Should I pay off my student loans early?

Paying off student loans early may seem like a good way to free yourself from debt and increase your disposable income. However, focusing on eliminating student loans may not always be the best choice, especially if you have other higher-interest debt like credit cards or you don’t have emergency savings.

Credit card debt tends to be more detrimental to someone’s financial situation. So, if you’re one of the many Americans who have helped accumulate a record $1 trillion in credit card debt, paying that may be a higher priority. Paying off student loans early may also not be the best move if you haven’t yet begun saving for retirement or if you lack an emergency savings fund.

While eliminating student debt may be a good choice under the right circumstances, it’s important to consider your total financial picture before taking this step.

Should I pay off my student loans early?

If you wonder, “should I pay off my student loans?” know that the answer to this question depends on your circumstances.

Peter Dunn, CEO of Your Money Line, says that although paying your loans early is a big achievement, you need to make sure that it won’t be at the expense of other foundational financial goals.

“Establish an emergency fund, contribute to your employer’s retirement plan at least up to the match and prioritize any other high-interest debt before attacking your student loans,” Dunn says. “Once you’re on track with your core financial habits and obligations, then start looking at systematically paying down your student loans.”

Pay off your student loans early if:

• You’re saving a reasonable amount for retirement already. If you’re already saving money for retirement and you’re on track to reach your long-term goals, it can make sense to funnel some extra cash toward your student loans.
• Your income is high enough to fund other goals. If your income is high enough that you can save for your other financial goals and you still have cash to spare, it can make sense to wipe out your student loans faster than normal.
• You have paid off all high-interest debt. If you are free of credit card debt and other high-interest debts, that’s another sign that it could make sense to pay off your student loans early.
• You have a fully funded emergency fund. You should pay off student loans early only if you have at least three to six months of expenses in a high-yield savings account. However, don’t use your emergency fund to pay for those student loans — keep it intact and available for emergencies.

Don’t pay off your student loans early if:

• You’re not saving for retirement. If you’re not saving for retirement, you should take care of this part of your finances first. At the very least, you should contribute up to your workplace retirement account to any amount your employer will match. If you’re not contributing to at least the employer match, you’re losing out on free money from your employer that can help significantly accelerate retirement savings efforts. As of 2021, about 95 percent of plans offer employer contributions. If you’re self-employed, contributing to an account like a SEP IRA or a solo 401(k) can help you prepare for retirement while lowering your taxable income.
• You have high-interest debt. If you have other kinds of debt, you should prioritize paying down whatever balances carry the highest interest rates. For instance, the average credit card interest rate is well over 20 percent, much higher than most student loans charge. Over the long run, it will cost you far more if you hang onto high-interest credit card debt. Americans pay nearly $120 billion in annual credit card interest and fees. That translates to about $1,000 annually per household in credit card interest.
• You don’t have any savings. If you don’t have any cash for emergencies or other goals, put any extra money there first. Maintaining an emergency savings account can help you avoid debt when unexpected expenses arise. About 22 percent of U.S. adults have no emergency savings at all. That’s the second-lowest percentage in 13 years of polling.
• You may want to utilize federal programs. If you have federal student loans and are considering signing up for an income-driven repayment plan or Public Service Loan Forgiveness, hold off on putting extra money toward your loans. Both of these programs allow you to have some of your balance forgiven.

What are the pros and cons of paying off student loans early?

Paying off student loans early has its upsides and downsides. Here are some benefits and drawbacks of paying back your loan early.

Pros

• Pay less over the life of the loan: Because your student loan, like most other debt, accrues interest when you carry a balance, it’s cheaper if you pay off the loan earlier. It gives the debt less time to accumulate interest, meaning you’ll pay less in the long run.
• Get a head start on other financial goals: With one less monthly payment to worry about, you can use the funds you would apply to your student loans for other purposes. This can help with financial goals like saving for a house or retirement, paying off a mortgage or taking a vacation.
• Improve debt-to-income ratio: Getting rid of a significant monthly payment could improve your debt-to-income ratio, a measurement that most lenders evaluate when determining your qualifications for credit. With an improved debt-to-income ratio, you may be eligible for better interest rates on credit cards and mortgages.

Cons

• Higher monthly payments: Especially if you’re early in your career or not making much money, you may struggle to pay off your student loans early. Paying off your loans early means making additional or larger payments, so you should only increase your student loan payments if you can afford to do so without making undue sacrifices.
• Draws focus from other financial goals: There are certain financial goals you shouldn’t wait on, and focusing on your student loans could take away from them. If you don’t have an emergency fund yet, for instance, send any extra payments there first.
• No opportunities for student loan forgiveness: If you’re eligible to have your student loans forgiven after a certain amount of time based on your career, it doesn’t make sense to repay your loans early. You’re better off making your required payments until the debt is forgiven.

How can you pay off student loans early?

If you’ve decided that paying off your student loans early is the best choice for you, here are some of the best ways to go about doing it:

• Pay more than the minimum payment: Paying more than the minimum on your student loans can help you lower the principal of your balance and pay off your loans faster. If you’re curious how much time you could save by making a larger payment, a student loan calculator can help.
• Pick up a side hustle: Look for ways you can earn some extra cash to throw toward your student loans. For example, pick up babysitting gigs, drive for Uber or Lyft, sell old clothes online or donate plasma.
• Put down a lump-sum payment: If you have come into some money, perhaps through tax returns or a cash gift, consider putting it toward your student loan repayment.
• Pay biweekly instead of monthly: By making biweekly payments on your student loans, you’ll make 26 half-payments within a year. This means you’ll make 13 full payments on your loans each year instead of 12.
• Refinance for a lower rate: Refinancing can help you pay off your loan faster if you can find a lower rate. By cutting down on interest charges, you may be able to more easily chip away at the principal balance on your loan.

Next steps

Paying off student loans early can feel empowering, but before you decide, make sure it’s the right decision for your circumstances. After all, student loans typically have relatively low interest rates, and it’s usually best to focus on paying back your highest-interest debts first.

We don’t recommend sacrificing retirement or emergency savings for the sake of getting out of student loan debt. However, ditching your student loans early can make sense if you already have a strong financial plan.