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!
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.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
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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 3.89% APR (with Auto Pay) to 6.97% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.30% 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 Month/Day/Year, 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 08/21/18. 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 firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent 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
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
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.
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 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.47% – 6.30%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.69% – 7.21%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|