Should I Pay Off My Student Loans Early?
If you have the means, paying off student loans early could save you money on interest. But there are other considerations.
Contributing Writer at Tally
October 8, 2021
It’s always better late than never, but what about being early as opposed to on time?
More than 43 million Americans have student loan debt, totaling more than $1.73 trillion.
If you’ve recently reviewed your finances and found that you have the means to pay off your student loans early, you may be wondering whether that actually makes financial sense.
There is a case for not paying off some debts early. For instance, mortgage rates are lower than the average stock market rate of return. In essence, the interest you save by paying off your mortgage early may not be as much as you could earn if you invested that extra money in the stock market instead.
In this article, we’ll look at the case for student loans and answer the question, “Should I pay off my student loans early?” This information can help you decide if early repayment is right for you.
Why early payoff is not straightforward
Determining whether you should pay off your student loans early is not always simple. The answer depends on your personal finances — though there are some general rules that apply.
The main reason why early payoff is not straightforward is because of loan forgiveness programs for borrowers.
There are numerous situations in which student loan forgiveness could apply, and it could save you thousands of dollars as part of your repayment plan. Examples of the forgiveness programs available include:
Public Service Loan Forgiveness: This is meant for government employees and those who work for nonprofits. If you work full-time for a qualifying employer, you are eligible for this program after making 120 monthly payments.
Teacher Loan Forgiveness: This is meant for teachers who work in low-income elementary schools, secondary schools and educational service agencies. If you work in one of these areas for five full and consecutive years, you can have up to $17,500 of your loan forgiven.
Perkins Loan Cancellation and Discharge: This is meant for those with Perkins Loans. The loan can be canceled or discharged based on certain employment or volunteer-based criteria.
Recently, student loan forgiveness has been a topic of conversation within the federal government. President Joe Biden canceled $1.5 billion of student loan debt via the “borrower defense to repayment” rule. There have also been calls to cancel $50,000 in debt for all student loan borrowers.
It remains to be seen if a blanket forgiveness program will be put into effect — but even if it is, it may only apply to federal student loans and will not cover those who have private lenders.
Therefore, when determining whether you should pay off your loans early, start by looking into forgiveness programs. If you are close to being eligible for forgiveness, then it may make sense to continue making the minimum student loan payment and waiting until your eligibility kicks in.
On the other hand, if you are a long way from eligibility, you may save more money on interest — depending on your interest rate — than you would ultimately have forgiven. In these cases, early student loan repayment might make sense.
There are complimentary advisors available to help you work through these decisions.
When deciding if you should pay off your student loans, it’s important to think about the other types of debt you have and your overall financial health. Let’s take a closer look at some of the factors you should be considering.
The types of debt you have
When it comes to evaluating your current debts, there are three things to be aware of:
The interest rates
If the interest compounds
If the interest rates are fixed or variable
For instance, a mortgage doesn’t have compounding interest. Mortgages often have low interest rates that are fixed, so you know exactly how much you need to pay each month. If you have a bit of extra money, it may not hurt to put it toward a payment every now and then, but generally speaking, paying off a mortgage might not be a high priority.
Credit card debt is different. Credit cards often have higher interest rates than other lending options. Plus, the interest compounds, which means you’re charged interest on top of interest.
Student loan interest rates fall somewhere in the middle. Most federal student loans use simple interest; though private student loans may use compounding interest.
Your interest rate can influence which debt you pay down first. When it comes to your debt repayment options, the debt avalanche method calls for you to pay down your highest-interest debt first. In this scenario, it makes more sense to pay off your credit cards first while continuing your minimum monthly student loan payments.
On the other hand, there is the debt snowball method, which calls for you to pay down your debt with the smallest balance first, regardless of your interest rates.
With this method, if you have a $3,000 balance remaining on your student loan and a $5,000 credit card balance, you would pay the student loan first.
Deciding between the debt avalanche method and debt snowball method is a matter of personal choice and your financial situation. Choosing the right method for you can help you determine whether you should pay down your student loans early.
Your financial health
If you are financially healthy, you have a bit more flexibility in paying down debt. One measure of financial health is whether you have an emergency fund in place. An emergency fund is cash set aside in a savings account for things like surprise medical bills or an unexpected car repair.
If you do not have the cash to cover these expenses, you will likely end up having to put them on a credit card or taking out a personal loan to cover the balance. Neither of these are desirable options.
Consider paying student loans down early if you can work it into your budget without giving up the security that comes with having an emergency fund.
Your financial metrics
You may want to improve your financial metrics if you are interested in securing future lending, like for a car or a home. If this is the case for you, paying off your student loans can:
Tools to help pay off your loans
If you think that you’d like to pay off your student loans early, you might consider refinancing or consolidation.
With a student loan refinance, a third-party loan servicer, like a bank or credit union, will pay down the existing balance on your student loan. The amount that was paid off now becomes the principal balance on a new loan that you owe back to the loan servicer.
Refinancing can potentially provide you with more favorable loan terms and repayment terms as well as a lower interest rate.
Consolidation is an option if you have multiple loans. You can combine multiple loans into one loan so that you only need to worry about making one monthly payment. You might be able to secure a lower interest rate through consolidation.
Should I pay off my student loans?
Any time you can get out of debt it’s a good thing and something to be celebrated, but the decision to pay off your student loans early is a complicated one.
If you qualify for any of the student loan forgiveness programs, you can have your debt forgiven and you may be able to save considerably. Student loan advisors can help you evaluate your personal situation.
Another consideration is if you have other types of debt with higher interest rates — you may want to pay those down before paying off student loans.
If you need to tackle higher-interest credit card debt, consider using a tool like Tally†. Tally is a credit card payoff app that automatically pays down your balances efficiently, ensuring you make all minimum payments. Even if you do not have credit card debt, the Tally app can help you stay on track and manage your monthly payments.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.