If you have student debt and are doing OK financially, you might ask yourself: Should I pay off my student loans early?
The answer really depends on your own situation. Some people treat student loans like the plague and zealously believe they should get rid of them as soon as possible. Others are more laid back about the whole thing and feel that student loan debt is the new norm.
So, what should you do? Although it’s a personal decision, there are several important factors worth considering before you decide whether paying off student loans early is right for you.
How to decide if you should pay off your student loans early
Let’s first look at the reasons it might be best to pay off student loans as soon as possible.
For one thing, not only would you be able to ditch those pesky monthly payments, but you also wouldn’t have to stress about what would happen to your debt if a sudden financial emergency came up. And just think about all that interest you could save each month without student loans.
But does it make sense to pay off student loans early in all cases? Not necessarily. For instance, you might have more pressing issues you need that cash for, rather than applying extra payments to your student debt.
Here are four things to think about as you decide what priority to give your student loan repayment.
1. Look at the big picture
Student loans are just one part of your financial situation. While it may seem like it makes sense to pay them off early, there are other things in your life that might take precedence.
For example, do you have an emergency fund? Even a basic emergency fund of $1,000 can be helpful. You can’t plan for every contingency, and in life’s full scope of irony, emergencies typically hit at the most inopportune time.
It’s also important to consider any other debt you have, aside from student loans. If you have high-interest credit card debt, for example, it makes sense to focus on paying that down first.
At the same time, look closely at what repaying student loans early might do to your quality of life. Most of us can sacrifice a bit to pay off debt, but it’s probably not worth bending over backward to pay back your student loans early if it means you must struggle to pay other bills and eat, or have to forgo basic necessities like health insurance.
2. Examine your goals
Knocking off your student loans early means that you will inevitably be paying more than the minimum toward your debt. This will divert money from other areas of your financial life, but that’s fine if your goal is to become debt-free as soon as possible.
But what if you want to quit your job and start your own business? What if you want to travel? Or buy a house? Maybe you’re starting to plan for a wedding or having a child. All these factors should inform your decision.
Money is a tool that helps us live the life we want. If your goal is to be debt-free as soon as possible, it may make sense to throw all your extra money toward debt. But if you have short- and long-term goals on the horizon that are extremely important to you, it’s critical to focus on those as well.
In fact, if you don’t attend to those other objectives, you’re likely to become less motivated about paying off debt, and you’ll lose steam fast.
It’s all about balance and coming up with percentages for your various goals. For example, you could put 25% of your discretionary income toward debt, while saving 10% for a wedding.
At the other end of the spectrum, you could go on an income-driven repayment plan to lower your monthly payments sharply, slowing the progress on your student debt in order to save for other life goals.
3. Compare interest rates
After you look at your personal and financial goals, it’s time to compare interest rates. Your interest rates can help you decide whether paying off student loans early is right for you — or whether you should jump-start your savings goals or begin to invest.
If you have an interest rate well over 5%, for example, you may want to make paying off debt a high priority. Hefty interest rates can tack on a lot of extra money to your balance, making the repayment period even longer.
But if you have a much lower interest rate, you may be able to get better returns on your money by investing. Use this student loan payoff calculator to help crunch the numbers as you consider other uses for your money.
While it’s hard to predict what kind of return you can expect from an investment, comparing estimates can be a worthwhile exercise as you decide on your financial strategy.
4. Evaluate your repayment plan
In most cases, paying off student loans early makes sense if you can afford it, especially since you’ll save money on interest.
But under certain repayment plans, it may not be so beneficial. For example, if you are hoping to get your loan balance wiped away under the Public Service Loan Forgiveness program, there’s not much reason to pay the debt off early.
Conversely, if you’re on an Extended Repayment plan running 25 years, it could make more sense to pay off your loans early if you can. This is because of the massive amount of interest that can accumulate over that time.
What if you want to pay off your student loans early?
If you decide that, yes, you should pay off your student loans early, then you’ll want to have a solid plan of attack. Here are a few ideas to best jump-start the process:
- Start repayment during the grace period. You usually have six months after you graduate to start making payments on your student loans. But if you’re school now (or just recently finished) and can afford to pay something — even a little — toward your loans, you can get ahead of the game and often avoid some interest.
- Pay more if you can. If you can make larger payments each month, then obviously, you can get your debt down faster. Just make sure that your lender applies those payments directly to the principal.
- Get a side job. If you have the time, a side hustle can help bring in some extra cash that you can use toward your student loan balance. Working a few extra hours at your current job or on a weekend now and then can go a long way toward helping your finances.
- Refinance your student loan. If you (or a cosigner) can qualify for refinancing, you could potentially score a lower interest rate and save a bundle, as well as consolidate your student debt into a single loan to make repayment simpler.
- Seek out forgiveness and repayment assistance. There’s a wide variety of forgiveness and loan repayment assistance programs out there, and some employers even offer their own student loan repayment benefits.
Paying student loans off early is a personal decision and one that should reflect your goals and values. Consider some of the points above as you look over your options.
Whether you decide to pay off debt as quickly as possible or take the longer road while you focus on other things, having a plan and sticking to it can help you reach your goals.
Carissa Chesanek contributed to this report.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.50% APR (with Auto Pay) to 7.82% APR (with Auto Pay). Variable rate loan rates range from 2.43% APR (with Auto Pay) to 7.21% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 17, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/17/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.45% effective May 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.43% – 7.21%1||Undergrad & Graduate|
|2.43% – 6.65%2||Undergrad & Graduate|
|2.43% – 6.59%3||Undergrad & Graduate|
|2.44% – 6.87%4||Undergrad & Graduate|
|2.46% – 7.08%5||Undergrad & Graduate|
|2.93% – 9.67%6||Undergrad & Graduate|