Should you save money or pay off student loans?
Updated on July 14, 2020
After you graduate, trying to balance all your new financial responsibilities can be challenging. Should you start saving for retirement? For a house? Or, start paying off your federal student loans? Unfortunately, there is no definite answer to this because there are so many factors to consider, including:
• Your employment status
• How much you earn
• The type of student loan you have. (Can be federal or private).
• Your interest rate
• Your saving goals
For instance, private student loans have a higher interest rate, which can change over time, increasing the amount you owe. In contrast, if you have a federal student loan, you can qualify for loan forgiveness after 20 or 25 years of on-time payments. In these cases, paying off your student loans first is a better option.
Here is a guide that can help you decide between saving and paying student loans.
1. Saving first
Saving allows you to invest your money in other ways that generate more money over time. Additionally, savings allow you to build an emergency fund before making any extra payments towards your federal student loan. This gives you a safety net in case you lose your job or experience financial hardship.
However, saving first is only a viable option when your student loans are at a lower interest rate. Experts recommend paying off your high-interest debts, be it credit cards or student loans first, before saving 10% of your gross salary. Others recommend saving for retirement before paying down your student loan debt.
2. Paying student loans first
With the ongoing student loan crisis in the US, paying off your student loan first is your best bet at becoming debt-free. Student loans can weigh down your finances for years as you’ll have a higher debt-to-income ratio. This means you have less money available to you when you want to borrow money for a car or buy a home.
However, don’t put off saving altogether when you pay your debt first. Building a solid financial foundation is your ticket to financial freedom.
Ultimately, the decision you make depends on your financial goals and needs.
Contact StudentLoanify today for more information about student loans.