Should You Start Repaying Student Loan Debt Right Away?
If you’ve just graduated from college, congratulations! A lot of changes and major decisions lie before you. One of those decisions may be whether you’re going to start repaying student loan debt right away. No one looks forward to paying bills but you’re probably eager to get those loans paid off and out of the way. On the other hand, you may choose to use your hard-earned money in other ways, at least right now.
Reasons to Start Repaying Student Loan Debt Now
In 2017, CNBC reported on multiple studies that show more than half of borrowers pay off their student loan debt in their 40s. Carrying debt 20 or more years post-college leads to lower rates of home ownership and even delayed retirement! So it’s wise to look at your student loans as part of your whole life financial picture.
Interest accrues over the life of a loan. That means, the longer you take to pay it off the more it will cost you. And if you pay a fixed amount each month, your progress actually slows over time. As with retirement saving, the sooner you start, the better off you will be.
Reasons to Defer Repaying Student Loan Debt
Many graduates simply cannot start repaying student loan debt immediately. They struggle to find a job–at least one that pays well–and meet other adult financial demands. They may no longer be relying on their parents’ health insurance plan, for example. Factor in rent, utilities, car payments, and other expenses. That may not leave much.
You can plan to wait until you make a certain income, or at least wait for a certain period of time before you begin repayment. There are certain situations when you can put off repayment. The Office of Federal Student Aid outlines which loans require you to pay interest immediately and which do not.
There are several ways to qualify for a deferment. Navient notes that for subsidized federal loans interest does not accrue during a deferment. However, for other loan types, interest may accrue and you may have to pay it even during the deferment period.
The Office of Federal Student Aid explains the different types of forbearance and who qualifies. General forbearance is a temporary delay in paying your student loans, typically on account of financial difficulties, medical expenses, or changes in employment. Mandatory forbearance is common for students in medical internship or residency programs, teachers, AmeriCorps workers, and sometimes those whose student loan payments exceed 20% of their monthly income.
Even if paying loans is comfortable with your income, you may choose to defer. Perhaps an investment opportunity presents itself that will allow you to come out ahead. You might put the extra money in a place where it can earn income for a time, then use the dividends to start repaying student loan debt.
Another reason you may want to rethink how to allocate your money is if you already run a business or plan to start one. Then your financial priorities might shift.
Starting a Business After College
If you plan to start a business, to weigh your options, ideally with the help of a qualified financial planner. When you seek business financing, a bank will judge your eligibility based on your debt-to-income (DTI) ratio. Credibly notes that if your DTI is high, you’ll struggle to find financing. You can still get financing, though you may need a cosigner or partner.
Investing in a business always presents some risk. However, if you plan well and redirect money you would otherwise spend paying student debt into your business, it may pay off in the long-run.
Know Your Priorities and Goals
Whether you begin repayment now or later, you will make tradeoffs. Keep your big picture goals and overall financial health in mind. Make sure to create an emergency fund or cushion, no matter which option you choose. Student Loan Hero lists six goals that you might think about prioritizing before loan debt repayment.
Do you want to focus solely on paying back your student loans as quickly as possible, or do you want flexibility? What are your priorities? It’s important to keep those in mind so that you don’t get discouraged with your repayment progress.