Paying Off Your Student Loans Early: Is It Worth It?

(April 7th, 2007)

You have gone to school for many years and have accumulated thousands of dollars in debt. Does it make sense to pay off this student loan debt as fast as possible or should you just make the minimum payments required on the loan? If you refinanced or consolidated your loan at a low student interest rate, you could invest the money you would have otherwise used to pay off your student debt into Money Market Accounts (MMAs), Certificates of Deposit or a regular savings account that will yield higher interest returns. Furthermore, any interest you pay on your student loans is tax deductible! Most people are smart enough to know both of these points.

However, there's a 3rd point to consider:

"If a student borrower who has received a loan described in subparagraph (A) or (B) of section 428(a)(1) dies or becomes permanently and totally disabled (as determined in accordance with regulations of the Secretary), then the Secretary shall discharge the borrower’s liability on the loan by repaying the amount owed on the loan."

Source: Higher Education Act of 1965, Section 437 (a).

This above paragraph states that if you were to die while still owing student loan debt or become physically disabled, you will be discharged from the loan and will NOT have to ever pay it back! Let's consider this example. Say Peter has an extra $800 every month left over every month after careful budgeting and minimizing his expenses. What should he do with this $800? Should he save it in a Money Market Instrument yielding higher interest rate returns, or should he pay off his student loan debt?

i) Peter uses his $800 saved up every month to pay off his student loan debt for a total of 5 years. Unfortunately after 5 years, Peter gets in a bad car accident and becomes permanently disabled. At this point, Peter does NOT have any student loan debt, but he does NOT have any savings either!!

ii) Peter makes minimum monthly payments on his student loan debt for 10 years of $50. He therefore saves $750 a month every month for that time period. At the end of 10 years, Peter gets into the same car accident described above and becomes permanently disabled. At this point, all of Peter's student loan debts will become discharged and he will be debt free. Furthermore, he will have a nice saved up amount of $750 / month x 12 months x 10 years = $90,000!

The above 2 scenarios are fictitious but they do make sense! At the end of 10 years, Peter would have $90,000 saved up (a nice amount) as opposed to having saved up nothing.

2 Things to Watch Out For

If you are in student loan debt, then this article probably relates to you and you can post your constructive criticisms below here in the comments field.

If you refinance your student loan and this increases your minimum payments by even 1 single cent, you will lose your right to deduct the interest on your student loan as a tax deduction. Therefore, do NOT refinance your student loan, even if its a lower interest rate.

If you die or become permanently disabled, your loan will be forgiven or discharged ONLY if you are the sole person responsible for the loan. This means if you have had co-signors signing your student loan (example your parents, sister, brother), then they will be responsible for paying off your loan! Also, if you refinanced your student loan and put your spouse as a co-signor, then your spouse will be responsible for paying off the loan should you become permanently disabled or die!

Forum Discussion

You can post your constructive criticisms about this article on our Forum Thread. Please join in and contribute!!

Comments

Lozarn Edward J Comments on July 4th, 2007

For students who aren’t committed to the notion of attending one specific university but still want to receive priority consideration and express their interest, early action applications are the way to go. This is a non-binding application that is usually submitted around the same time as an early decision application (usually before December of the student’s senior year).