Should I pay off my student loans early?

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If you’ve been in debt for years, paying off your student loans early could seem like a no-brainer. However, student loans generally have lower interest rates than other kinds of debt, like credit cards, so before you decide to pay off your student loans, think about what other debt is on your personal balance sheet. Paying off student loans early could be the right option for some people, but it does come with some downsides.

Key takeaways

  • Paying off student loans early should come second to having an emergency fund and saving for retirement.
  • You lose the opportunity for student loan forgiveness programs if you decide to pay off your loans early.
  • People with private student loans or without other debt can consider paying off student loans early, but federal student loan borrowers should hold off for now.

Should I pay off my student loans early?

Whether or not you should pay off your student loans early depends a lot on your specific circumstances. On the one hand, the longer you spend paying off your loans, the more you’ll be paying in interest. On the other hand, making extra payments could detract from other savings goals. Here are some of the 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, and that means you’ll pay less money in the long run.
  • Get a head start on other financial goals: With one less monthly payment to worry about, you’ll be able to use the funds you would apply to your student loans for other purposes, 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 will 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, mortgages and more.

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 payments 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.

Factors to consider

Before paying off your student loan debt early, consider whether there are other financial priorities you should be focusing on instead.

Other debt

If you have other kinds of debt, you should prioritize paying down whatever balances carry the highest interest rates, like credit card balances. Those will cost you more the longer you hold on to them, and they almost certainly have higher rates than your student loans do. The average credit card interest rate is around 16 percent, but federal undergraduate loans can have interest rates as low as 2.75 percent.

Retirement savings

If paying off your student loans will prevent you from getting an early start on saving for retirement, you should consider waiting. Just like your loan interest, retirement savings accounts will grow more the longer you hold on to them. You want to start contributing to your retirement fund early and often, especially if you work for a company that will match your contributions to a 401(k) or IRA.

“Time is your greatest ally when it comes to compounding your money. Every dollar you invest in your 20s could be $15 by the time you retire, but only half as much if you wait 10 years to get started. Straining to pay down low rate debt — especially federal student loans that have unique provisions like income-based repayment or debt forgiveness — should take a back seat to socking money away for retirement that has 40 years or more to grow,” says Greg McBride, Bankrate senior financial analyst. He adds that a good rule of thumb is to save 15 percent of your income, with 10 percent going toward retirement and the rest into a rainy-day fund.

Homeownership

The burden of paying off student loans can have an adverse impact on homeownership. Many college graduates can’t afford mortgage payments and student loans at the same time, but sinking extra money into student loan payments may put off homeownership even further — especially considering how much you’ll have to save for a down payment.

If you are on the path to homeownership, keep in mind that the average monthly mortgage payment is over $1,000 a month, but the average student loan payment is just a few hundred dollars per month.

Lifestyle expenses

Vacations, fancy cars, dinners with friends and family – we call these lifestyle costs, although you might know them as experiences. The truth is that all of the time and money you spend paying off your student debt can impact your lifestyle. Only you can decide what you are willing to give up in order to pay off your student loans early. If paying off student loan debt early would significantly decrease your quality of life, it may not be worth it.

Emergency expenses

Having an emergency fund is essential; if you lose your job or get hit with a large medical bill, having savings in the bank may help you avoid taking on even more debt. In general, you should aim to have at least three to six months’ worth of savings in an emergency fund. Since student loans have relatively low interest rates, prioritize building up your emergency savings before making extra payments on your loans.

How to pay off student loans quickly

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

One of the most straightforward ways to pay off student loans early is to bump up your payments. Say you have $40,000 in student loans with a 5 percent interest rate. Using a student loan calculator, you can see that under the standard 10-year repayment plan, your monthly payment would be $424.

If you add $100 to each payment, you’d shave two years off of your plan. If you add another $100, you take off an additional two years.

This also decreases the amount of interest you’ll pay. Under the standard plan, you’d pay $10,911 total in interest. Adding $100 to each monthly payment brings the total interest down to $8,239, and adding $200 to each payment brings interest down to $6,630.

Make an extra loan payment each month

Another trick to paying off student loans faster is to make extra loan payments each month. One good way of doing this is to set up biweekly payments instead of monthly. Before proceeding, contact your lender to let it know that the extra payments you plan on making are above the monthly minimum. Otherwise, this extra payment could be rolled over to the following month’s bill.

Not sure how to swing an extra payment each month? Here’s a few ideas for increasing your income:

  • Start a side hustle: A side hustle doesn’t have to turn into a full-time gig, but it can be a helpful addition to your income. Examine your skills and resources to figure out what type of side hustle you could start.
  • Donate plasma: Most plasma donation centers pay around $30 to $50 per donation, and you can donate up to two times per week. Check out plasma donation centers near you to find out more.
  • Get a second job: Any additional income can help you pay off your student loans early if that’s your goal. Getting a second job on nights or weekends can help you earn extra cash to pay off your loans quicker.
  • Sell your stuff on secondhand marketplaces: Do you have too many clothes or a garage full of stuff you never use? Consider listing items like these on secondhand markets like OfferUp or LetGo and using the extra cash you earn for your student loans.

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. Dropping a significant one-time lump sum into your principal balance could help you pay off your loans sooner rather than later.

Refinance for a lower rate

Refinancing can help you pay off your loan more quickly 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 that 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 also don’t recommend sacrificing retirement or emergency savings for the sake of getting out of student loan debt. However, if you already have a solid financial plan in place, it may be worth making a plan to pay down your student loans more quickly in order to put them behind you.

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Written by
Zach Wichter
Mortgage reporter
Zach Wichter is a mortgage reporter at Bankrate. He previously worked on the Business desk at The New York Times where he won a Loeb Award for breaking news, and covered aviation for The Points Guy.
Edited by
Student loans editor