Is Paying off Student Loans Early the Right Decision for You? 4 Factors to Help You Decide


It’s a common question many borrowers face—”Should I pay off my student loans early?”

Some people treat student loan debt like the plague and zealously believe that people should get rid of it as soon as possible. Others are more lax about the whole thing and think that student loan debt is the new normal.

So, what should you do? Well, that’s a personal decision, but there are several important factors to consider before deciding whether paying off student loans early is right for you.

1. Look at the Big Picture

Student loans are just one part of your financial picture. While it may seem like it makes sense to pay them off early, there are other variables in your financial life you need to look at that might take precedence.

First things first. Do you have an emergency fund? Even a basic emergency fund of $1,000 can be helpful. You can’t plan for emergencies, and in life’s full scope of irony, they typically hit at the most inopportune time.

Will you be prepared? Paying off debt without having an emergency fund in place is practically inviting more debt into your life.

It’s important to evaluate your situation. Do you have other debt aside from student loans? If you have high-interest credit card debt, it makes sense to focus on paying that down first before tackling your student loans.

In addition to establishing an emergency fund and paying off high-interest debt first, look closely at what paying off debt early might do to your quality of life. Most of us can sacrifice a bit to pay off debt, but if you are struggling to pay other bills and eat or are foregoing basic necessities like health insurance, it’s probably not a smart idea to pay off your loans early.

2. Examine Your Goals

Paying off student loans early means that you will, inevitably, be paying more than the minimum toward your debt. Doing so necessarily means putting less toward other areas of your financial life. And that’s okay if your goal is to be 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? Buy a house? Or maybe you’re starting to plan for a wedding or 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.

However, if you have short- and long-term goals on the horizon that are extremely important to you, it’s critical to focus on those goals as well.

If you don’t, you’re likely to become less motivated about paying off debt, and you’ll lose steam fast. It is possible to pay down debt, save for retirement, travel, etc. Is it easy? No.

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-Based Repayment plan to lower your payments while saving 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 jumpstart your savings goals or begin to invest.

If you have an interest rate over 5%, you may want to make paying off debt your main priority. High interest rates can tack on a lot of extra money to your balance, making the repayment period even longer.

But if you have a low interest rate—especially around 2%—you may be able to get better returns on your money in the stock market. Use this calculator to see whether paying off debt or investing makes more financial sense.

While it’s hard to predict what kind of return on investment you can expect from the stock market or other investments, comparing estimates can be helpful for choosing your strategy.

4. Evaluate Your Repayment Plan

In most cases, paying off student loans early makes sense. If you can afford it, it seems like a great thing to do, and you’ll save money on interest.

But under certain repayment plans, it may not make sense. For example, if you are hoping to get your loans forgiven under the Public Service Loan Forgiveness program, it doesn’t make sense to pay them off early. You’ll want to stick with your repayment plan and schedule—just make sure you qualify and that you stay in touch with your lender!

Conversely, if you’re on the Extended Repayment plan (the 25-year repayment plan), it makes sense to pay off your loans early if you can. If you’re looking to get your loans forgiven and you’re on an Income-Based Repayment plan, that’s one thing—but many borrowers might have their loans repaid before that time.

The key is to do what you can afford, but don’t feel stuck by your repayment plan. If you can afford to pay your student loans off early and you’re on a 25-year plan, don’t be complacent and simply ride out the duration of the term. Get that debt gone!

Bottom Line

Paying student loans off early is a personal decision and one that should reflect your goals and values. Look at the big picture and keep your debt-free date in mind.

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.

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Published in Budgeting, Debt, Federal Student Loan Repayment, Financial Goals, Income, Pay Off Student Loans, Student Loan Repayment

  • Komrad

    If you are stressed by debt, pay it off first. If you want to purchase a home , pay it off first to improve your DTI ratio and get the best interest rate in a mortgage. If you want to start a business , pay your student loan off first so that you have more free capital to support you business until it starts producing enough income to support itself.

    You don’t want to be stuck with a business loan and a student loan if your business fails . I can tell you from experience with 2 failed business that put me in deep debt on top of student loan debt that it sucks .

    • Good tips, Komrad.

      One thing I’d add is if you want to start a business, there are more options than ever to start a business that requires little to no capital (and no loans). I know this isn’t always the case, but it can be hugely helpful to those who want to try starting a business without huge financial risk.

  • JayFleischman

    Along the lines of interest rates, remember that it’s a better idea to pay off credit cards before student loans. Credit cards not only usually have a higher interest rate, the interest isn’t tax deductible. In contrast, you can deduct student loan interest up to certain limits.

    • Great points, Jay! Thanks for the tips!

    • Lil25

      The student loan interest tax deduction is absolutely pathetic. My husband and I paid more than $7K in interest alone on our student loans one year, but we could only deduct $2500. We are in the 25% tax bracket. This means the most we could ever save is a measly $625/year on our taxes. A lot of RCGs would save less than that because their incomes would put them in a lower tax bracket. What a load of crock.

    • Lil25

      The student loan interest tax deduction is absolutely pathetic. My husband and I paid more than $7K in interest alone on our student loans one year, but we could only deduct $2500. We are in the 25% tax bracket. This means the most we could ever save is a measly $625/year on our taxes. A lot of RCGs would save less than that because their incomes would put them in a lower tax bracket. What a load of crock.