Whether you have federal or private student loans, the deal you got four or more years ago when you were in college may not be the best deal today. Refinancing student loans is pretty easy, you can compare the rates online and get offers within a business day. Credible for example offers fee free refinance, and if you can get even half a point lower on your debt, that can save you a ton of money.
Let’s take a case study of a student graduating with the average debt these days, $30,000. Paying off that balance over 15 years at 6% interest would mean monthly payments of $253, for a total repaid of $45,568. You will have paid over 50% of interest, or over $1.50 for each dollar you borrowed.
If you can lower the rate to 4%, over 15 years you would pay $222 a month, and $9,943 in interest. Now, if you find extra money every month and make a $303 payment instead, which only amounts to $20 more every week, you can shave five years off your loan life, and be done in 10 years! You would only pay $6,448 in interest, too.
Now remember, when you take on debt and you see these relatively small monthly payments, you think it’s no big deal, and you can easily manage these. But 15 years is a long time. 180 payments to be exact. 180 times you can’t afford to default, or miss a payment. In 15 years, you will probably have a family, a couple of kids. They’ll need food and a bigger house and a bigger car to move around, a college fund, and you’ll need to save for retirement. Will there still be enough money in your budget for student loans?
Now this is why as a young graduate, you should always try to repay your loans as soon as possible. If you can make a one off $1,000 payment with your first paycheck, while you still live with your roommates for a few more months that can have a huge impact down the road. You should also try to build a $1,000 cash reserve, so you can avoid charging your credit card in case of an emergency. Starting your young adult life with as little debt as you can will allow you to save and invest early on, and enjoy a growing net worth thanks to compound interest. If you look up calculators online you will see how much of a difference investing 100 a month from age 25 to 65 can do, compared to investing from age 45 to 65.
And paying your debt is an instant, guaranteed return on your money. Student loans often carry a lower rate of interest, so it is easy to keep making the minimum payments, and using the money for other things. If you have high interest credit card debt, yes, that should be your priority. But if you are lucky to have no more debt, that is what you should address first, before you think about getting more debt for a car or other treats. Be wise with your money early on, and you will have a comfortable financial future.