Should I Pay Off My Loans with My Summer Earnings?

16 Jul

Leah Oswalt, Purdue Alum 2012

beach; text overlay: Should I Pay Off My Loans with My Summer Earnings?

It’s easy to forget about your student loan debt while you’re still in school. With tests, projects, and a social life to keep up, student loan payments don’t normally make it to the top of the priority list. However, it’s important to be aware of what those loans are really costing you now.

Borrowing money now is the easy part. It pays your tuition, your living expenses, and a night or two out with friends and all you had to do was accept it and sign an agreement to pay it back. Those thousands of dollars I borrowed? Sounds like a future problem to me!  The real fun comes once you graduate and have to start paying those loans back.

So the big questions is:  If you have extra money now, maybe money you’ve earned working during the summer, should you start making payments towards your student loans?

And the answer is….maybe. Each student’s financial standing is very different, and to understand what would work best for you, you’ll need to have a good understand of where your money is now, what it’s doing, and how much it’s costing you. Time to use some of that eighth grade arithmetic you remember so well!

Interest rates of your loans

The first step is determining how much you’ve borrowed in student loans and the current interest rates of those loans. Some student loans do not add interest until after you graduate. So while you’re in school, you owe the exact amount you borrowed. However, most loans are not so nice and add interest from the time you borrow them.

For example, a loan you borrowed for $2,000 at a 6.8% interest rate for 4 years will actually add up to over $2,500 once you graduate. Your lender, whether it is the Department of Education or a private company, will send you statements periodically listing the accrued interest, principal, and total balance. Hang onto these statements! Not only does it tell you what your current balance and accrued interest is, but it also has information about repayment options.

The reason loan interest rates are important to know is because you will need to decide the best use of your extra money today. Consider any credit card debt or any other financed item you are still paying off (car, laptop, etc.) For instance, you might have a balance on your credit card, which is charging you 17% interest each month. 17% is a lot more costly than a 6.8% interest rate, so paying the credit card balance should be a higher priority now.

Will I need this money in the future?

You have to also consider your future costs and spending. If loans are offered to you at a higher interest rate in the fall semester than in past semesters, you won’t want to pay off old loans at a lower interest rate, just to borrow at the new, higher interest rate. Instead, pocket that earned money and use that to pay your tuition and living costs directly. Or maybe Grandma decided to let you borrow money for next year at a 2% interest rate. Since your old loans are costing you 6.8%, it’s a lot cheaper to hit up Grandma for money next term and use your summer earnings to make payments on that loan from last year.

A lot of your peers are in the same place you are, and most are just as new to this concept of loans and interest rates. If you feel uncomfortable or embarrassed talking to older people about this, you might learn a lot from just talking with your friends. At the same token, don’t take anyone’s word as gospel and do your homework (no pun intended) before making your decision. Regardless of how you choose to spend and save your money now, those future student loans bills will come, and they will find you. Making wise decisions now might save your future self a lot of stress induced head-banging.

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