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Are Paying Student Loans in a Lump Sum Right for Me?

Kara Yaquinta
By Kara Yaquinta - December 12, 2018

Sometimes in life “The Luck of the Irish,” hits, which causes you to run into large sums of money, whether it be from an inheritance or an income tax return. If you have student loan debt, you’ve most likely thought about using a big chunk or “lump sum” of that money to pay down your loans. As good of an idea as that sounds idea, is it really the most effective thing for you to do?

Let’s take a look at some of the pros and cons of paying down your student loan with a lump sum, so you can decide what is best for you.

Pros

Young African american couple happy about paying off student loan debt

Reduces Interest

The interest is sometimes worse than the loan. Just when you thought you took out only 10k that somehow turned in 14k over the course of your bachelors. By putting a lump sum towards your loan it will reduce that amount of interest you will pay overtime considering the life of the loan will now be shorter.

Speeds up Pay off Time

This one isn’t rocket science. If you pay a lump sum that means your balance is going to go down which ultimately means saying goodbye to loan sooner than if you were just paying the minimum payments due.

The Feeling

Just knowing you don’t have a large amount of debt hanging over your head could be worth putting a lump sum towards your student loans. Also knowing that you’ll have an easier time qualifying for a car, house or large purchase because your debt-to-income (DTI) has suddenly shrunk is worth it too.

Cons

caucasian male watching money fly out of wallet

Eliminates Safety Net Depending

Consider this one. If you have only 10k in savings and you use half of it to pay down your student loans, you’re short that money. If something major happens you may not have what you need to cover it, which could throw off your whole financial situation. Make sure you can afford a lump sum before you just go for it.

Still Have Payments Required

Even though you paid a lump sum, your borrower will still require you to make payments. Just because a lump sum payment was paid, you are still responsible for next month’s payment, so be sure you have those funds available.

Ineligible for Tax Deduction Moving Forward

The sooner you pay off that loan means the sooner you won’t be able to qualify for certain tax deductions anymore. Without this deduction that means more of your annual income is subject to be taxed. Basically, this will directly affect the amount you either owe or will receive on a tax refund check.

 Whether you decide to put a lump sum payment towards your loans or not, ultimately is your decision. However, something you may want to consider to help you in the meantime is taking a look at the different repayment options to see how they fit with your lifestyle and if you decide to put a lump sum towards you loans how your repayment could change.

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The content reflects the view of the author of the article and does not necessarily reflect the views of Tropical Financial Credit Union or its employees.
We do not guarantee the accuracy or completeness of the information presented in the article.