4 Situations When Paying Off Student Loans Early is a Bad Idea


Normally, I advocate paying off student loans as quickly as possible. They’re a burden and something that should be conquered early in order to make room for more important and pressing life goals.

However, I concede that in a few unique situations, you shouldn’t pay off student loans early. In these situations, it just doesn’t make mathematical sense to pay off your loans, or it’s just not a wise life choice.

I’ve outlined four of these situations below. So, before you pay off student loans early and get rid of them, first make sure that one of the situations below doesn’t apply to you.

1. You Have High-Interest Credit Card Debt

If you have high-interest credit card debt in addition to your student loan debt, then it’s better to conquer your credit card debt first before you attempt to pay off student loans early.

Credit card debt can be very difficult to escape, especially when average interest rates exceed 15%. If your student loan interest rate is less than that, then paying off your credit cards needs to be your priority. Otherwise, you’re essentially losing money.

To pay off your high-interest credit card debt, pay back as much as you can afford to each month, not just the minimum. If you pay only the minimum amount, then it will take years for you to pay off your balance.

Another strategy is to transfer the balance to a 0% card for 12 months to avoid incurring more interest while you pay off your debt. Just be sure to watch the balance transfer fees as well interest rates after the 0% interest period ends.

If necessary, or if your credit card debt is astronomical, then you might need to speak with a credit counselor to discover what options are available to you. These options might include negotiating with your credit card companies to lower their fees and lower your interest rates in order to help you to conquer your debt.

If your case is severe, then they might also recommend bankruptcy, which roughly 10% of credit counseling clients need to consider.

2. You Might Want to Go Back to School

If you think that you might want to back to school someday, but you’re just not sure when, then I would postpone making any large payments on your student loan debt. Instead, build a large savings account.

Why? When you go back to school, you can pause payments on federal student loans if you’re enrolled at least half-time. Keep in mind that if you have subsidized student loans, then you can defer them without interest while being enrolled half-time. By contrast, if you have unsubsidized loans, then know that they will accrue interest while you’re in school.

Plus, you might need that money that you would have otherwise spent paying off your loans to be in a savings account.

Going back to school often means juggling work and school and trying to live on a very limited graduate school stipend. If you’re expecting that situation or a similar one in which you won’t have much extra money, build up savings beforehand to make life a little easier while you’re in school.

3. You Need to Save an Emergency Fund

Emergency funds are an extremely important part of staying out of debt. When an emergency happens—and they will happen—you need to have the resources to pay the cost without having to take out another credit card. In this sense, emergency funds help to keep your credit healthy.

If you have a family or want to start a family soon, then emergency funds are especially important. Though you never want to imagine the worst that can happen, if it does happen—and it can—then you need to be financially prepared.

I was diligent and had saved, when my husband and I decided to have our first child. At our first ultrasound, we found out that we were having twins. Needless to say, it was quite a shock, and I immediately stopped paying the additional $800 per month as part of my aggressive student loan repayment strategy but instead put it into a baby fund.

It’s a good thing that I did. Our twins were born prematurely and required a great deal of medical care. Paying off my student loans early hardly mattered when I needed money to take care of my children. Clearly, having a savings account can be more important than being debt free, depending on your stage of life.

4. You Work in Public Service

There are many types of student loan forgiveness, including Teacher Loan Forgiveness and Income Driven plans, that offer forgiveness after a certain number of years.

The federal government also offers Public Service Loan Forgiveness, forgiving your student loans after you work in the public service for 10 years and met eligibility requirements.

This program is far better than the standard Income-based repayment plan that discharges what’s left of your loans after 25 years. In that case, it’s often not worth waiting 25 years, but better to pay it off as soon as possible.

If you want to qualify for the Public Service Loan Forgiveness program, you’ll need to work in public service. This includes many non-profit and government organizations. It also includes being active duty in the military or a member of the Peace Corps.

There’s no reason to pay more toward your loans when you’re enrolled in this program, because after 10 years of consecutive payments, your remaining loan debt is forgiven, no matter the amount. Why pay money that you don’t have to just to pay off student loans early?

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