Paying Off Student Loans Early: Everything You Need To Know

Paying off student loans early may make sense, especially if you can afford to and it will save you significant money in interest charges. That being said, if you’re in a situation where you may be able to have your federal student loans forgiven or your loan has a prepayment penalty, it may not be the right choice for you.

Ultimately, whether you should pay off your student loans early will depend on your financial situation and loan balance.

Can You Pay Off Student Loans Early?

Yes, paying off a student loan in full at any time is usually allowed. In many cases, there are no prepayment penalties, though it’s worth checking with your loan provider to be sure. Even still, paying off your student plans early may not be the best move, unless you absolutely can afford to do so without compromising your other financial obligations.

Pros And Cons Of Paying Off Student Loans Early

Paying off your student loans early is a major financial decision that shouldn’t be taken lightly. It’s key to look at the advantages and disadvantages in order to understand all the factors that go into paying off student loan debt early.

Pros

• Savings on interest: The lower your principal balance, the less interest you’ll accrue overall. You could save thousands of dollars over the life of your loan by paying down your loan principal early.
• Lower debt-to-income ratio (DTI): Your DTI compares your income to your current debt obligations. The lower this number, the more positively you could look to lenders. This is helpful if you’re trying to qualify for other loans.
• No more debt: It can be a big stress-relief if you no longer have to account for your student loan debt. The sooner you pay off your student loans, the sooner you may be able to use your money towards other goals.

Cons

• The need to spend more money upfront: In order to pay off your debt early, you must make higher monthly payments or put a big lump-sum payment down. This can be difficult in the short term. In other words, having less wiggle room in your budget could be risky, especially if you face emergencies, like a major home repair or unexpected job loss.
• Becoming distracted from other financial goals: Putting more towards your student loans now could mean having to set other financial goals aside, such as buying a new car or saving for a down payment on a house. It could even limit your ability to work on other important aspects of your financial future, such as establishing an emergency fund or saving for retirement.
• Being unable to attack the highest-interest debt: Student loans may have lower interest rates compared to credit card debt or other forms of high-interest debt. It may save you more money in interest charges to tackle higher-interest debt first.
• The potential for unnecessary spending: If you have federal student loans and you are a public servant or work in another qualifying profession, you may be eligible for student loan forgiveness. In this case, paying a loan back early can mean spending a lot of money you didn’t need to spend.

Should You Pay Off Student Loans Early?

There are several factors to consider when deciding whether to pay off your student loans early, including your other financial obligations and aspects of your financial health.

1. Do You Have An Emergency Fund?

An emergency fund is money you set aside specifically for unexpected expenses like car repairs, medical bills, or a job layoff. Most experts recommend having anywhere from three to six months’ worth of living expenses to ensure there are enough funds to draw from should the unexpected happen.

If you don’t have enough money saved in an emergency fund or even some extra cash in your savings account, it’s probably better to use the money to build up those reserves before tackling your federal student loan debt.

For those who have enough money in your emergency fund, then any extra money left over from your regular budget could go towards your student loan debt.

2. Are You Saving For Retirement?

Long term goals, such as saving for retirement, are just as important as your other financial goals, especially because your money can grow more the sooner you start investing. That said, you’ll want to be able to set aside some funds for your golden years, whether it’s in an IRA or an employer-sponsored retirement plan.

While it may not be a major deal breaker, not saving for retirement now means you won’t be able to tap into the biggest advantage when it comes to investing: time. If you have an employer-sponsored plan like a 401k, you could be missing out on a free employer match to contributions you make. Consider starting a retirement account before paying down your student loans.

Setting aside money already? Then you can consider whether it makes sense for you to add student loan principal payments into your budget now.

3. Do You Have Other Debt With A Higher Interest Rate?

Federal student loans tend to have lower interest rates than credit cards, personal loans and private student loans. Having a large amount of high-interest debt on a credit card can cost you more in interest over time than your student loan interest. If you’re not sure, do your research to compare the interest rates of your student loans compared to any other debt you may have. It may be better to put your money towards paying your high interest loans down first.

In the meantime, consider different tactics, like the snowball method, for paying off debt. It’s also a good idea to learn about getting out of debt if you have a lot of it.

4. Can You Afford To Pursue Other Financial Goals?

While it might be tempting to pause everything to tackle student loan debt, it might not be the best strategy in the long run.

Ultimately, you need to be able to comfortably afford to pay off your student loans early. Otherwise, you could put yourself at financial risk. Look at your budget: can you afford all the necessities, other debt payments, savings and retirement goals, and still have plenty left over?

If so, you can consider paying off some of your student loans early. Otherwise, you could be better off putting extra money toward activities with a higher return on investment (ROI) instead of making additional payments on your student loans.

Tips For Paying Off Student Loans Early

If you want to pay off your student loans, the following tips could help you manage and pay off the debt faster:

• Make biweekly payments. Making bi-weekly student loan payments could help borrowers pay off their student loan debt faster. This method requires you to make half a month’s payment every 2 weeks instead of once a month; you’ll end up making 26 payments a year, or 13 full payments. Before doing so, check with your loan servicer to see if this is possible, and whether the amount will go towards the principal, or both principal and interest.
• Pay more than the minimum. Paying more than the minimum monthly payment could help borrowers pay down their student loan debt faster and it can be directly applied to the principal balance (check with your lender to confirm this). This also means you’ll pay less interest overall when you put more money towards your loans than is required each month.
• Refinance. Refinancing your student loans could help you save thousands of dollars in interest, assuming you can qualify for a loan that has a significantly lower interest rate. If you combine tactics like refinancing and paying more than the minimum,  you may be able to really start to make a dent in the principal balance. Keep in mind that if you refinance your federal student loans, you’ll have to refinance to a private lender. Doing so means you’ll lose out on federal loan benefits such as income-driven repayment plans.
• Make lump-sum payments. If you get a bonus from your job or have an unexpected financial windfall, putting a lump sum of extra cash toward the principal can be one of the fastest ways to pay off the debt.

The Bottom Line

It’s important to weigh all the benefits and drawbacks of paying off student loans early before making your decision. The best choice will depend on your unique financial situation. Look at all the different options, calculate how much interest you'll save if you make extra payments and decide what's best for you.

To get a better insight into your financial situation, create a free account with Rocket Money today to monitor monthly bills, track your spending and create a budget that works for your needs.