When you've been working for a while at paying off your student loans, it may become tempting to gather your funds and pay off your loans once and for all. From bonus checks to tax refunds, it can seem worthwhile to pay down your student loan balance as soon as possible, but before you write the check, let's stop and consider a few things.
What are your loan rates?
If you haven't already refinanced your loans, you should consider trying to lower your rates before you make any big payments. If you have a low interest rate, it may be worth keeping your loans. Market rates are at all time low, so see what you can save with refinancing first – use Credible’s Handy Tool to see how your rates compare.
What are your other debts?
This is a big one to consider. If you're one of the 43% of American households that carry some sort of revolving debt or credit card debt, before you make a big payment, you should review what debts you have and what interest rates you're paying on that debt. Unless your student loans are the only debt you carry, it's likely that your other debt has a higher interest rate, meaning that it costs you less to have student loan debt than other debts. You may be better off paying your credit card bill rather than putting extra money towards your student loans.
What sort of emergency fund do you have?
One of the biggest steps towards financial freedom that is recommended by many financial planners and experts is having a cash emergency fund that can take care of minor emergencies, such as a broken car or a surprise payment. If you are currently living paycheck to paycheck, you may be better served by creating an emergency fund of $1000 or so. That way, if something does happen, you don't have to hit the credit card; you'll have the cash to handle the problem.
What else can you do with the money?
If your bonus is enough to create an IRA, for example, you might be financially better off investing that money over the long term. Depending on the interest and return rates available, you may get a return greater than what you could save on interest by paying off your student loans faster. If you think you might be interested in investing your bonus, check in with a financial professional to get guidance.
Do you have a cosigner that needs relief from the debt?
Perhaps your student loan cosigner now needs to show more credit freedom in order to qualify for a loan of their own. Paying down the loan may help your friend as much as it helps you.
What mental toll does student loan debt take on you?
Some people are bothered more by debt than others and it doesn't matter what the investment returns are, they just want to know that they are free and clear from their student loan debt. This can be a fair consideration, and using a bonus to pay off debt in this situation can help you find some relief.
To learn more about student loan refinancing and to receive student loan refinancing offers from many lenders after filling out one form, visit Credible.