Should You Pay Off Your Student Loans Early?

Getting ahead of your student loan debt is generally a smart move. But, if it meansavoiding higher-interest debt or delaying an important financial goal, paying your student loans off ahead of schedule may not be worth it in the long run. Here, we’ll run through when it does and doesn’t make sense to pay off student loans early.

When it makes sense to pay off your student loans early

You can save money on  interest

While student loans tend to have lower interest rates than other common forms of debt, such as credit cards, you can save money on interest by paying off your loans sooner. If student loan debt is the only type of debt you have or the highest-interest debt you have, it may make sense to pay your loans off early.

You need to lower your debt-to-income ratio

Your debt-to-income ratio (DTI) is the sum of your monthly debt payments divided by your gross monthly income, expressed as a percentage (e.g., $1750 in monthly debt obligations / $6250 gross monthly income = .28, or a28% DTI). A low DTI means you are less burdened by debt and makes you less risky to lenders.. Paying off student loans early can help you lower your DTI and take on other debt more easily, such as a mortgage or practice loan.

You feel stressed out by your debt, even while making payments

Dealing with debt is no walk in the park. The emotional effects of heavy debt can be deep and long-lasting, so prioritizing faster repayment as part of your overall wellness plan can be a smart move. If monthly student loan payments cause a lot of stress for you, early payoff may be something to consider.

When it’s not worth it to pay off your student loans early

You haven’t built up an emergency fund

Having 6-12 months of living expenses in readily available in a savings account can make a financial emergency much easier to navigate. If you’re thinking about tapping into your emergency savings to pay your student loan debt, consider waiting—now is probably not the right time for early payoff.

You’re fully utilizing your tax advantage

Interest paid on student loans is up to only $2,500 each year. Depending on how much you’re paying in interest, it may not be worth it to pay more toward your student loans each month. To figure out if this is relevant to your financial situation,consult a tax professional or financial expert.

You’re taking advantage of federal loan repayment options

Certain federal loan repayment options include forgiveness programs, such as Public Service Loan Forgiveness (PSLF)  or Income-Driven Repayment (IDR) .

If these plans give you the peace of mind to meet your goals and pay your loans at the right pace for you, there’s likely no need to change things up. To learn more about the forgiveness benefits from PSLF and IDR go to studentaid.gov.

Paying student loans means accumulating higher-interest debt

It usually doesn’t make sense to prioritize student loans over higher-interest debt, such as credit card debt. The same is true if you’re accumulating more credit card debt to pay off student loans early.

How to pay off your student loans early

1. Make extra payments automatic

   Making extra payments can mean paying off your loans faster. For some lenders, setting up autopay can come with a rate reduction that lets you save. To pay extra toward your loans, you can set up your preferred payment amount via autopay and forget about it.

2. Look for employers that help with student loans

   Some employers offer direct student loan repayment assistance as part of their compensation packages. It is increasingly common to find this offering from employers, so be sure to ask about it.

3. Refinance your student loans

   Refinancing allows you to take out a new consolidated loan with a private lender—and if you have a strong credit history and meet certain criteria, potentially get a lower rate. If you obtain a lower rate with a shorter loan term you could pay off your loans sooner and reduce the overall interest paid over the life of the loan.

If you are refinancing any Federal Student Loans with us, you will no longer be able to take advantage of federal Income-Driven Repayment (IDR) and forgiveness options. For more information about these benefit programs and other Federal student loan programs, please visit studentaid.gov.