Student loan debt in the US has reached an all-time high of over $1.5 trillion, growing faster than in the previous years. Many students who took education loans realized that they spend most of their life repaying these liabilities, and many default their loan payments, adding to their circle of debt. Let’s look at the reasons to clear student loan debts early and ways for students to pay off their loans.
- Why should one pay off their student loans?
The following are a few reasons why paying off student loans early is beneficial:
- Tax break
The student loan tax deductions valid on their qualified loans might be why students make this payment less of a priority. That said, this tax deduction only allows an individual to deduct up to $2,500 of the interest they pay on a loan for higher education. Isn’t that great, right? The deduction further goes down for people who file as single and have an adjusted gross income of $70,000 or more, and people with an adjusted gross income of $85,000 or more are not eligible.
- Debt-to-income ratio
This ratio is an individual’s monthly debt payments divided by their gross monthly income. If one wants to apply for new credit, lenders will check their debt-to-income ratio to determine their creditworthiness and repayment ability. Paying off student loans will lower one’s debt-to-income ratio, making them more likely to get credit approvals and qualify for better rates in the future.
- Inescapable debt
Once the debt accumulates and repayment becomes overwhelming, many may think of declaring bankruptcy as a solution. That said, student loans are rarely pardoned this way, and borrowers need to prove that repayment can cause “undue hardship” to get these loans discharged in bankruptcy.
2. How can an individual pay off their student loans?
Here are a few effective ways to pay off student loans:
People who are at a steady job and have earned a good credit score can refinance all their student loans into one private loan at a lower interest rate.
- Extra payments
One can always pay off their student loan early or make extra payments with each installation. That said, it’s important to ensure that the extra payment is added to the current month’s payment and not calculated as an advance on the next month’s pay cycle.
One can get a quarter-point interest rate discount from Federal student loan companies if they choose autopay. The discount might not seem much, but the savings can help borrowers pay off the debt faster.
The $1.9 trillion federal coronavirus relief package signed by the President makes loan forgiveness tax-free through the year 2025. In the case of student loan debt relief, the President supports the forgiveness of $10,000 in debt but is facing pressure to take the amount of student loan debt cancellation up to $50,000 to cope with the debt crisis in America.