Main image courtesy of Ariel Education Initiative.
Student loan debt affects more people than you might think. With a total of close to 42.9 million Americans who owe $1.57 trillion dollars, chances are you and lots of people like you owe a debt for their education. In addition to qualifying for scholarships, grants, and federal work study programs through the Free Application for Federal Student Aid (FAFSA), the majority of students also need to take out student loans to cover the cost of tuition and room and board at their schools.
Once you graduate and your loans disburse, it’s up to you (and anyone who wants to help like your parents) to start paying back those student loans. Have you ever wondered if it is worth it to pay off your student loans early? What could be the benefits to doing this, and is it realistically feasible?
We’re glad you asked, because in this article, we’re going to cover:
- The pros and cons of paying your student loans off early
- The best (and most efficient) way to pay your student loans off early
The Pros of Paying Off Your Student Loans Early
Why would you want to start paying off your student loans early?
There are a lot of benefits to paying back your student loans early. Image courtesy of KLBK.
If you have student loan debt, chances are you’d like to get rid of it as fast as possible. Depending on where you went to school and how much you were required to take out to pay for. The average amount of student loan debt for Americans hovers around $30,000, but you could have more, less, or right around that amount. Regardless, your debt might be pretty substantial, and you may not be interested in carrying it around with you longer than you need to.
Once your loans are in repayment, you need to either decide to pay them off traditionally with a monthly payment, or decide to pay them off early. Before you consider this as an option we recommend you take a solid look at your finances, and be in a good spot. By this we mean have at least a month of savings available, start contributing to your 401K or IRA, and get rid of other high interest debt like credit cards.
If you’ve been wondering whether or not paying off your student loan debt early is for you, let’s take a look into the pros and cons of doing so.
Pros of paying off student loans early
- You really save
If you’re able to pay off your student loans early, you can really save a lot of money on interest payments that you’ll never need to worry about. Depending on the type of loan you have and whether it’s private or a federal loan, you could have interest accumulating daily or monthly.
If you want to pay off your loan with one lump sum, you will need to tell your provider that you’re going to pay off your loan early. Then, they will give you an adjusted final pay off amount. This amount will take into account some interest, but not nearly as much as you would pay should you continue for the entirety of your repayment plan.
Or you could decide to make extra payments each month, which most lenders have no problem with.
That’s why so many people want to pay off their student loans early, because in the long run, they’re saving a lot of money.
- Frees up additional money
One of the best things about paying off your student loans early is that you can then start to use that payment you’d make every month towards other things. When you no longer have that monthly student loan payment, this frees up additional money that you can start to invest, save, or put towards a big purchase.
The burden of student loan debt has kept many people from making big purchases such as houses and cars. Once you’ve paid off your student loan, then you can start saving towards these goals. Or perhaps you always wanted to take a big trip, need some new appliances, or run into an unexpected emergency. Having the savings to cover these expenses is extremely helpful in the long run.
- Lower your debt/income ratio
No one likes living with debt, but unfortunately it is a part of our society. However, when you pay off and get rid of your debt, when you go apply for a loan for a house or a car, you’ll find that by lowering your debt to income ratio, you may qualify for lower interest rates.
- No more student loan debt!
If you’re able to pay off your student loans early, you get some well deserved peace of mind. With your debt paid off, you can start to use the money that would have gone to student loans towards other big goals of yours. Plus, you’ll never need to worry about having that level of debt again—that is unless you decide to return for additional schooling.
The Cons of Paying Off Your Student Loans Early
Are there cons to paying off your student loans early?
It’s important to make sure you’re in a good place financially if you want to pay off your student debt early. Image courtesy of Vox.
While paying off your student loans early may seem like a great idea, you should first consider whether or not it is the right option for you. If you have a large amount of student loan debt, paying it off all at once might not be the best strategy right now. Instead it might be better to keep making payments in order to reduce your debt before you try to pay it off early.
While we wouldn’t want to discourage anyone with the means to pay off their student loan debt early from doing so, there are a couple of downsides that you might want to consider.
Cons of paying off your student loans early
- You may pay higher interest rates later
While getting rid of debt is a good thing, did you know that your student loan debt typically comes with some of the lowest interest rates? That means should you decide to pay it off by taking out a private loan, you may not get the same low interest rate, causing you to pay more in the long run.
- You’ll lose that tax advantage
When you file your taxes each year, you’re allowed to deduct up to $2,500, since student loans are considered tax deductible. Depending on what your interest rate is and how much you are paying in interest each month, it might not be in your best interest to pay your loans off early.
This is why we recommend taking a good look at exactly where your finances are, and what some of your financial goals are before you decide to pay off your student loans early.
- It could cause a drain on your finances
Perhaps one of the biggest downfalls to paying off your loans early is that it can really drain your financial situation. When you put all your savings towards your loan pay off, you could be left very vulnerable should an emergency situation occur. You don’t want to find that you have no money saved because you decided to pay off your loans early.
You also don’t want to decide to pay off your loans early, and then find that you’re working all the time, non-stop. That’s not a sustainable situation! Paying off your loans is a good thing, but don’t do so at the expense of your health or your emergency savings.
The Best Way to Start Paying Off Your Student Loans Early
If you do want to pay your loans off early, make sure you do it the right way!
Setting up a payment plan and sticking to it is a good way to pay those loans off sooner. Image courtesy of University Business.
As we mentioned earlier, before you consider paying off your student loan debt early, make sure to pay off any credit card debt or other personal loans. If you’d like to take steps to start paying off your loans, consider these tips!
- Start with the interest
If you’re still in your grace period after graduating from school, try to make a lump sum to cover any of the interest that has accumulated. This can help you start making payments towards your principal sooner.
- Try to make extra payments
We know it can be hard enough to make one student loan payment each month, but if you can, consider paying more than you owe, or making two payments each month. You might be surprised at how much faster you’ll see your student loan debt start to decrease.
- See if your employer can help
Check and see if your employer offers any help when it comes to paying back student loans. Even if it doesn’t seem like it will make a dent in your loan balance, every little bit helps and can save you from paying more interest in the long run.
- Consider refinancing
If you’re okay with turning your federal loans into private loans, you could get a better interest rate and pay your loans off early. There are a variety of lenders who may be able to give you a better interest rate than you’re paying now but will shorten the term of your loan, so make sure to do your research.
If you’re considering paying off your student loans early, make sure you take into account both the pros and the cons. If you decide to do it you’ll be on your way to being debt free sooner rather than later!
