by Stacy Francis, CFP®, CDFA
A young woman at a recent Savvy Ladies seminar had just received her first student loan bill, and subsequently, her first panic attack. What was she supposed to do? There was no way she could spare that much money per month. Could she make smaller-than-minimum payments?
The answer is yes, she could. But for most people, it may not be the best idea. Here’s why.
Around graduation time, most students’ mailboxes are stuffed with offers from banks to refinance their debt and shrink their payments. So it is certainly possible. But the problem is, the longer you stay in debt, the more interest you are going to pay. And paying interest is basically throwing away money. While there are certainly worse kinds of debt than student debt, if you can stay on your regular payment schedule, it is generally wise to do so.
Another thing to note is that even if all your debt is with the same company, it is most likely split between a few different loans with different interest rates. If you do not stay on top of the company, they will apply your payments toward the lowest interest loans first – the exact opposite of what you want them to do. By making sure your money goes where you want it to go, you can save a ton of cash.
Of course, as I told the young woman in the seminar, there’s no reason you can’t pay off your loan earlier just because you have refinanced it. For her, refinancing now but striving to pay it off as soon as possible is probably the best option. What will work in your case will depend on your unique set of circumstances.