An ongoing debate on paying off students loans

Education costs have increased to unprecedented levels in the last couple of decades. Therefore, student loans come in handy for people with financial constraints. Majority of us have to opt for loans during our college years to fund our education. Paying them off is a responsibility, that cannot be shirked. Many people who work for a couple of years, after finishing graduation, keep their student debt.

Instead of paying it off early, many people make it a part of their larger debt payment plan. If you have been doing likewise, you need to think carefully about the entire scenario. If at all you’re unable to do the math regarding the money, consult a financial adviser.

Why You Should Pay Off Your Student Loan Early

People have all sorts of misconceptions about repayment of student loans. Some try to keep them for tax breaks, while some believe it will help them in their debt payment plans. While arguments for both sides can seem justifiable in individual circumstances, here are some very fundamental and practical reasons for paying them off early.

Improvement in Debt-to-Income Ratio
Some simple math will help you to understand that lowering your debt-to-income ratio can easily help you save some money for your future financial commitments. If you pay off your loan early, you’ll have more money available for yourself, as you won’t be having any such commitments in the future. The same amount that is being used for repayment, can be invested in better options.

Isn’t the Student Loan an Additional Payment?
Every month, you’re bound to withdraw some money to pay off the loan. This is in itself an extra payment deducted from your earnings. Moreover, if you’re planning to keep your student debt for a tax break, then give it a second thought after studying the federal income tax laws. Mostly, only USD 2500 of the interest can be deducted every year. Added to this, if you start earning a decent amount (say USD 70,000) per year and you’re unmarried, your tax break amount may be phased out. Eventually, you’ll either pay more interest or more tax, so ideally, it is better to pay off student loans as quickly as possible.

Think of Better Investment Plans
Mutual funds and similar investment options are ideal for people who want their money to be managed by professionals. Such investment opportunities are also extremely beneficial as they have high growth rates. Why not repay the debt early, and use this amount to invest in mutual funds? That will be the best utilization of the earning potential of that amount.