How Paying Off Your Student Loans Could Save You Money

Paying Off Your Student Loans

What about your student loans? Clocking in at around $1.5 trillion, student loans are a massive liability. As a result, it’s best to repay your student loans as quickly as possible. Here are the tips to paying off your student loans.

By the Numbers

One of the main reasons people continue to pay the minimums on their student loans is because they don’t realize how much it’s really costing them. But when you see the real numbers, you start to understand what this all actually means. 

PLUS (Interest) Loans

The average interest rate for these loans is currently a whopping 7.6%. I went to a private school and my loans were near $100k. However, I also had some Perkins and Stafford loans. So, let’s just say we have $75k in Parent PLUS Loans paying for 25 years.

Investing the Difference

For the average student, that means you will be 34 years old when you’re 12 years out of college. Let’s say you invest that $10,593 in a pre-tax account starting at 34 and don’t touch it until retirement. By simply paying off our student loans more quickly and investing the difference, we end up with an extra $92,321 by the time we retire.

Small Percentages Matter

This is an economic concept that is often stressed in the personal finance community. I remember that I was able to justify investing in Fidelity’s FZROX over Vanguard’s VTSAX after I ran the numbers. Keep in mind that the expenses on VTSAX are a measly 0.04%.

My Recommendation: Budgeting + Automatic Payments

Set up a recurring, automatic payment with your loan servicer with that combined amount. It’s often said that we don’t miss the money we don’t see. If you make it automatic and don’t think about it, you’ll be less likely to mess with your payments going forward.

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