Should I Use My Inheritance to Pay Off My Student Loans?

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The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers. If you have a question, please ask an expert.

This Weeks Question: Should I use my inheritance to pay off my student loans? 

Receiving an inheritance can be bittersweet and bring conflicting emotions. On the one hand, you’ve lost someone you loved, and on the other, you received a one-time sum of money that can change the shape of your finances. One way you can honor your loved one’s memory is using the inheritance she left you to build a secure financial future.
Whenever you inherit a sum of money like this, you have new options to manage your finances. The best ones typically include investing, paying down debt, and building an emergency fund. Generally, it makes sense to have a bit of an emergency fund, pay your debts, and then invest. But it all depends on your priorities, financial goals, and where you are in life at this moment.
Nothing negative can come from paying your student loans. Federal and private student loans don’t have prepayment penalty fees, so you wouldn’t cost you more to pay your loans early. However, paying your debt will help you save money on interest through the life of the loans. How much you can save depends on how much you owe right now and your current interest rates on each. When you reach this milestone of paying off your student loans, you will debt-free and that’s a huge accomplishment. It allows you to increase your monthly cash flow and plan for the future.

Other Options

The alternative of not paying off your loans is to save or invest your inheritance money. Nationally, a high-yield savings account offers an average of 0.05% APY, which is very low. You will have liquid funds readily available, but you won’t be generating much of an income. You will likely earn less than what you will pay for interest on your student loans. Your other option is to invest. If you are new to investments, it’s usually best to start slow, investing small amounts of money until you determine your goals and risk tolerance. It’s a volatile investing environment, so being cautious is worth it.

Set Goals and Make a Plan

If you decide to pay off your loans, you must set priorities and financial goals. This should include a clear plan on what to do with the new extra income you will have every month. If you don’t know what to do with that money, it can be easy enough to spend it. So, make sure you start saving or investing with your newly increased cashflow. If you don’t have an emergency fund, or if it’s not where it should be, create one. You should aim to have at least six months’ worth of your living expenses. And after you’ve reached that goal, you can start investing in a way you are comfortable with, whether it’s in the stock market or real estate.
You have a unique opportunity to become debt-free. Without the burden of debt, you can focus on other long-term financial goals like saving, buying a home, and investing with confidence. I’m sure your loved one would be proud of you using their gift to establish a solid foundation for a successful financial future. Paying your student loan debt is only the beginning; you have to work hard and smart to accomplish the rest.