Studying abroad comes with substantial financial demands, but student loans are always the hope of last resort for international students. There are many pros & cons involved in taking student loans. For instance, taking a loan to fund your studies abroad implies that you will grow into adulthood with debt.
Life after graduation from the University is indeed a great relief after the rigorous years of studying. Now that you are through with the University, and if you are lucky enough to bag a good job with good pay, then new responsibilities will fall on you.
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Relatives and friends will start depending on you. You may consider marriage, buying a car, building a house, or saving. In the midst of this, your mind will never rest, especially if you have accumulated student loans to pay.
In the US, over 70% of people of ages 25 – 35 are struggling with loans, incurred during their days in the University.
Here comes the big question! Should you pay off my student loans after your regular monthly expenses, or you should consider saving?
Why Should You Pay off Your Student Loan?
Being in a similar situation when schooling in the US as an international student, I would say that it is very dicey. Now, let’s take a look.
- Firstly, you should figure out and understand your financial status as well as your future dreams. Before you decide whether to pay off your loan, you should consider these:
- The term of the student loans is a crucial factor. Ponder deeply about the interest rate and other loan terms. With this, you will know if you will be qualified for loan forgiveness.
- Do you have any other debt? If yes, what are the interest rates?
- It would help if you considered your monthly income, budgets, fixed expenses, and the minimum repayment for student loans.
Read More: What is Student Loan Forgiveness in the USA?
It is when you get this information that you can then consider how to spend your extra money. Two questions will inevitably pop on your minds – Should you pay off your loans or you save for the future?
Save, Only If the Interest Is Equal
You should pay off your loan if the loan interest is higher than the amount you earn if you save the money.
If the interest rate on your student loan is 10%, while you earn a 3% interest on the amount saved in your savings account, then your loan interest is too high. In this case, you have to focus on paying off your loan before you save.
Pay off loans with interests of 8% and above: You will continue to struggle if you allow your loans to accumulate. Over time, loans with interest rates of 8% and above will have substantial negative impacts on your credit score and your long-term investment return on the stock market.
It Can Become Riskier If You Lose Your Job:
The thoughts of your debts can cause severe psychological trauma, depression, and a drop in your productivity. The situation will be worse if you lose your job during this time. More so, the interest rate on loans can go up if it is variable.
You shouldn’t be caught napping. You have to hurriedly take the burden off your shoulder by paying off your debts as soon as possible. Your self-esteem will increase, your relationship with other people, and your emotional well-being will also improve.
You Should Not Overlook Savings in Entirety:
Paying off your student loan is not necessarily the first action to take. It will be very absurd for you to pay off a high-interest loan using your extra money. You have to be cautious. You need emergency funds to tackle any unplanned financial emergency.
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It is advisable to continue to pay the minimum loan amount while saving your extra money in the bank. This should keep until you can save enough money that is worth your one-year living expenses. This emergency fund is critical, as you will be prepared if you lose your job.
Read More: Do Student Loans Affect Credit Score?
Should I save Before Paying My Student Debt?
Back then, when I was still struggling to pay off my loan, I read about a young lady who paid off her debt at 26. However, she added that it crippled her financial buoyancy in her early thirties.
On the contrary, a friend of mine once stated that you would not get rich if you pay off your debt early. He insisted on investing his money in more productive ventures that will generate good interests. He became a millionaire; he used the interest accrued from saving/investing in paying off his loan in the long run.
Why You Should save First
You should not rush to pay off your student loan if the interest rate is low. Saving or investing would be a better option. In this case, the interest accrued from your investment should generate more money in the long run.
Read More: What is Student Loan Forgiveness?
Aside from direct investment, financial experts will advise you to save your money in the bank before paying off your loan. You will have enough money to tackle emergencies and other bitter situations.
Saving your money is like creating an emergency net, and you may land in a bad situation if you overlook it. What if you lose your job? Have you also considered other financial hardship? These underlines why you should consider saving first before paying off your loan.
Channelling your funds into investment and savings should be done as soon as you graduate. Let’s say you graduated at 23, you start paying off your loans and overlook your savings and investments until 30. My dear, you will never recover the lost years, and you will miss out on savings and compounding of investments.
Read More: Top 10 Ways to Pay off Student Loan Quickly
Furthermore, you may be given loan forgiveness in the long run if your career path takes you to a job that grants loan forgiveness. Your debts could be partially or wholly cancelled if you are in the military or offer volunteer services.
Your loan can also be forgiven for some period if you engage in an income-based repayment plan. It would help if you considered the pros and cons before deciding when and how to pay off your student loans.