Ask a Trainer: Should I Pay Extra on My Student Loans?
To pay extra on a student loan or not? That is the question. And, it’s a question we hear often considering that the average person in the U.S. owes $30,000 or more in student loan debt.
It may surprise you to hear that we don’t always encourage our clients to pay extra towards their student loans. Ultimately, this decision comes down to priorities. We are generally dealing with limited resources (i.e. income) and we need to make choices about how to best use those resources to achieve our goals.
Before paying extra on your student loans, you should have your financial foundation in place. Check your financial fitness by answering these questions:
Do you have 3-to-6 months of expenses saved in a high yield savings account for your emergency fund?
Are you paying your credit card payments in full and not carrying high-interest consumer debt from one month to the next?
Are you saving enough for retirement?
If you can’t answer yes to all of these questions, you’re better off putting your money towards these goals. If you do have the basics covered, you have more leeway to decide whether paying extra on your student loans is the next right step.
But first, dig deep and ask yourself why you want to focus on paying off your student loans. Is it to relieve worry and financial stress? Do you feel you need to pay off your loans before you can buy a home or start a family? Once you identify your underlying goal, you may find that you don’t actually need to pay off your student loans to achieve it.
If you haven’t already, take some time to envision what you want your life to look like in the future. Buying a house, traveling, saving for a wedding or a new car may be on your list. If you prioritize paying off your student loans over saving towards these goals, how much longer will it take you to achieve them? Are you okay with that timeline?
Outside of your financial fitness and your priorities, there are a few other factors to consider before paying extra on your student loans:
Do you have federal or private student loans? Federal student loans typically offer more potential benefits to borrowers such as delaying repayment, lower monthly payments, and loan forgiveness. Private student loans also tend to have higher interest rates than federal student loans. For both of these reasons, we usually recommend tackling private student loans first.
What are the interest rates on your student loans? If the interest rates are less than 3% or 4% and you have about 5 or more years left to pay them off, then you may want to consider investing the “additional payment” instead. Overtime (more than 3+ years, ideally 9+ years), you could earn more by investing your extra money than you save in interest by paying off your loans early. In fact, the average annual return of the stock market is 8%. Having more assets, rather than just less debt, gives you extra flexibility and resources to achieve your goals.
As long as you have your financial foundation in place, the decision of whether to pay extra on your student loans isn’t clear-cut. Different factors come into play, like job security, earning potential, life priorities, and financial security. But in general, we think that your hard-earned money should be strategically saved and/or invested to help you live the life you want so make sure you are truly considering your future and your goals when making that decision.
To help you figure out how student loans fit into your financial life, you can always meet with a Financial Gym Trainer!
We offer a Trainer-on-Demand service that can help you not only work through these choices but other personal financial questions as well!
If you want a dedicated trainer, you can check out our personal 1-on-1 coaching service.