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When to Pay Off Your Student Loan

The Motley Fool

by Dayana Yochim

Make fun of the so-called "professional students" all you want. You know, the ones who, unlike the TAs, remember the original Dukes of Hazzard TV show. But would you be in a huge hurry to check out of the ivory tower and into debtors' prison?

More and more, recent graduates are trading their sheepskins for student-loan debt payments. Plenty of college grads face five-figure debts, and for those with professional degrees, loans of $100,000 or more aren't uncommon.

But what if you had the means to wipe the student-loan slate clean? Those who are fortunate enough to get good-paying jobs out of school may accumulate savings rapidly enough that they can pay off their loans early. If you can choose, which should you do: Kill off the loan, or keep cash in the bank? Well, it depends.

Wipe out that loan ASAP if:
  • You're stuck in a high-interest private student loan. Private loans aren't subject to the same interest-rate limits that apply to many federal loans, so even if you consolidate your loans, you may end up paying more than you should. If private loans are a necessity, be sure to shop around to see whether you can get lower rates.
  • The interest you're paying is not tax-deductible.
  • You are flush with cash -- or at least flush enough to pay off your loans and still have money left over to start your emergency savings account.
  • A sweet job with an even sweeter salary awaits.
Sit on your student loan if:
  • You locked in a low, fixed-interest rate before the July 1 deadline.
  • You're able to deduct the interest from your taxes.
  • You have other higher-interest debt looming -- for example, if you paid for your college textbooks with a credit card, and those books are sitting on the balance.
  • If you're unsure of your future income.

When it comes to paying off debt, do a side-by-side interest-rate comparison of all of your loans to see which one you should knock off first.

Dayana Yochim is the author of The Motley Fool's Guide to Couples & Cash and the on-call phone-a-friend for her coupled pals having financial tiffs. The Fool has a disclosure policy.