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Choosing Between Paying Off Or Saving For A Down Payment Of Student Loans
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Debt-to-income ratio determines the option to take
The decision one makes depends on a range of factors and most importantly one’s debt-to-income ratio. The debt-to-income ratio is what you pay monthly in servicing debt which includes car loans, or student loans.
It is advisable to begin paying off your student loan if your debt-to-income ratio is not at par. This will help you in lowering the ratio and thus enabling you to apply for another loan either mortgage or car loan down the line. However, you can consider saving for a down payment but this will decrease your necessary loan amount and in this case, the debt-to-income ratio might not be a sticking point.
Put off saving and pay off your loan
Sometimes you can put off saving to pay off your student loan if the interest the savings account is earning is smaller than the interest rate you pay on the student loan. For instance, in a savings account can earn you 2% and the student loan has a 10% interest rate then you might be paying more than you are earning from the savings account. Therefore it makes sense to start paying off the loan rather than saving for a down payment.
Interestingly you can consider saving for a down payment because student loans typically do not carry high-interest rates and they have longer repayment periods. Therefore a student loan debt is not bad for your credit score compared to other loans. If you have a mortgage, a down payment is important as it will lower the cost of the mortgage and thus it is advisable to consider saving relative to paying off the low-interest student debt.
Debt-to-income ratio determines the option to take
The decision one makes depends on a range of factors and most importantly one’s debt-to-income ratio. The debt-to-income ratio is what you pay monthly in servicing debt which includes car loans, or student loans.
It is advisable to begin paying off your student loan if your debt-to-income ratio is not at par. This will help you in lowering the ratio and thus enabling you to apply for another loan either mortgage or car loan down the line. However, you can consider saving for a down payment but this will decrease your necessary loan amount and in this case, the debt-to-income ratio might not be a sticking point.
Put off saving and pay off your loan
Sometimes you can put off saving to pay off your student loan if the interest the savings account is earning is smaller than the interest rate you pay on the student loan. For instance, in a savings account can earn you 2% and the student loan has a 10% interest rate then you might be paying more than you are earning from the savings account. Therefore it makes sense to start paying off the loan rather than saving for a down payment.
Interestingly you can consider saving for a down payment because student loans typically do not carry high-interest rates and they have longer repayment periods. Therefore a student loan debt is not bad for your credit score compared to other loans. If you have a mortgage, a down payment is important as it will lower the cost of the mortgage and thus it is advisable to consider saving relative to paying off the low-interest student debt.
