How to Decide If You Should Pay Off Your Student Loans Early

If you have extra money from your budget, you may be wondering if you should pay off your student loans early.

Some borrowers choose to aggressively pay off their student loans as fast as possible. While others choose to treat their student loan payment as more of a tax that will eventually be forgiven many years down the road.

So, what’s the best decision for you? It depends on your financial situation and personal preference. However, there are some important factors to consider before you decide to pay off your student loans early.

Reasons to consider paying off your student loans early

There are a variety of reasons to consider paying off your student loans ahead of schedule. This may include financial and emotional benefits like:

  • Giving you peace of mind. Paying off your student loans early can provide a sense of emotional relief and financial stability. For example, you wouldn’t have to stress about what could happen if you have a financial emergency and could no longer afford your payments.
  • Freeing up your money from monthly payments. Many borrowers are making payments anywhere from several hundred to over a thousand dollars per month. Imagine what you could do with that money if you were no longer obligated to make a monthly payment.
  • Moving you forward on your debt-free journey. Paying off your student loans will put you one step closer to being debt-free and financially independent. It will also reduce your debt-to-income ratio, which can impact your ability to make large purchases (e.g. securing a mortgage) in the future.

It can also save you a significant amount of money on interest charges over the life of your student loans. Which means more money in your pocket for future savings goals or other financial milestones.

Financial considerations to help decide if you should pay off your student loans early

Paying off your student loans early can certainly be beneficial. But it may not be the most strategic decision depending on your situation. 

Here are seven things to think about before you decide on your final student loan repayment plan.

Do you have federal or private student loans?

The type of student loan you have may influence whether you pay it off early or not.

If you have private loans, you’re required to make a monthly payment that is calculated based on your interest rate and outstanding balance. That payment is going to be there until you pay the loan in full, so it may be worth paying off early. You can achieve this goal faster by shopping around for a better refinancing rate at least once a year to maximize your payments.

However, if you have federal loans, you have access to more borrower protections and benefits. For example, federal loans have various repayment plans that can lower your monthly payment based on your income. And options for forbearance or deferment if you experience financial hardship. So, it may make more sense to focus on other pressing financial issues before tackling your federal student loan debt.

Do you qualify for loan forgiveness?

Before you start funneling extra money toward your federal student loans, explore all student loan forgiveness programs available to you.

Forgiveness programs may include:

  • Public Service Loan Forgiveness (PSLF) for those who work in the public or nonprofit sector.
  • Income-driven repayment (IDR) plans that include loan forgiveness after 20-25 years of qualifying payments.

You may also qualify for forgiveness programs that are unique to your state or profession. For example, teachers and medical professionals may have access to additional forgiveness programs in exchange for working in underserved communities.

Do you have a solid emergency fund?

Because student loans are generally considered good debt, it’s best to address other financial issues before paying off your student loans early. This is especially important when it comes to your emergency fund.

Start by creating a basic $1,000 emergency fund to prepare for life’s many unexpected emergencies. And then build your fund to cover at least six months’ worth of living expenses.

Do you have credit card or other consumer debt that have higher interest rates?

If you have high-interest consumer debt, you’ll save more money by focusing on paying it off first. 

Contact your credit card providers and ask for an interest rate reduction. Even if it’s just a temporary reduction, it will help pay off your credit card debt faster since more money will go toward the principal instead of interest.

Are you maximizing your retirement contributions?

At a minimum, you should take advantage of your employer’s company match for your retirement fund. This is essentially free money and will compound over time.

Even plans that don’t include an employer match offer tax advantages. This may include certain tax deductions, tax deferral, and sometimes tax credits.

Retirement contributions are subject to annual limits. But with proper planning, you can maximize your contributions for the present and future.

Can you get a better return by investing?

In some cases, you could see a better rate of return by investing your extra money instead of paying your student loans off early. But this will greatly depend on your specific student loan interest rate and the types of investments you make.

Keep in mind that this strategy takes serious commitment and requires you to actually invest the money. Even if your plan is to make investments, the reality is that extra money is often eaten away by unplanned purchases or just sits in a checking account somewhere.

So, for many people, it’s best to go ahead and pay off debt instead of pursuing the alternative investment route.

Can you claim the student loan interest deduction? 

While the student loan interest deduction isn’t a huge determining factor in paying off your student loans early, it’s worth noting when making your repayment plan.

You may be able to write off up to $2,500 of paid interest, regardless of whether you itemize or take the standard deduction. But there are certain limitations, so be sure to explore this deduction if you made any interest payments in 2020.

Early student loan repayment isn’t one-size-fits-all

Ultimately, the decision to pay off student loans early comes down to individual preference.

But this important decision should include your entire financial picture in order to choose the most advantageous repayment strategy for your unique situation.

Review your financial goals and create a repayment plan that fits your needs. Whether you choose to pay off your student loans early or tackle other financial concerns first, you’ll be best served by having a clear plan to follow. 

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