It’s getting harder and harder for many Americans to pay back their student loans. The student debt crisis seems to be getting worse over time, as tuition costs rise and wages stay the same. You might feel like you need to pay off your loans as quickly as possible. However this is not always the best financial decision. Because of these things, you might want to think twice before adding more to your student loans.
Income-Driven Repayment Plans
If you have federal student loans and are on an income-driven repayment (IDR) plan, it is usually not a good idea to pay more than the minimum. IDR plans let you choose how much you want to pay each month based on your family size and extra income. Any loan balance that is still due is forgiven after 20 to 25 years of payments.
Making additional payments on an IDR plan does not help you pay off your loans faster. Since your payments are based on income, paying extra does not lower your monthly dues. The extra amounts simply go toward the interest, which is forgiven after your term. You’d be better off investing extra funds for retirement or other goals rather than wasting money on interest that will ultimately be canceled.
With the new Student Aid Value for Empowerment (SAVE) plan, extra payments are even less useful. According to SAVE, borrowers can only put 5% of their discretionary income toward undergraduate loans, which is less than 10% in 2010 and stops interest from building up when monthly payments don’t cover it all. Your goal should be to get as much of the debt forgiven as possible, so extra payments will hurt you.
Loan Forgiveness Programs
Programs like Public Service Loan Forgiveness (PSLF) provide forgiveness after 10 years of payments while working for an eligible employer. For those pursuing PSLF, paying more than the minimum also provides no benefit. You still need to make 120 qualifying payments over 10 years regardless of how much extra you pay. Focus on meeting the requirements and minimums for forgiveness rather than interest costs.
Other Financial Goals
Aggressively paying down student loans often means sacrificing other goals. An emergency fund should take priority over extra loan payments. High-interest debt like credit cards should also get addressed first. Putting money into retirement accounts, stocks and bonds, down payments on homes, and other goals may give you better long-term returns than paying off your student loans.
Federal student loans have reasonable interest rates and flexible repayment options. Paying the minimums frees up cash flow for the other important aspects of your financial life.
Potential Future Forgiveness
Although broad student loan forgiveness has faced setbacks, the idea still garners a lot of support. The Biden administration proposed forgiving $10,000 per borrower, and this policy could be revisited in the future. Congress may eventually approve some level of widespread forgiveness.
You don’t want to overpay loans now only to see balances erased later. Keep making the minimums on your federal loans and stay updated on forgiveness proposals.
Key Takeaways
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Income-driven repayment plans base payments on income, so extra payments don’t help pay them off faster. Focus on maximizing forgiveness.
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Programs like PSLF provide forgiveness after a set number of payments, so paying extra does not speed up the process.
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Building an emergency fund and paying down high-interest debt should take priority over eliminating student loans.
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Potential widespread student loan forgiveness proposals make prepaying loans risky.
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Stick to the minimums on federal student loans and devote extra money to other financial goals.
While it may seem satisfying to aggressively pay off student loans, doing so is often not the optimal strategy. Federal loans offer flexible repayment and forgiveness options. You’re better off making minimum payments and using surplus funds for emergencies, high-interest debt, and other important goals. Prepaying loans can mean lost opportunities for better returns and the risk of overpaying debt that could get forgiven later. Evaluate your entire financial situation and think critically before paying more than you need to on student loans.
Improve your standard of living
A lesser-made argument: You could enjoy life more by spending that money.
Not making your student loan payment means more money in your pocket now — who’s worried about future debt? You could die tomorrow, and you might skip a latte today because some financial guru told you to?.
In the event that you do not make a student loan payment, you may have more money each month to spend on things such as
- Higher rent: You could live in a cheap house in central Wisconsin (heyyy!), but you might want the community and basic human rights protections that come with living in a state or city with a higher cost of living.
- More expensive foods: Right now, it wouldn’t be hard to spend your extra $400 on just eggs.
- Gym membership (or running shoes or a bike, etc. Today, it takes a lot of work to stay away from depression and anxiety. If therapy and medicine are out of reach, a little exercise might be the only thing that helps.
- Nicer things: I’ve lived with an annual income of $12,000 and $100,000. I can say from personal experience that buying new clothes, the newest iPhone, and a couch that doesn’t smell funny can be good for your mental health.
Student loan forgiveness & cancellation
The crème de la crème of not paying your student loans is to get the lender to tell you you don’t owe the money anymore. There are a few ways you can get your federal student loans forgiven, but it takes time and you have to meet certain requirements.
- Public Service Loan Forgiveness: If you work for the government or a nonprofit, you might be able to get your loan balance forgiven after 10 years. This isn’t as easy as it sounds. Teacher Loan Forgiveness is like that, but it happens faster and is harder to get.
- Cancellation and discharge: There are a lot of other times when the government will forgive your loan balance, but they can be picky. You can look into this option if you get sick or hurt, die, or your school closes. Your heirs will, of course, inherit your debt.
- Forgiveness under IDR: When your IDR repayment term is over, the rest of your loan is forgiven. (See above re: court action and forgiveness eligibility. ).
What Everyone’s Getting Wrong About Student Loans
FAQ
What happens if you don’t pay your student loans?
While the fate of the SAVE Plan is being decided by the courts, borrowers are being placed on an interest-free administrative hold. Regardless of SAVE Plan’s ultimate impact, some borrowers are simply refusing to pay their student loans.
Should you pay off student loan debt?
It would be a shame if you devoted too many resources to paying off student loan debt only for the debt of others to be wiped away in the future. This is even more true if you put off other goals like buying a house or investing for retirement to make extra student loan payments each month.
Should I pay extra on my student loan debt?
Most borrowers should not pay extra on their student loan debt. Aggressively paying your student loans could actually be a bad financial decision.
Do you have to pay off your loans if you don’t graduate?
Even if you don’t graduate, you still have to pay off your loans. Fewer than 60% of college students graduate within 6 years, which means that at least 40% of students either take longer—accumulating more debt with every passing year—or don’t earn their degree at all. Unfortunately, your lender doesn’t care if you graduate or not.
Are borrowers not making their student loan payments?
However, recent reports paint a more complex picture. The New York Times recently reported that almost half of borrowers are not making their student loan payments. Additionally, in June and July, federal judges in Kansas and Missouri blocked the SAVE Plan, as reported by CBS News.
Should you take out a loan for college?
In other words, we take college from an overly expensive drain on your bank account, badly plugged by future-killing student loans, and turn it into something that you can actually pay for out of pocket. Reason 14. You really don’t need to take out a loan for college.
How long would it take to pay off $100,000 in a student loan?
How long does it take to pay off $100K in student loans?Repayment termMonthly paymentsTotal interest paid5 years$1,933$15,99710 years$1,110$33,22515 years$844$51,98420 years$716$71,943.
Is $70,000 in student loans a lot?
What is considered a lot of student loan debt? A lot of student loan debt is more than you can afford to repay after graduation. For many, this means having more than $70,000 – $100,000 in total student debt.
Is $40,000 in student loans a lot?
The average student loan debt per borrower is nearly $40,000. With an average interest rate of 5. 5%, that works out to about $393 a month. And here’s the kicker: it typically takes borrowers 17 to 23 years to pay off those loans.
Do student loans go away after 7 years?