Prepaying on student loans is tough. The loan terms are often so long that even putting an extra $100 in every month doesn’t feel rewarding. It takes years and years to see the benefits. It’s not easy to stay motivated that long!
Adding Fuel to the Fire
Instead of just thinking about the time you are debt-free, let’s look at the possible gains once you are.
Say you’re paying $565 / month on your student loans and you add $100 every month to your highest interest loan (typically called the Avalanche method). Depending on the loans, you could be debt-free 2 years, 3 months faster with that prepayment — what could you do during those years?
You could take that $665 / month and put it in an investment account to earn interest. Just after the 2 year mark, you’d save:
- $18,649.12 at 1% interest
- $19,501.37 at 4% interest
- $20,182.64 at 7% interest
Holy smokes, $20,182.64!! You could put that towards a down payment on a house or keep it for retirement. By prepaying, you’re actually giving yourself the time to earn more cash. And that’s freaking powerful.
Imagine two universes:
- You keep doing what you’re doing. You’re debt free in 8 years
- You add $100 extra / month. You’re debt free and have $20k in 8 years
Which do you prefer?