Should I Pay off My Student Loan With My Savings?
I recently had a friend come to me wondering if she should use most of her savings account to pay off her student loans or if she should continue to pay the minimum on the student loans. I suggested using the savings account to get rid of that debt. Here are a few reasons I answered this way:
As you’ve heard me say before, if you have savings of $7000 and debt worth $5000, you only actually have savings of $2000. When you look at the total picture of your personal net worth (net worth = assets – liabilities), debt is a liability and factors into the total.
With most loans, you have an interest rate that keeps ticking away as you’re making payments. That means the longer it takes you to pay off this loan, the more interest you’re paying over time. Did you think the loan companies give you such a long time to pay them back to make it easy for you? No way! They want you to take as long as possible to pay back your loan so they can collect interest! Do the math on your own loan – add up how much you’ll be paying in interest over your entire loan term. Crazy, right?
You may feel nervous using your savings account and suddenly seeing your balance drop. It’s ok, here’s the plan. Say you were making $800 payments per month on your student loan. With that loan gone, your $800 payment can be redirected toward your savings account and you will build it back up in no time!* You need to be absolutely sure you have the self-discipline to redirect these funds once they’re no longer going toward the loan. I suggest setting up automatic transfers with your bank if you have trouble with this.
*It is important to leave a little bit of a cushion for an emergency fund (generally 3-6 months of expenses). Make sure not to leave yourself high and dry.
If you are lucky enough to have a super low interest rate and are happy with how your cash flow is serving you, stay on your current path! This strategy isn’t a one size fits all. But, if you would like to evaluate whether you should use your savings for debt, fill out the contact form for a complimentary consultation. I’m happy to take a look!