points to your credit score. Say you had a $10,000 student loan. With all else being equal, you would improve your credit score by several points by reducing that balance to zero.
Qualify for Other Loans
If you’ve had your eye on a new car or house, paying off student debt might help you get the loan to buy it. Lenders require your monthly financial obligations to be less than or equal to a certain percentage of your monthly income to qualify for a loan. Paying off student debt reduces your monthly financial obligations, which increases your chances of qualifying and might get you a better interest rate.
- "How to Wipe Out Your Student Loans and Be Debt Free Fast: Everything You Need to Know Explained Simply"; Martha Maeda; 2009
- FinAid: Prepayment
- "Personal Finance"; E. Thomas Garman and Raymond Forgue; 2009
- Federal Reserve: Five Tips -- Improving Your Credit Score
- Bankrate.com: Debt-to-Income Ratio Important as Credit Score