If you’re feeling the burden of student loan debt from multiple loans, you may be trying to figure out if strategies like making extra payments or refinancing student loans can help you get out of debt faster while still being achievable with your budget.
Paying off your student loans faster than expected comes with several long-term benefits that may be worth the short-term financial sacrifice. Let’s explore four main ways that paying off student debt early can benefit you.
1. Lower your debt-to-income ratio (DTI)
One of the main benefits of paying off your student loan is a lower debt-to-income ratio (DTI), which is the ratio of your monthly payments on debt to your gross monthly income.
Lenders can use your DTI to determine whether you are a safe or risky investment. For example, if you are seeking approval for other types of credit, such as a mortgage, but your DTI is too high due to a student loan, 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 that debt no longer counts against your DTI, you may have access to larger loans and lower interest rate loans.
2. Save money on interest
In addition to potentially reducing your DTI, paying off your student loans faster means less time for interest to accrue. By shortening your payment term and paying less interest, you can reduce the total cost over the life of your loan.
Another way to save money on interest and pay off your loans faster is to refinance your student loans. Through refinancing, you could potentially set better loan terms for your student loan. Ideally, your new loan would offer a better interest rate and better loan terms to lower your monthly payments. Although student loan refinancing is a great option for many borrowers, it’s important to compare rates and terms from multiple lenders before deciding on a new loan. Make sure you understand all the terms and conditions of your new loan before signing on the dotted line.
Also be aware that by refinancing your federal student loans with a private lender, you will no longer be eligible for existing or future benefits offered by the federal government to federal student loan holders. Please visit www.studentaid.gov for the most up-to-date information on federal student loan benefits.
3. More monthly payments
Another major motivator for paying off student loans early can be the prospect of no longer having student loan payments factor into your budget each month. Not having to devote part of your income to paying off your debts can make you feel more free and have more purchasing power. Imagine the possibilities of what you could do with those freed up funds!
4. Relieve Financial Stress
Finally, don’t discount stress reduction as a major benefit of paying off student loans sooner than expected. Stress relief may not come with a dollar amount per se, but it can be invaluable. Eliminating the burden of debt can greatly relieve stress and pave the way for a stable financial future. Expect to breathe a sigh of relief on your final student loan payment.
IMPORTANT INFO: The US Department of Education recently announced a student loan debt relief plan that includes forgiveness of up to $10,000 for eligible federal student loans and up to $20,000 for eligible Pell Grant recipients. For more information, please visit: https://studentaid.gov/debt-relief-announcement.