Home » Benefits of paying off student loans early and how to do it.

Benefits of paying off student loans early and how to do it.

Benefits of paying off student loans early and how to do it.

Photo courtesy Javier Trueba on Unsplash.

Nowadays with the rising cost of education, many students have to take student loans to complete their higher education. Different banks have their own rates of interest and terms and conditions for offering student loans.

The student loan debt is carried for a number of years and for most banks the repayment period is 15 years. But it is a source of anxiety and many people think of repaying it early to get rid of their worries and consider other avenues of investment. But before paying off the debt an individual should think if it is the best use of the money that they are making. There are a few reasons why you can consider repaying student loans early –

Lowering debt to income ratio-

When you pay the student loan early it lowers your debt to income ratio. This is the ratio that compares your monthly income to the monthly debt payments. When you have a lower debt to income ratio it will be considered a favorable condition when you apply for new credit and it makes you more likely to be approved for loans at better rates in the future.

If the student loan has high-interest rates-

If the student loan you have has a high-interest rate and it can be quite high in the case of private lenders, a good part of the loan goes towards repayment of interest. Paying the loan early can help you save a lot of money over the length of your loan period.

The tax advantage is not everything that matters-

One of the common misconceptions and the reasons why people keep paying student loans till the end is due to the tax break it provides. But the amount you save is nominal and you end up paying more interest on the loan in its lifetime than you save on the tax. It is better to finish the student loan early than just to stay put for the tax break.

When you are stressed out and have financial worries-

Student loans can be a source of stress for individuals. If you feel stressed and want to reduce stress in your life you should pay off your student loans early. This can reduce financial stress and you can be emotionally free.

If achieving financial goals is getting delayed-

If you have taken a large amount of student loan the debt you may have incurred is huge and would make up a sizable part of your monthly budget. If you repay the loan early a sizable part of the cash would be free for investments.

There are other goals in life like investing and buying a house. The cash you free up can help you to achieve financial goals quickly like creating an investment portfolio or even starting your own business.

Things to do before paying off your student loan

Have an emergency fund first

The times we are living in have demonstrated how we should be prepared for any emergency. Covid-19 has demonstrated how we should keep the money for any emergency. It is always smart to keep 6-9 months of living expenses worth money where we can withdraw the money at the earliest. You never know when such a difficult situation will occur and it is good to focus on building the emergency fund first so that you don’t run into financial problems. It is better to keep this money separate and never use it for regular expenses.

Repay your higher interest debt first-

When you have credit card debt paying it off should be your first priority. Some student loans may have high-interest rates but they will not come near to the interest rates of credit cards if left unpaid or delayed. You will probably save more money paying off the credit card debt first.

Start saving for retirement-

At a young age, few people think of retirement that is decades away. So the tendency is to put off saving for retirement for a later age. But this is not the correct approach and the money that you invest in your 20s multiplies by the time of your retirement. In the EPF account, you get a contributing match from your employer. It is free money and you have to save all the less for your retirement. This lets your money grow over the decades.

How can you pay off your student loan early?

Make loan payments during the moratorium period-

EMIs of the loan do not start immediately after completion of a loan. There is a grace period of 1 year which is called the moratorium period. The borrower is not required to pay EMIs during this period but the lender charges interest. Some banks offer concessions of 1% if the borrower chooses to pay interest during the moratorium period. This reduces the cost of repayment.

Pay extra money for every installment

Paying extra money every installment will help you to save on interest during the complete period of your loan. This will help in saving interest in the long run.

Automate the payment-

Automating the payment process reduces the chances of EMI defaults and the resulting penalties. Applicants can decide the extra EMI amount and automate the process. This can get a lower interest rate from the loan provider.

Use any extra money you receive towards paying debt-

There are times when you receive some extra money be it some inheritance or yearly bonus. This can be used for paying the student loan.


Check if a loan transfer is possible to a bank that has cheaper interest rates. You may even try to negotiate with your bank for a better interest rate.

Budget and Save more-

Make a budget every month and find out the extra unnecessary expenses you are making. Try to cut down on these expenses. Write down all the expenses and try to live within your means. Every penny saved will help in repaying the education loan faster.

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