Wednesday, October 3, 2012

The Student Loan Debate: Should You Pay Off Those Loans Early?

For those of you who have successfully landed and kept a job, let me say congratulations!  It could be any job at all, not necessarily a legal job. You have a job and you can pay your bills. For those of you who have not found a steady job, I still encourage you keep reading, because I think the principles of budgeting and living within your means is important no matter what your situation.
Before you decide whether you want to pay off your loans early, you need to know what is going in and out of your bank account. The first thing you need to do once you have a steady job is to set up a budget. My husband and I use Mint.com and I highly recommend it. You input all of your bank accounts, student loans, credit cards, ect and then you set up budgets for all of your expenses. There is even a mint.com app so you can track your budget on the go. The most important thing is to account for every dollar that you spend and that you don't spend more than you earn. Here is a video on how to set up a budget in Mint.
My husband and I went to a Dave Ramsey seminar and he has some great advice on how to budget. Before going to this seminar, we did not budget; we did not track our spending. We had no idea how much money was going out every month and we definitely did not have an emergency savings. We learned that if do not control your money; your money will control you. So we took control! Following his 7 Baby Steps, we were able to set up an emergency savings account, pay off our car, a credit card, and save for a vacation all within a 16 month period We still ate out and went shopping, but we did it mindfully and within our allotted budget. Now our only debt is our student loans and our mortgage. So we are faced with the question with whether to pay down some of the smaller loans off early or save up for another goal.
As a side note, if you haven't already, make sure your student loans are set up to be automatically taken out of your bank account each month. Most lenders offer a percentage reduction when you sign up or after a few months. This will definitely save you money in the long run. Also if you ever lose your job or have to take extended time off (for injury or maternity leave), you might want to sign up for a temporary 6-month deferment. I recommend trying to still make interest payments, but if you can't just know that you will pay capitalized interest once your loans come off of deferment.
My husband and I are still researching our options at this point. We don't necessarily want to make higher student loan payments at the sacrifice of some of our other goals. We also will not add additional debt and will save up for future high cost purchases. For instance, we will save up to pay for a used car rather than taking out a loan. However, it might make sense to pay off some of the smaller loans, like the Perkins loans that are not consolidated with our other loans. I know Dave Ramsey doesn't like any debt, so he might recommend that we use the snowball method and pay the smallest loan and then continue to pay apply this method until all our student loans are paid off.
Whether you choose to pay your student loans off early is a personal decision. However, as I mentioned before, you will not even have the ability to make this decision if you do not live within your means. I think the best and easiest way to live within your means is to establish a budget and stick to it. Once you take control of your money, you are on your way to a less stressful financial
Here are a couple of other articles on the subject
Listen to an attorney and his wife who paid off $145,000 worth of debt, most of it consistenting of student loans in 3 years.

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