Repaying Low Interest Student Loans

Repaying loans early has the advantage of decreasing the total interest paid on the loan. This means less money paid to the bank and more money put in the bank (or the mutual fund, or better yet, the personal trade account, real estate investment, or other intelligent financial strategy). From this standpoint, it may seem best to pay off your student loans as quickly as possible.

That being said, one needs to consider the whole financial picture when making decisions about loan repayment. With low interest loans, such as student loans, repayment may be near the bottom of your financial priority list! Why? Because there may be even more productive things you could be doing with your income. There is no one piece of advice that addresses every financial situation. Your personal goals, income, debt, and personality all come in to play when making monetary decisions. You need to devise a financial plan that will work for you, and a repayment schedule is a big part of that plan.

If you are paying, say, 6% interest on a mortgage, but only, say, 3% interest on your student loans, then paying back the mortgage should take precedence over paying back the student loans. You will save more money in decreased interest payments by paying extra on the mortgage than by paying on your student loan.

Another thing to consider is your investments. A good mutual fund may well be earning you as much as 10%, far more than the small amount of interest you are paying on your student loans. It only makes sense to keep that money in the mutual fund instead of using it to pay off those student loans. Just keep in mind that rates of return can vary in a trade account or mutual fund. You may even end up losing money. However, repaying a loan is always a safe investment; the interest you save by doing so will be a very real “return”.

The time it really becomes logical to put student loans first is when you have no higher interest loans and no investments that earn more interest than your student loan is accruing. For many recent graduates, this is the case. Even for individuals of such financial freedom, it makes sense to save some income and use some to pay back student loans. Don’t allocate all of your income toward loan repayment.

It is vital that you not default on your student loan payments, as doing so would harm your credit rating. Your credit rating affects your ability to take out a mortgage loan, get an auto loan, or open a credit account. People with low credit scores pay more in financing fees and interest rates than those with high credit scores. Even people with moderate or low incomes can have excellent credit ratings if they practice responsible borrowing and make their loan payments in a timely fashion.