When you graduate with tens of thousands of dollars in student loan debt, one of your top priorities might be to pay off this debt as quickly as possible. However, there are some cases in which it is wiser to save your money than to make extra student loan payments.
Investment Accounts
The main consideration when deciding whether to pay off your student loans or save the money is the rate of return. If the expected rate of return on an investment account is higher than your interest rate on your student loans, you are generally better off saving the money. This is because the money will earn more interest each year than you will get charged for continuing to keep the student loan debt. Depending on your stance on risk, you could buy bonds, invest in a mutual fund or play the stock market.
Emergency Fund
If you do not have an emergency fund, you should save some money for this before making extra payments on your student loans. If you encounter financial trouble, you cannot get the money you have paid toward your student loans back. Financial adviser Dave Ramsey suggests saving $1,000 in an easily accessible account before making any extra debt payments. If you ever need to use your emergency fund, replenish it back to $1,000 before making extra student loan payments again.
Retirement Savings
On average, retirement accounts that invest in the stock market earn about an 8 percent annual rate of return, according to Young Money. If your loans have an interest rate under 8 percent, this would lead you to believe that you should invest in retirement first. However, this is money you will not see until you retire, whereas paying off student loans will reduce your monthly debt burden in the near future. Therefore, take a balanced approach to retirement savings. If your employer matches contributions, contribute at least the amount your employer will match every month. After that, you can split your money between student loans and retirement savings, depending on what you feel is more important.
Paying Off Loans
If you want to pay off your student loans, focus on the loans with the highest interest rate first. If you have credit card debt, pay that off first because it almost always has a higher interest rate than student loans. After that, pay only the minimum on most of your student loans and make extra payments on the loan with the highest interest rate until it is completely paid off. This will maximize the speed at which you pay off your debt.
Tags: student loans, your student loans, your student, interest rate, student loan, before making, before making extra