If you’re feeling the burden of student loan debt from multiple loans, you may be trying to determine if strategies like making extra payments or refinancing student loans can help you get out of debt faster while still being feasible with your budget.
Paying off your student loans faster than expected comes with several long-term benefits that can be worth a financial sacrifice in the short term. Let’s explore four key ways that paying off student loan debt ahead of schedule can benefit you.
1. Lower your debt-to-income ratio (DTI)
A key benefit to paying down your student loan is a lower debt-to-income ratio (DTI), which is the ratio of your monthly debt payments compared to your gross monthly income.
Lenders may use your DTI to determine if you are a safe or risky investment. For example, if you are looking to get approved for other types of credit, like a mortgage, but your DTI is too high due to student loan debt, a lender may decide not to give you a loan or decide to offer you a loan at a higher interest rate. If you pay off your student loans and no longer have that debt factoring into your DTI, you may have access to larger loans and loans with lower interest rates.
2. Save money on interest
In addition to potentially lowering your DTI, paying your student loans off faster means less time for interest to accrue. By shortening your payment term and paying less interest, you can lower the total cost over the lifetime of your loan.
Another way you can potentially save money on interest and pay your loans off faster is by refinancing your student loans. Through refinancing, you could potentially define more beneficial loan terms for your student loan. Ideally, your new loan would offer a better interest rate and loan terms to reduce your monthly payments. While student loan refinancing is a great option for many borrowers, it’s important to compare rates and terms from multiple lenders before you choose a new loan. Be sure to understand all the terms and conditions of your new loan before you sign on the dotted line.
Also, be aware that refinancing your federal student loans with a private lender you will no longer qualify for existing or future benefits offered by the federal government to federal student loan holders. Please consult www.studentaid.gov for the most current information about any federal student loan benefits.
3. No more monthly payments
Another major motivating factor to pay off student loans early can be the prospect of having no more student loan payments factored into your budget each month. Not having to put a chunk of your income toward paying off debt may make you feel freer and like you have more spending power. Imagine the possibilities of what you might do with those freed up funds!
4. Relieve financial stress
Finally, don’t overlook stress reduction as a major benefit to paying off student loans earlier than expected. Stress relief may not have a dollar amount attached to it per se, but it can be priceless. Eliminating the burden of debt can serve as big stress reliever and pave the way for a stable financial future. Look forward to breathing a sigh of relief when making your last student loan payment.
IMPORTANT INFORMATION: The U.S. Department of Education recently announced a student loan debt relief plan which includes forgiveness of up to $10,000 for qualifying federal student loans and up to $20,000 for qualifying Pell Grant recipients. For more information, please visit: https://studentaid.gov/debt-relief-announcement.