This report was originally published September 30, 2016.
While the standard financial advice is to pay off debt as quickly as possible, I believe there are both pros and cons to paying off student loans early. For me, the downsides outweigh the benefits, which is why I refuse to pay my student loans ahead of schedule.
While your goals might be different, here’s why I decided against paying off my student loans as fast as possible.
4 reasons I refuse to pay my student loans early
There are four specific reasons I won’t be rushing to pay my student loans off early:
- I have a very low interest rate
- I want to keep using the student loan tax deduction
- I prefer to invest my extra money
- I like my cash flow where it is
Years ago, when I was tackling credit card debt on top of my student loans, it made sense to ignore my student loans. After consolidating my student loans in 2005, I had a 1.9% interest rate. Rather than focusing on such low-rate loans, I turned my attention to the higher-rate credit card debt I’d amassed.
When deciding which debt to demolish first, it’s tempting to pay off student loans early because they are often so big. But starting with higher-rate debt often makes more sense mathematically.
The more you pay in interest, the more you may end up paying throughout the lifetime of the loan. Get rid of the high-rate debt first and tackle the student loans once it’s out of the way.
The interest you pay on student loans is tax deductible. Between my low interest rate and the tax deduction, my student loans don’t cost very much at all. Paying off student loans early means you may not receive that tax deduction down the road.
You shouldn’t keep your loans around just for the tax deduction, but if you have other things to do with your money, it’s nice to know that your student loans aren’t such a huge resource drain.
You won’t even have to itemize your deductions to take advantage. You can reduce your taxable income by up to $2,500 when you meet the eligibility requirements for a student loan tax deduction, which include being legally obligated to pay interest on a qualifying student loan and your modified adjusted gross income being less than the amount determined by the IRS. That’s a pretty decent sum, and that reduction may be enough to save you some money come tax time.
Because the 1.9% rate on my student loans is so low, I prefer to invest the money I would have used to pay off student loans early. We talk about debt repayment as a guaranteed return, but is the 1.9% really worth it? With a long-term approach to investing, you could see annualized returns of more than 7%.
Putting extra money toward my retirement has helped me build my portfolio and prepare for my future. It’s been much more profitable than putting that money toward paying down low-rate student loan debt since my returns are much higher than what I’m paying in student loan interest.
Even with hiccups in the stock market, the overall gains have been worth it. My returns so far and my potential returns for the future are much better than I would see if I spent five years diverting that money to student loan payoff.
Putting the money to work with the help of compound interest over time has been a much better investment than paying off low-rate student loans early. Combine that with the tax efficiency boost from my loan interest tax deductions each year, and my student loans aren’t worth paying off early.
If your employer offers you a 401(k), you may be able to get an even greater return on your retirement savings. That’s because your employer could match what you contribute to this type of retirement account up to a certain percentage of your paycheck. Why wouldn’t you want to take advantage of that?
One of the most important aspects of your finances is your cash flow. Paying off student loans early means devoting more of your financial resources, which can restrict your cash flow.
If you are willing to give up part of your budget to make it happen, that’s no problem. I’m not willing to do so, especially since my low rate and being able to take advantage of the tax deduction mean I’m not paying very much for my student loans.
I like having the freedom to use my monthly disposable income how I want without it going toward paying down loans.
While you might want to pay off student loans early, you don’t want to put other areas of your finances at risk. Before you stretch your budget for rapid student loan reduction, it might make more sense to shore up your finances with an emergency fund.
Having an emergency fund can help you with more immediate crises, such as a job loss, an unplanned medical procedure or car repairs. This money can prevent you from falling into more debt if you need to take out an additional loan to pay for these unplanned expenses.
Think about other ways to use that — what else could you do with that money if you weren’t putting so much toward student loan debt early repayment?
Just because paying off student loans early isn’t my thing, it doesn’t mean you have to stop aggressively tackling your own debt. Some repayment plans span 20 or 25 years, and not everyone likes the idea of having these types of long-term obligations.
And sometimes it doesn’t matter what the math says — if you can’t sleep at night because of the student loan debt hanging over your head, then it could make sense to pay it off ASAP, regardless of other pros and cons of paying off student loans early.
Another consideration is that you might not have the same interest rate I do, which is extremely low. If your rate is higher, you can look into student loan refinancing to see if it’s possible for you to find a lower rate that reduces the cost of your student loans.
Otherwise, if you are paying 8% on your student loans and are worried that you will only see 7% annualized returns on your investments, paying down your student loans as fast as possible makes sense.
But if you can refinance, maintain your cash flow and invest in assets that provide a better return, you might not need to pay off your student loans early. There are real pros and cons of paying off student loans early, so consider student loan refinancing and all other avenues before making a decision.
Rebecca Safier and Sarah Li Cain contributed to this article
Interested in refinancing student loans?Here are the top 9 lenders of 2022!
|Lender||Variable APR||Eligible Degrees|
|2.49% – 11.72%1||Undergrad & Graduate|
|2.50% – 6.30%2||Undergrad & Graduate|
|4.13% – 7.39%3||Undergrad & Graduate|
|2.49% – 7.99%4||Undergrad & Graduate|
|2.49% – 7.99%5||Undergrad & Graduate|
|3.24% – 8.24%6||Undergrad & Graduate|
|2.48% – 7.98%||Undergrad |
|1.74% – 7.99%7||Undergrad & Graduate|
|3.69% – 9.92%8||Undergrad & Graduate|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount. Fixed loans feature repayment terms of 5 to 20 years. For example, the monthly payment for a sample $10,000 with an APR of 5.47% for a 12-year term would be $94.86. Variable loans feature repayment terms of 5 to 25 years. For example, the monthly payment for a sample $10,000 with an APR of 5.90% for a 15-year term would be $83.85.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of September 6, 2022.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
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 $9 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.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of April 29, 2021. Information and rates are subject to change without notice.
3 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.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 09/09/2022 student loan refinancing rates range from 4.13% APR – 7.39% Variable APR with AutoPay and 2.99% APR – 9.93% Fixed APR with AutoPay.
4 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.
You can choose between fixed and variable rates. Fixed interest rates are 3.99% – 8.74% APR (3.74% – 8.49% APR with Auto Pay discount). Starting variable interest rates are 2.74% APR to 8.24% APR (2.49% – 7.99% APR with Auto Pay discount). Variable rates are based on an index, the 30-day Average Secured Overnight Financing Rate (SOFR) plus a margin. Variable rates are reset monthly based on the fluctuation of the index. We do not currently offer variable rate loans in AK, CO, CT, HI, IL, KY, MA, MN, MS, NH, OH, OK, SC, TN, TX, and VA.
5 Important Disclosures for Navient.
6 Important Disclosures for SoFi.
Fixed rates range from 3.99% APR to 8.24% APR with a 0.25% autopay discount. Variable rates from 3.24% APR to 8.24% APR with a 0.25% autopay discount. Unless required to be lower to comply with applicable law, Variable Interest rates on 5-, 7-, and 10-year terms are capped at 8.95% APR; 15- and 20-year terms are capped at 9.95% APR. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. This benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The benefit lowers your interest rate but does not change the amount of your monthly payment. This benefit is suspended during periods of deferment and forbearance. Autopay is not required to receive a loan from SoFi.
7 Important Disclosures for Purefy.
Purefy Student Loan Refinancing Rate and Terms Disclosure: Annual Percentage Rates (APR) ranges and examples are based on information provided to Purefy by lenders participating in Purefy’s rate comparison platform. For student loan refinancing, the participating lenders offer fixed rates ranging from 2.73% – 7.99% APR, and variable rates ranging from 1.74% – 7.99% APR. The maximum variable rate is 25.00%. Your interest rate will be based on the lender’s requirements. In most cases, lenders determine the interest rates based on your credit score, degree type and other credit and financial criteria. Only borrowers with excellent credit and meeting other lender criteria will qualify for the lowest rate available. Rates and terms are subject to change at any time without notice. Terms and conditions apply.
8 Important Disclosures for Citizens.
Education Refinance Loan Rate Disclosure: Variable interest rates range from 3.69%-9.92% (3.69%-9.92% APR). Fixed interest rates range from 4.49%-10.11% (4.49%-10.11% APR).
Undergraduate Rate Disclosure: Variable interest rates range from 6.39%- 9.60% (6.39% – 9.60% APR). Fixed interest rates range from 6.58% – 9.79% (6.58% – 9.79% APR).
Graduate Rate Disclosure: Variable interest rates range from 3.69% – 9.16% (3.69% – 9.16% APR). Fixed interest rates range from 4.49% – 9.35% (4.49% – 9.35% APR).
Education Refinance Loan for Parents Rate Disclosure: Variable interest rates range from 3.69%- 9.09% (3.69%- 9.09% APR). Fixed interest rates range from 4.49% – 9.28% (4.49% – 9.28% APR).
Medical Residency Refinance Loan Rate Disclosure: Variable interest rates range from 3.69% – 9.16% (3.69% – 9.16% APR). Fixed interest rates range from 4.49% – 9.35% (4.49% – 9.35% APR).