Borrowed Time: Recent Grads Should Pay Student Loans First

College grads have the world at their feet… unless they’re standing on a pile of debt from student loans. According to the latest statistics available from credit bureau Experian, more than 40 million Americans had at least one outstanding student loan in 2014. On average, borrowers had four student loans each and a balance of about $29,000.

“Recent grads should not wait to pay off their student loans,” said Laura Huderwitz, First Vice President and Area Manager of The Provident Bank. “While some financial experts recommend recent college grads hold onto student debt for the length of the payment period, citing tax benefits, relatively low interest rates and the potential to build a good credit rating by making on-time payments, for most recent grads, clearing the debt is the best option.”

College grads, particularly those who find employment quickly and who do not have lingering credit card debt, are in a unique position to build their credit rating by paying off the loan (reducing debt-to-income ratio), rather than keeping it and paying it on-time, added Huderwitz, who noted the following additional benefits to trimming student loans as a first priority out of college:

• Save money on interest—The average student loan features an interest rate of between four and seven percent. Over a period of 10 years, that adds up to a significant amount of cash that could otherwise end up in your pocket. For example, a loan balance of $10,000 with a 10-year term, carrying an interest rate of 7 percent, would have a monthly payment of about $116/month, resulting in a total for all payments of more than $13,900.
• Tax benefit is not all that great—When applied, the tax benefit enables the borrower to reduce taxable income by only $2,500. This is a deduction, not a refund, so the benefit might not be significant enough to warrant the decision to hold the debt.
• If you miss one payment, the penalties are steep—If a payment is missed, the credit score benefit is nullified, as the federal government is not slow to make note of missed payments on a credit report. Also, the last thing a recent grad needs is to have their wages garnished for failure to keep up student loan payments.
• Peace of mind—College grads who can clear their debt can focus on more long-term priorities, such as building an emergency fund, saving for a house, a wedding, their own children’s college fund and even retirement.

For those who don’t have the funds to pay off the debt immediately after graduation, Huderwitz suggests they meet with their banking professional to discuss their options and come up with a plan that works for them.

About The Provident Bank

The Provident Bank, (www.providentnj.com) a community-oriented bank offering “Commitment you can count on” since 1839, is the wholly owned subsidiary of Provident Financial Services, Inc. (NYSE:PFS), which reported assets of $8.5 billion as of March 31, 2015. With $5.8 billion in deposits, The Provident Bank provides a comprehensive suite of financial products and services through its network of branches throughout northern and central New Jersey and eastern Pennsylvania. The Bank also provides fiduciary and wealth management services through its wholly owned subsidiary, Beacon Trust Company.