Should I Pay Off My Student Loans Early?

Paying off your student loans early seems like a dream come true. However, while paying off any type of loan early would seem to be ideal, the reality is that there could be some viable reasons to consider waiting before you fully pay off the balance on your student debt. This is because, in some instances, it may actually make more sense to put your money to work in other areas first.

There can be strong arguments for either side. So, before you actually pay off your student loans early, be sure that you are aware of which direction is really right for you. And for those of you that it makes sense for, we’ll recommend a few tips on how to pay it off faster.

Should I Pay Off My Student Loans Early

Pros to Paying Off Your Student Debt

It can be such a great feeling to finally have your student loans paid off. For many recent graduates, this is the only large debt that you currently have. However, if you ever plan on getting a mortgage or other large loans in the future, ridding yourself of your student loan balances can be extremely beneficial.

Lowers Debt to Income Ratio

One big factor on the plus side for paying off your student loans is that it can help in lowering your debt to income ratio. What this means is that you will have more income than outgo – which shows up as a positive factor to lenders if you are applying for financing such as a mortgage or a car loan.

More Funds Available to Invest

Having less money going towards your student loan payments means that you can put more towards saving and investing for your future. While retirement may seem like it is eons away, the more you sack away now, the more time it has to grow and compound exponentially over time.

Reasons Not To Pay Off Your Student Loans Early

While there are certainly many reasons to rid yourself of student loan debt, there can be some good arguments for hanging on – provided that the payment isn’t detrimental – and moving forward with some additional perks.

The Tax Deduction

You may qualify for a tax deduction on the interest that you pay on your student loan. Depending on the situation, you could be able to deduct up to $2,500 in interest each year. This, however, could still be a double-edged sword in that being rid of the debt completely may be the better option.

Build an Emergency Fund

Many financial advisors suggest having a readily available “emergency fund” in case of, well, an emergency. This could include the need for cash for anything from a fender bender to an unexpected period of unemployment.

Being able to pull cash from a savings account can be much more beneficial than having to dip into your retirement fund – or worse yet, having to put your emergency expenses on a credit card with 20% (or higher) interest charges.

Ideally, your emergency fund should have between three and six months’ worth of living expenses in it. But, when just starting out, any amount can be helpful. Funding this account can be another factor to consider in lieu of putting all of your extra cash towards paying down your student loan balances.

Enjoy Life Now

While paying your bills is always an important piece of advice, the truth is that you are only young once. So, in some cases, as long as you are able to keep a handle on making your student loan payments, you may not want to over-burden yourself financially by trying to pay off your loans early. In other words, don’t strive so much on just paying off your student loans right now that you neglect to experience and enjoy life as a young adult.

Important Factors to Consider

Even after jotting down your pro / con list, there are still some additional factors that are important for you to consider when deciding whether or not you should pay off your student loans in full right now.

For example, even if you are able to deduct student loan interest on your taxes, it is important to determine just how much the debt is actually costing you each month because of the payment itself. In other words, what is the possible opportunity cost that you may be missing out on?

In order to get a better idea of this figure, consider the difference between what you are paying on the loan versus the amount of return that you could be earning on an investment in a certain mutual fund. Because you have a student loan payment to make each month, it could essentially be holding you back from having or doing other things.

How to Get Your Student Debt Paid Off

If you do opt to go the route of paying off your student loans early, there are some strategies that you may want to consider for speeding up the process and crossing this big task off your list.

One way to pay off the loans more quickly is to make a higher amount of payment each month. Oftentimes, people will use this same strategy for paying off a mortgage faster. By making the additional payment, you will be paying down your principal more quickly, and potentially cutting years from your total payoff.

You may also want to check for possible refinancing options. If there is a way to move the loan over to a lower interest rate option, you might be able to lower your payment and / or the term of the debt.

Other Options for Easing the Student Loan Burden

Even if you don’t get all of your student debt paid off in full, it can help to pay more than just the minimum payment each month. This can help you to save on the interest, and it will also result in shortening the overall length of the loan repayment period.

If you have more than just one student loan, another potential option could be to consolidate all of your loans into just one. This can provide you with just one simple monthly payment – which may be less than the total of what you were paying previously.

If you do decide to go this route, though, be sure that you don’t end up taking on a higher amount of debt overall. This is because sometimes, consolidating multiple loans can result in a lower monthly payment, but it can also mean making payments on the new loan for a much longer period of time.