At what point should I begin paying off student loans?

Question

I am attending a rather pricey American university, and most of my money for tuition comes from grants and loans. Grants are great, but obviously I have to pay off loans at some point.

I have some money saved from various paid internships, and I began to start making monthly payments to my principal about a year ago. However, I have been told by some that I shouldn't start making any payments to my loans until I'm required to, ie after I graduate. I didn't understand this point of view, since to me it seems more logical to start paying as soon as I can.

Is it better to start making payments towards my loans as soon as I am financially able, even if I am still in school, or should I wait until I am required to begin paying them?

Answer 1

Everyone has made some good points that I was going to mention but to put it in terms that might make it easier to decide. As stated by others, paying off debt and being free is always the goal and desirable.

However, you must also consider the "efficiency" of what you do as well. For example, there are two common types of student loans (there are others but let's focus on these) and that is subsidized and unsubsidized.

The main difference? Subsidized loans don't earn interest on your balance while you are in school, it only happens when you graduate and come out of repayment grace period. Unsubsidized loans begin accumulating interest the moment they are disbursed, but you are not required to make payments on them until you graduate.

All student loans are deferred until you graduate and exhaust your grace period or other means of deferring your payment, say for example a postponement or forbearance. However, it is often recommended that on UNSUBSIDIZED loans, you pay down your principle while still in school to avoid that massive interest amount that will get added to it when you are officially in repayment. On the other hand, it is often (if not always) recommended that you hold off on paying SUBSIDIZED loans until you are done and go into repayment, as for all intents and purposes its not costing you anything extra to wait. Family and parent loans are considered and treated more like personal loans, so treat them as such.

Hope that helps. Also, don't forget to take advantage of the income based repayment options, as they will make the payments manageable enough to avoid making them a burden while you are trying to get a job and go post education.

Further reading:

Income-Driven Plans (Department of Education)

Income-Driven Repayment Plans (nelnet)

Answer 2

Its almost always better to pay off loans sooner rather than later. Being debt free is amazingly liberating.

However, in your case, I'd be reluctant to make significant headway on a loan repayment program. Here's why:

The best investment you can make, right now, is in yourself. Completing your education should be the top priority. The next would be to meet the requirements of a job after received after school is complete. So what I would do is estimate the amount of money it would take to complete school. Add to that an estimate of an amount to move to a new city and setup a household.

That amount should be held in reserve. Anything above that can used to pay down loans.

Once you complete school and get settled into a job, you can then take that money and also throw it at your loans.

Answer 3

Pay off your highest-interest debt first: credit card, car, maybe even mortgage. Pay minimums on all else. Student loans are typically low interest, so pay off anything else first, but double-check your rate of course.

Even if you have no other debt, you may still want to hang on to your savings instead of paying down your student loans if getting rid of your savings causes you to accrue debt. For example, if you have a low income and no savings, you may accrue credit card debt (high interest). Or you may want to buy a car with cash instead of getting a loan.

Even if this is not an issue, consider what you can do with your savings that others who lack them cannot do. You can put it into mutual funds, which may offer higher rate of return (albeit with risk) than your student loan interest. Or you may pay a down payment on a home. The very low interest rates of student loans are, to a person with savings, essentially a source of cheap money that doesn't need to be justified to a bank. You can use it as seed money to start a business, as funds for travel, for living expenses while in the Peace Corps, or whatever else. But if you pay down that principal, you bind yourself.

In short, pay down your student loans when there is no better use for the money.

Answer 4

If you have sufficient money to support yourself until you have a career, then paying off your student loan principal on unsubsidized, federal loans, is probably your best bet. This is because interest accumulates before you're actually required to pay. If they are private, make the payment on the highest interest rate loans.

Answer 5

All great answers. The only thing I didn't see mentioned was that student loans are not dischargable in a bankruptcy.

So for example if you took money that could have gone to student loans and poured it into other debt, then for some reason declared bankruptcy later, your student load debt would remain while other debt would be discharged; essentially that money would have been better spent on the student loan.

This isn't to advocate that you should pay down student loans with the intent of declaring bankruptcy, or that this makes it a better decision necessarily, just a factor that is sometimes forgotten.