Use Extra Income to Pay Off Student Loans
Student loans fall in the category of what we often consider to be “acceptable” debt. This is debt that comes with a fairly low interest rate, and that is considered an “investment” of sorts, since the presumption is that you can increase your earning power by getting an education. However, it is vital to realize that your student loan debt is still debt – and you are still paying interest on it. Once you have high interest debt, like credit cards, paid off, it’s a good idea to turn your attention to student loan debt. Supplemental income can help you save money by paying down your student loan debt faster.
Saving Money By Paying Off Student Loans Ahead of Time
CNN Money has a handy calculator that can help you get an idea of what you could be saving if you paid your student loans off faster. It is common for students to graduate with a four-year degree – and $22,000 in debt. Between July 1, 2008 and June 30, 2011, interest rates on students loans will have ranged between 4.5% and 6%. For my initial calculation, I used 5.5%, since it seemed to be a good average. Many student loans are repaid over 10 years.
According to the simple calculator offered by CNN Money, a monthly payment of $239 would be required to pay off the $22,000 in 10 years at 5.5% interest. The total amount paid in interest would be $6,641. Now, what if you were able to use supplemental income to speed up the pay down? Suppose you could double your monthly payment to $478. You could have your student loan paid off in four years and four months, with an interest cost of $2,766: A savings of $3,875. That’s almost $4,000 that you can put to work for you, rather than padding someone else’s pocket.
The big difference
If you have a longer education, the difference can be even bigger. After receiving my M.A., I consolidated $56,000 in student loan debt. I was fortunate to get a good rate: 1.5%. However, I’m looking at 25 years’ repayment, and spending $11,187 in interest. With supplemental income to speed the process, though, I could save quite a bit. By upping my monthly payment from $224 to $600, I can have my loans paid off in eight years and four months, and pay $3,583 in interest. That’s a difference of $7,604 in interest. Enough for a nice, long family vacation overseas.
Or, I could invest the $224 a month that I would have been paying for my student loan at 5% for the “remaining” 11.5 years of the loan. Investing each month, and earning a modest return, I would end up with $42,874.01 (according to this compound interest calculator).
I’d just need to find a way to increase my income by $376 a month. That seems doable when you think of the options available for earning supplemental income. The key is to figure out how much you could save by paying off your student loan debt early, and then work out what you would have to earn extra each month to make an extra payment. Having a target number for your earnings can help you better focus your efforts, while showing you how possible it is to use a little extra supplemental income to improve your financial situation dramatically.