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The Pros and Cons of Paying Off Student Loans Early

Published August 20, 2020

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Student Loan
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Despite what you may think, paying off your loans as soon as possible isn’t always the best thing to do.

Getting ahead of your debt is, in general, 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.

Pros of Paying Off Student Loans Early

Cons of Paying Off Student Loans Early

When you can save money by avoiding interest When you haven’t built up an emergency fund
When you need to lower your debt-to-income ratio When you’re fully utilizing your tax advantage
When you’re looking for a return When you’re taking advantage of federal loan repayment options
When you feel stressed out by your debt, even while making payments When you would create higher interest debt

When it makes sense to pay off your student loans early (if you can afford it)

When you can save money by avoiding interest

While student loans tend to have lower interest rates than other common forms of debt, such as credit cards, the substantial cost over time can be alleviated by paying off your loans sooner, thus incurring less interest.

When 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 = .28, or 28% DTI ). A low DTI signals to lenders that you can likely make timely monthly payments and are able to handle debt responsibly. 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.

When you’re looking for a return

You can look at paying off your student loans as having a positive return on investment in yourself and your future. Good debt is debt on an investment that will grow in value, generate long-term income, and increases your net worth. Bad debt is a debt incurred to purchase things that quickly lose their value and do not generate long-term income; also carries a high-interest rate, like credit card debt. Through the lens of good debt vs. bad debt, many consider student loans to fall squarely in the good debt category.

When 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 is a smart move. If monthly student loan payments cause a lot of stress for you, early payoff is a good thing to consider.

When it’s not worth it to pay off your student loans early

When you haven’t built up an emergency fund

Having 6-12 months of living expenses in cash, readily available and on hand in the case of an emergency or financial stress, is universally regarded as smart and resourceful. Don’t threaten those savings by using them to pay off student loans. If you are having to consider tapping into your emergency savings, consider some alternatives — now is probably not the right time for early payoff.

When you’re fully utilizing your tax advantage

Seeing that interest on student loans is tax deductible up to only $2,500 each year, it may not be worth it to pay more towards your student loans each month, as you may forfeit this advantage. To see if this is a consideration, please consult a tax professional or financial expert.

When you’re taking advantage of federal loan repayment options

Certain federal loan repayment options you may be benefitting from include forgiveness programs such as Public Service Loan Forgiveness (PSLF), or Income-Driven Repayment (IDR). If these plans afford you the peace of mind to meet your goals and pay your loans at the right pace for you, there’s likely no need to change things up. To learn more about the forgiveness benefits from PSLF and IDR go to studentaid.gov

When you would create higher interest debt

It usually doesn’t make sense to prioritize student loans over higher interest debt, such as credit card debt. Avoid these scenarios that incur higher interest rates such as putting money on a credit card or personal loan to pay off your student loan early.

How to pay off your student loans early

  1. Make extra payments automatic

    For some lenders, setting up autopay can come with a rate reduction and is worth looking into—not only for the convenience, but for the savings, too. To pay extra, you can set up your preferred payment amount via autopay and forget about it.

  2. Look for employers that help with student loans

    Some employers offer direct student loan repayment assistance as part of their compensation packages. It is increasingly common to find this offering from employers, so be sure to ask about it when interviewing if it’s important to you.

  3. Refinance your student loans

    Refinancing allows you to take out a new consolidated loan with a private lender—and if you have a strong credit history and meet certain criteria, potentially get a lower rate. If you obtain a lower rate with a shorter loan term you could pay off your loans sooner, reducing the overall interest paid over the life of the loan.

If you are refinancing any Federal Student Loans with us, you will no longer be able to take advantage of Federal Student Loan repayment options, including but not limited to Income Based Repayment (IBR), Public Service Loan Forgiveness (PSLF), or Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE). Additionally, Federal Student Loans offer deferment, forbearance and loan forgiveness options that may not be available with Laurel Road. For more information about these benefit programs and other Federal student loan programs, please visit studentloans.gov.

In providing this information, neither Laurel Road or KeyBank nor its affiliates are acting as your agent or is offering any tax, financial, accounting, or legal advice.

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