I refuse to pay off my student loans early.
Plenty of people judge me for this decision — after all, the standard financial advice about debt is to pay it off as quickly as possible.
But rapid student debt reduction isn’t the only path to financial freedom. The reality is that paying off student loans early isn’t always the best bet — at least when it comes to the numbers.
4 reasons I won’t be paying off my student loans early
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 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 that’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 includes 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 my 1.9% rate for 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 401(k), you may be able to get free money. 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?
Avoid the pitfalls of paying off student loans early
Just because paying off student loans early isn’t my thing, it doesn’t mean you have to stop aggressively tackling your own debt. Depending on your loan balance, you need to be comfortable with the idea of carrying this debt for 20 or 25 years if you don’t want to pay off your student loans early.
Not everyone likes the idea of having these types of long-term obligations. And 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 if off ASAP.
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 all avenues before making a decision.
Sarah Li Cain contributed to this article
This report was originally published September 30, 2016.
Interested in refinancing student loans?Here are the top 7 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
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 3.45% APR (with Auto Pay) to 6.99% APR (with Auto Pay). Variable rate loan rates range from 1.81% APR (with Auto Pay) to 6.49% 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 November 6, 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 11/06/2019. 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 SoFi.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
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. Mortgage lending is not offered in Puerto Rico. All loans are provided by KeyBank National Association.
ANNUAL PERCENTAGE RATE (“APR”)
There are no origination fees or prepayment penalties associated with the loan. Lender may assess a late fee if any part of a payment is not received within 15 days of the payment due date. Any late fee assessed shall not exceed 5% of the late payment or $28, whichever is less. A borrower may be charged $20 for any payment (including a check or an electronic payment) that is returned unpaid due to non-sufficient funds (NSF) or a closed account.
For bachelor’s degrees and higher, up to 100% of outstanding private and federal student loans (minimum $5,000) are eligible for refinancing. If you are refinancing greater than $300,000 in student loan debt, Lender may refinance the loans into 2 or more new loans.
ELIGIBILITY & ELIGIBLE LOANS
Borrower, and Co-signer if applicable, must be a U.S. Citizen or Permanent Resident with a valid I-551 card (which must show a minimum of 10 years between “Resident Since” date and “Card Expires” date or has no expiration date); state that they are of at least borrowing age in the state of residence at the time of application; and meet Lender underwriting criteria (including, for example, employment, debt-to-income, disposable income, and credit history requirements).
Graduates may refinance any unsubsidized or subsidized Federal or private student loan that was used exclusively for qualified higher education expenses (as defined in 26 USC Section 221) at an accredited U.S. undergraduate or graduate school. Any federal loans refinanced with Lender are private loans and do not have the same repayment options that federal loan program offers such as Income Based Repayment or Income Contingent Repayment.
All loans must be in grace or repayment status and cannot be in default. Borrower must have graduated or be enrolled in good standing in the final term preceding graduation from an accredited Title IV U.S. school and must be employed, or have an eligible offer of employment. Parents looking to refinance loans taken out on behalf of a child should refer to https://www.laurelroad.com/refinance-student-loans/refinance-parent-plus-loans/ for applicable terms and conditions.
For Associates Degrees: Only associates degrees earned in one of the following are eligible for refinancing: Cardiovascular Technologist (CVT); Dental Hygiene; Diagnostic Medical Sonography; EMT/Paramedics; Nuclear Technician; Nursing; Occupational Therapy Assistant; Pharmacy Technician; Physical Therapy Assistant; Radiation Therapy; Radiologic/MRI Technologist; Respiratory Therapy; or Surgical Technologist. To refinance an Associates degree, a borrower must also either be currently enrolled and in the final term of an associate degree program at a Title IV eligible school with an offer of employment in the same field in which they will receive an eligible associate degree OR have graduated from a school that is Title IV eligible with an eligible associate and have been employed, for a minimum of 12 months, in the same field of study of the associate degree earned.
The interest rate you are offered will depend on your credit profile, income, and total debt payments as well as your choice of fixed or variable and choice of term. For applicants who are currently medical or dental residents, your rate offer may also vary depending on whether you have secured employment for after residency.
The repayment of any refinanced student loan will commence (1) immediately after disbursement by us, or (2) after any grace or in-school deferment period, existing prior to refinancing and/or consolidation with us, has expired.
POSTPONING OR REDUCING PAYMENTS
After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship.
We may agree under certain circumstances to allow a borrower to make $100/month payments for a period of time immediately after loan disbursement if the borrower is employed full-time as an intern, resident, or similar postgraduate trainee at the time of loan disbursement. These payments may not be enough to cover all of the interest that accrues on the loan. Unpaid accrued interest will be added to your loan and monthly payments of principal and interest will begin when the post-graduate training program ends.
We may agree under certain circumstances to allow postponement (deferral) of monthly payments of principal and interest for a period of time immediately following loan disbursement (not to exceed 6 months after the borrower’s graduation with an eligible degree), if the borrower is an eligible student in the borrower’s final term at the time of loan disbursement or graduated less than 6 months before loan disbursement, and has accepted an offer of (or has already begun) full-time employment.
If Lender agrees (in its sole discretion) to postpone or reduce any monthly payment(s) for a period of time, interest on the loan will continue to accrue for each day principal is owed. Although the borrower might not be required to make payments during such a period, the borrower may continue to make payments during such a period. Making payments, or paying some of the interest, will reduce the total amount that will be required to be paid over the life of the loan. Interest not paid during any period when Lender has agreed to postpone or reduce any monthly payment will be added to the principal balance through capitalization (compounding) at the end of such a period, one month before the borrower is required to resume making regular monthly payments.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of November 8, 2019 and is subject to change.
4 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.
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 1.9299999999999997% effective October 10, 2019.
6 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 11/07/2019 student loan refinancing rates range from 1.90% to 8.65% Variable APR with AutoPay and 3.49% to 7.75% Fixed APR with AutoPay.
7 Important Disclosures for College Ave.
College Ave Disclosures
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
1College Ave Refi Education loans are not currently available to residents of Maine.
2All rates shown include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
3$5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees.
4This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
Information advertised valid as of 09/23/2019. Variable interest rates may increase after consummation.
|1.81% – 6.49%1||Undergrad & Graduate|
|2.31% – 7.36%2||Undergrad & Graduate|
|1.99% – 6.65%3||Undergrad & Graduate|
|2.43% – 7.60%4||Undergrad & Graduate|
|2.02% – 6.30%5||Undergrad & Graduate|
|1.90% – 8.65%6||Undergrad & Graduate|
|2.74% – 6.24%7||Undergrad & Graduate|