Should You Pay Off Your Student Loans Early?
Getting ahead of your debt is generally a smart move; however, if it comes at the cost of avoiding other debt, or overshadowing other benefits you may be receiving, it could set you back in the long run. In this article, we’ll run through the pros and cons of paying 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 = 0.28, or a 28% 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 six to 12 months of living expenses 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
You can only deduct up to $2,500 in student loan interest paid per 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)1 or Income-Driven Repayment (IDR).
How to pay off your student loans early
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.
