The day you pay off your student loans will be a day to celebrate. Not only will you feel a sense of accomplishment, but it will also give you the freedom to pursue other financial goals.
If you are trying to achieve that financial freedom faster and pay off your student loans early, that is a great goal to work towards. Student loans can normally be paid off early with no prepayment penalties. But before you make that last payment, consider these pros and cons of paying off student loans early.
Pros of Paying Off Student Loans Early
Freedom and Less Stress
Paying off your student loans early allows you freedom in your life since you are not burdened down by large debt payments. You will have less stress without a large loan payment every month. Paying your loans off also allows you to explore different job opportunities you may have shied away from due to your student loans, such as taking a dream job at a non-profit that pays less than a corporate job.
Save on Interest
One significant benefit of paying your student loans early is the amount you can save on interest costs. Making extra payments can save thousands of dollars in interest, depending on your loan balance and interest rate.
More Money to Budget
Once your loans are paid off, you can use that money for other financial goals or for fun items you have been putting off. Saving for a down payment on a house or taking a dream trip will be more feasible when you have additional money in your budget.
Improve Credit Score and Debt-to-Income Ratio
Once your student loans are paid off, you may see a bump up in your credit score with less debt to your name. Fewer loans will also help improve your debt-to-income ratio, which will be important if you are looking to take out a mortgage.
Cons of Paying Off Student Loans Early
There is no doubt that there are great benefits to paying off student loans early, but there are also some drawbacks to consider. It may not be wise to make additional payments or a large payment on your loans in certain financial circumstances. Here are a few circumstances to watch for.
You Can End Up in More Debt
If you are contemplating making additional payments, but you do not have an emergency fund, you may want to hold off. Not having any money saved for an emergency can set you up for more debt.
An unexpected expense may come up, whether an unplanned medical bill, car repair or another expense. 61% of Americans cannot comfortably afford to pay for a $1,000 emergency. Most experts agree you should try to save at least $1,000 before attacking debt.
You Can Derail Your Retirement Plan
Focusing all your extra money towards debt payments can make you miss out on large returns on retirement investments while you are still young. Starting to save for retirement early allows you to take advantage of compound interest.
Increasing Your Credit Card Debt
If you put all your money towards paying off your loans early and then have an emergency, you may have to turn to credit cards if you do not have an emergency fund. This can cause you to have more debt at a higher interest rate than your student loans.
Focusing on paying off your student loans early also takes your attention away from other debts, like credit card debt. Compare your interest rates on your student loans and credit card debt before deciding which to focus on.
When to Pay Off Your Loans Early
It is financially beneficial to pay your student loans off early in most circumstances. If you can start paying student loans while in school, you can avoid capitalized interest and save more money in the long run.
If you have an emergency fund, contribute towards a retirement account (especially up to any employer matching contributions), and have no higher interest debts, paying off your student loans early is generally a financially savvy move.
When Not To Pay Off Your Loans Early
If you do not have anything saved for an emergency, are not contributing towards a retirement account or are struggling with higher interest debt, like credit card debt, it may not be the right time to make large payments towards your student loans.
Should You Pay Off Other Debts, Invest or Save First Instead?
You may wonder whether investing, saving or paying debts is a better financial move.
If you are trying to decide whether to focus on investing while paying down your student loans, consider that some student loan interest rates may be much lower than the returns you could receive from investing. In that case, it would make more sense to contribute towards investing since your money could have a larger return than paying off the lower interest rate student loans.
Trying to decide to pay down student loans or invest in a 401k? Many factors can determine which is the right decision for you, including whether your employer offers matching contributions.
If you are struggling with high-interest credit card debt and deciding whether to pay off student loans early, in most circumstances, it would be best to focus on paying down your credit card debt before tackling student loan debt.
How to Pay Off Student Loans Early
There are many ways to help pay off student loans early. Here are some options to implement:
Make Extra Payments
To pay your loans off early, make additional payments can be a smart move. Just be sure the extra payments are applied to the loan principal and not applied to next month’s payment.
Take Advantage of Benefits
Some loan providers give a discount on your interest rate for signing up for autopay on your loans. Take advantage of this and apply the savings towards your loans. You may also ask whether your employer offers any student loan repayment benefits.
Student Loan Refinancing
Student loan refinancing could allow you to obtain a new loan with a shorter repayment term, thereby paying your loans off early. Another possibility when refinancing is obtaining a loan with a lower interest rate. The lower interest rate will often result in a lower monthly payment. The savings can then be applied to your new loan as additional payments and help pay off your student loans quicker while saving on interest costs.
Refinance Your Student Loans With ELFI & Save
Student loan refinancing can be a financially wise move to help pay your loans off early. There are many benefits of student loan refinancing with ELFI. You may be able to:
- Save money on interest costs
- Lower your monthly payments
- Change your student loan repayment term
- Get a rate quote without affecting your credit score
- Personal Loan Advisor to help answer any questions
- Consolidate multiple loans into one loan
- Remove a cosigner
Bottom Line
In most circumstances it is a good idea to pay debt off early – just be sure you are prepared with an emergency fund and have paid down other high-interest debt. Tackling debt is a great financial goal to work towards, good luck!