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Figuring out whether to pay off student loans or save your money is a common conundrum. Both are important financial goals, so how do you know which one to prioritize?
At the very least, you should always keep up with your minimum student loan payments — otherwise, you could rack up late fees or even default on your loans. But if you have extra money at the end of the month, you might have to pick between making extra payments on your debt or putting that money into savings and investments.
While everyone’s financial situation is unique, thinking through the following eight points can help you figure out the right course of action for you.
Should I pay off student loans or save? 8 questions to ask
1. Do I need emergency savings?
2. Should I pay off student loans or invest in my retirement savings?
3. Should I save for any major life events?
4. How high are my interest rates?
5. Do I need to lower my debt-to-income ratio?
6. What do I value most?
7. Can I work on savings and student loans at the same time?
8. Could focusing on one goal help me achieve the other?
When deciding whether it’s better to pay off student loans or save, the first thing to consider is whether you have a solid financial safety net — your emergency fund.
An emergency fund should be a buffer of cash that you keep on hand to weather any surprise expenses or costs that life throws your way. This fund is crucial for helping you avoid future debt and the worst consequences of financial setbacks.
Only you know how big your emergency fund should be to achieve the level of financial security comfortable to you. That said, it’s typically a good idea to save enough to cover three to six months’ worth of expenses in the event you lost your job.
You’ll also want to weigh emergency savings against student loans. Depending on factors such as the student loan interest you face, your college debt might feel like the emergency. If this is the case, you might choose a minimal emergency fund for now, and put your extra cash toward extinguishing the burning fire of your student debt.
Then there’s another important financial goal: saving for retirement. When you’re facing student loan payments each month, retirement can feel far off. But when it comes to saving for retirement, there’s no replacement for an early start.
Even small contributions now can be worth thousands more in retirement, with decades in between to grow your savings via compounding interest.
Here are a few other ways saving for retirement can be financially savvy:
- Tax-advantaged retirement accounts let you lower your taxable income
- You get more money if your employer matches your retirement contributions
- The return on your investments can sometimes beat the cost of your student loan interest rates
If your employer does offer a retirement savings match, it’s a good idea to max that out. Since this match is an immediate 100% return on investment, its value outweighs the cost of student loan interest.
Consider important future life events that you’d need money for. Unlike emergencies, these are anticipated and planned, and could include:
- Moving out on your own for the first time
- Moving to another city or state
- A wedding
- Starting a family
- Starting a business
- Going back to college or switching careers
- Getting a divorce
When deciding whether it’s better to pay off student loans or save, spend some time thinking about your student debt and your significant life events. Five years from now, which would you regret more — delaying or not taking one of these life steps or still having your student debt?
At the same time, don’t lose sight of the financial side of the equation. Think carefully about how far these big costs could set back your student loan repayment.
If your student loan interest rates are high, you might prefer to pay your debt off ahead of schedule. But if your rates are relatively low, your student loans don’t have to be the highest priority on your list.
This is especially true if you have other debt with higher interest rates. The average APR on credit cards, for instance, is 19.39%, according to LendingTree. So, if you have high balances on your credit cards, it makes more sense to pay them off first before tackling your student loans. The same goes for a high-interest personal loan or payday loan.
If your student loan rates are fixed, you don’t have to worry about those rates increasing in the future. But if you have variable rates that are rising, then student loans might be more of a priority — either repaying them quickly or, if possible, refinancing them to a fixed (and hopefully lower) interest rate.
If you’re hoping to take out a mortgage or car loan in the near future, you might consider ways to lower your debt-to-income (DTI) ratio. Lenders use DTI to decide whether to approve your loan, and according to the Consumer Financial Protection Bureau, they often want that ratio to be 43% or lower if you’re seeking a qualified mortgage.
If student loans have lifted your DTI to a relatively high level, it might make sense to pay down some of that debt as quickly as you can. By decreasing your debt (and/or increasing your income), you can lower your DTI and boost your chances of qualifying for a low-rate mortgage or car loan.
Snagging a lower rate will decrease your interest costs, so even if you’ll have to spend more on your student loans in the short term, you might save money on your home or car loan in the long run.
If you want to crunch the numbers on your DTI, try out this calculator:
Debt-to-Income (DTI) Calculator
Of course, financial calculations and returns on investment are just one side of the equation. The other factor in any financial decision, including whether to save money or pay off student loans, is you. Specifically:
- What is most important to you?
- What are your goals and dreams?
- How comfortable are you with being in debt?
- What kind of lifestyle do you want?
- What are you willing to sacrifice to achieve this?
Considering financial questions alongside your personal goals can help you compare their importance to you. You might have certain goals or achievements you value more than repaying student loans.
Many people will live with student loan payments and interest if it means they can travel more while they are young, work at a lower-paying job they’re passionate about or build a robust investment portfolio.
Then again, that might not be you. You might see your debt as a significant source of stress and hate the idea of having it. If freedom from debt is the top concern, then paying extra on student loans would likely be a higher priority than saving for a house.
Of course, your finances don’t have to be a zero-sum, all-or-nothing game. It can be possible, and even beneficial, to work toward repaying student loans and saving money at the same time.
Say you have $300 of discretionary income a month to put toward financial goals. You could throw all of this toward either saving or repaying student loans, but you could also split the money between both.
One possible strategy to do this is “temptation bundling,” where each time you put extra money toward your student debt, you also use some money for something you really enjoy. Maybe you reward yourself for every extra $200 paid toward student debt by adding $50 to a vacation fund.
|Debt Snowball vs. Debt Avalanche: What’s the Best Way to Strategy?|
On a related note, you might want to think through how your goals of saving and paying student loans can actually work together.
For instance, money-saving strategies can help you save, but they can also help find extra funds to put toward student loan repayment.
Likewise, effectively managing your student loans can help you accelerate a savings goal. For example:
- Refinancing student loans could cut your interest costs or lower your monthly payments.
- By switching federal student loans to an income-driven repayment plan, you could create enough room in your budget to start contributing to a retirement plan.
- Maybe after doing the math, you realize you could pay off one of your student loans in just six months. And with that loan paid off, you could free up the money you’d been putting toward the monthly payment and use it to save.
You have a variety of financial goals, life events and big purchases to plan for. If you take some time to focus on what’s most important — not only with your money, but with your life — you can reach the right decision for you.
Rebecca Safier contributed to this report.
Interested in refinancing student loans?Here are the top 9 lenders of 2021!
|Lender||Variable APR||Eligible Degrees|
|1.88% – 6.15%1||Undergrad & Graduate|
|1.88% – 5.64%2||Undergrad & Graduate|
|2.50% – 6.85%3||Undergrad & Graduate|
|1.89% – 5.90%4||Undergrad & Graduate|
|1.99% – 6.59%5||Undergrad & Graduate|
|1.88% – 5.64%6||Undergrad & Graduate|
|1.90% – 5.25%7||Undergrad & Graduate|
|2.39% – 6.01%||Undergrad |
|2.13% – 5.25%8||Undergrad & Graduate|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of June 1, 2021.
2 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.
Interest Rate Disclosure
Actual rate and available repayment terms will vary based on your income. Fixed rates range from 2.48% APR to 5.79% APR (excludes 0.25% Auto Pay discount). Variable rates range from 1.88% APR to 5.64% APR (excludes 0.25% Auto Pay discount). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 36% (the maximum allowable for these loans). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 2.04% and 5.8% to the one month LIBOR. Earnest rate ranges are current as of 6/8/2021, and are subject to change based on market conditions.
Auto Pay Discount Disclosure
You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay.
Student Loan Refinancing Loan Cost Examples
These examples provide estimates based on payments beginning immediately upon loan disbursement. Variable APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 5.89% APR would result in a total estimated payment amount of $17,042.39. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 6.04% APR would result in a total estimated payment amount of $17,249.77. Your actual repayment terms may vary.Terms and Conditions apply. Visit https://www.earnest. com/terms-of-service, e-mail us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
Earnest Loans are made by Earnest Operations LLC or One American Bank, Member FDIC. Earnest Operations LLC, NMLS #1204917. 535 Mission St., Suite 1663, San Francisco, CA 94105. California Financing Law License 6054788. Visit earnest.com/licenses for a full list of licensed states. For California residents (Student Loan Refinance Only): Loans will be arranged or made pursuant to a California Financing Law License.
One American Bank, 515 S. Minnesota Ave, Sioux Falls, SD 57104. Earnest loans are serviced by Earnest Operations LLC with support from Navient Solutions LLC (NMLS #212430). One American Bank and Earnest LLC and its subsidiaries are not sponsored by or agencies of the United States of America.
© 2021 Earnest LLC. All rights reserved.
3 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.15% effective Jan 1, 2021 and may increase after consummation.
4 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of April 29, 2021. Information and rates are subject to change without notice.
5 Important Disclosures for SoFi.
Fixed rates from 2.49% APR to 6.94% APR (with autopay). Variable rates from 1.99% APR to 6.59% APR (with autopay). All variable rates are based on the 1-month LIBOR and may increase after consummation if LIBOR increases; see more at SoFi.com/legal/#1. If approved for a loan your rate will depend on a variety of factors such as your credit profile, your application and your selected loan terms. Your rate will be within the ranges of rates listed above. Lowest rates reserved for the most creditworthy borrowers. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license #6054612; NMLS #1121636 (www.nmlsconsumeraccess.org). Additional terms and conditions apply; see SoFi.com/eligibility for details. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
6 Important Disclosures for Navient.
7 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 04/07/2021 student loan refinancing rates range from 1.90% APR – 5.25% Variable APR with AutoPay and 2.49% APR – 7.75% Fixed APR with AutoPay.
8 Important Disclosures for PenFed.
Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.89%-4.78% APR and Variable Rates range from 2.13%-5.25% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.