Paying off debt as quickly as possible is usually a sound strategy. In fact, it’s hard to find many situations where we would argue the contrary. But, increasing your student loan payments isn’t always optimal. When you allocate too much of your income towards your student loan debt, other areas of your financial life begin to suffer. And if you don’t find the right balance, you end up reducing your student loan debt at the expense of other important goals.
Remember, sound financial planning requires a well-balanced strategy.
So before you increase your student loan payment, consider a few issues first.
Are You Already On An Income-Driven Repayment Plan?
If you repay your loan through an income-driven plan, chances are you’re already paying the maximum you can afford. So before you start fretting about the lack of progress, remember, public student loans are forgiven at the end of your repayment term. In this case, increasing your payment isn’t optimal.
A better approach is to use the surplus funds to create a rainy-day fund. Imagine your car breaks down. Or what if you lose your job? Emergencies like these can strike at any moment. But having a cash cushion allows you to keep the damage to a minimum.
Are You Applying For Student Loan Forgiveness?
If you’re eligible for student loan forgiveness, making additional payments isn’t a worthwhile endeavor. Remember, it doesn’t matter whether your balance is large or very small – the entire amount is forgiven. As well, if you make extra payments, it may hurt your chances of qualifying for the program. Usually, student loan forgiveness is granted to those in need or those who agree to enter certain professions. And if the U.S. Department of Education sees how easy it is for you to repay your loan, it may offer loan forgiveness to another borrower.
What Else Can I Do With The Surplus Funds?
If you have leftover cash each month – instead of increasing your student loan payments –create an emergency fund. You should aim for one year’s salary. This way, you’re prepared for any downturns. Regardless of the amount, an emergency fund ensures you have peace of mind when you need it most.
Also consider high interest debt. If you have outstanding credit card balances, make sure you pay them off first. Credit card interest rates are much higher than student loans, so making them a priority will reduce your out-of-pocket costs.
A third option is contributing to your retirement account. While far from certain, investment accounts have the ability to earn a higher return than the interest rate you’re paying on your loan. If the rate is very low, it’s beneficial to invest that money instead of decreasing your debt load. As well, if your workplace has an employer-sponsored retirement plan, take advantage of the contribution match. Many employers match the funds you deposit into your account – so the more you contribute, the more free money you accumulate along the way.
Is There Ever A Good Time To Increase My Student Loan Payments?
If you already have a rainy-day fund, contribute to your retirement account and have zero credit card debt, increasing your student loan payments does make sense. Keep in mind though, this assumes you have a private student loan or a repayment plan that does not offer loan forgiveness. In these situations, reducing your debt load as quickly as possible is a prudent practice.
However, the important takeaway is that student loan debt shouldn’t control your entire financial life. Balance is extremely important. And if you fret over student loan debt, you’re sure to fall behind in other important areas.