Student Loan Advice
You have choices when paying off or consolidating your student loans and while choices are a good thing, they also add extra pressure to be sure you’re making the right decision. There is no absolute right way to handle your student loans. Only what is right for you.
The best advice for configuring your student loan structure is to take into account how much you can afford to pay each month. Then try to find a consolidation lender that will work with you to make your payments as close to your ideal number as possible.
Depending on how much you owe, you might be able to extend the length of the loan and keep the payments down. Of course, extending the loan means you’ll pay more overall, but if that’s the only way you can afford it, it will have to do.
Making Extra Payments on the Principle
Like any other loan, student loans are top heavy with interest. This means that for a number of payments in the beginning you’ll be paying mostly interest. The amounts will shift gradually, so that your last few payments are almost entirely principle.
In most cases you’ll have the option of paying your loans back early without penalty. If you can, be sure to have this clause in your loan agreement. This way you can pay a little bit extra each month if you have the means and finish your loan off ahead of schedule, saving you a decent chunk of interest in the process.
Paying off Loans vs. Contributing to Savings/Retirement
There may be times when you have to decide between paying extra on your student loans or contributing to your retirement or savings accounts. Your decision will always be a on case by case basis, but it usually comes down to simple math.
For instance, if you’re student loan is at 2.5% and you have a savings account that’s at 3.0% you’re better off keeping the extra money in savings and paying the minimum on your student loan. The same is true for your retirement. If it is earning around 8-10%, which is historically typical, then you should put the extra money there.
Student loans usually have very low interest rates so in most cases the best thing to do is only pay the minimum and put the extra money where it will earn at a higher rate.
Please remember, this site should not replace your financial advisor, so be sure to check with a professional who is familiar with your situation before making a decision.
