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Can I Pay Off My Student Loans Early?

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In a Nutshell

One commonly asked question is if college graduates should pay off their student loans early. The short answer to that question is, “it depends.” This article will examine the various factors to consider before paying off student loans early. And if repaying student loans ahead of schedule is the right thing for you, we’ll also discuss how you can go about doing this.

Written by Curtis Lee, JD
Updated May 15, 2023

When it comes to debt relief and financial advice, student loans get a lot of attention. There’s a good reason for this, as education debts can have a huge effect on an individual’s finances and future life goals, like getting married, buying a house, and starting a family.

One commonly asked question is if college graduates should pay off their student loans early. The short answer to that question is, “it depends.” 

This article will examine the various factors to consider before paying off student loans early. And if repaying student loans ahead of schedule is the right thing for you, we’ll also discuss how you can go about doing this.

Should I Pay Off Student Loans Early? 

At first glance, it seems like making higher or additional student loan repayments to pay off a student loan debt before it comes due is a no-brainer. But if you’re lucky enough to have extra cash to do this, it may not always be the best financial strategy. 

Whether you decide to pay off your student loans early or not, there are several things to keep in mind: 

  • First, always make sure you make your monthly payments on time. The last thing you want to do is pay extra money in the form of late fees or hurt your credit score.

  • Second, remember that there is no penalty for early repayment of your federal student loans.

  • Third, don’t discount the psychological effect of student loans. While not everyone will view debts the same way, having an emotional weight lifted after paying off a student loan could be worth an added financial cost.

Before you make a decision, it’s a wise move to explore and consider all your options.

What Should I Do Before Paying Off Student Loans Early? 

Before spending any extra money you might have on extra payments for your student loan debt, you’ll want to do three things. Doing these three things will ensure you not only pay as little money as possible in interest but also maximize the return on your cash flow and avoid getting into a precarious financial position.

1. Establish an emergency fund. 

Without an emergency fund, all it takes is one surprise bill to force you into a financial predicament. Even if you can use credit cards to avoid missing a monthly payment on your other loans or bills, now you’re facing the prospect of carrying a balance each month and paying those high interest rates.

Ideally, you want your emergency fund to be large enough to cover 3 to 6 months’ worth of expenses. But for many people, having that much cash on hand in a savings account is unrealistic. So at the very least, strive to have enough money to cover at least one month’s worth of typical living expenses.

2. Maximize Your Retirement Savings.

401(k) and 403(b) are special retirement plans that allow employees to invest money for retirement with certain financial advantages. One of the biggest advantages is that payments made to either plan can help reduce the taxes you owe for that particular tax year.

Another advantage is that many employers offering the 401(k) retirement plan will match a portion of what you contribute. So if you put $2,000 into your 401(k) one year and your employer will match 50 cents for every dollar you invest, you will have $3,000 in your 401(k) at the end of the year. This comes from the $2,000 you invested and the $1,000 matching contribution from your employer.

The tax advantages and matching benefits of 401(k) and 403(b) retirement plans are subject to contribution limits for each year. If you’re not hitting these limits, you’re losing out on free money from your employer or lower taxes when you file in April. 

Finally, don’t forget the benefit of compound interest. The earlier you save, the more you can take advantage of this principle. 

3. Pay Off Higher-Interest Debt First.

If you have other debts with higher interest rates, such as credit cards, it’s almost always going to be a better financial decision to pay those debts off first. The typical credit card debt will have an interest rate of around 15%, although some credit card interest rates can easily exceed 20%. In contrast, student loans often have lower interest rates that are closer to 5% or so. 

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When Is It Not the Best Idea to Pay Off Student Loans Early? 

Depending on your financial landscape, paying off your student loans early may not be the wisest decision. 

For example, would you qualify for a student loan forgiveness program, such as the Public Service Loan Forgiveness program? If so, you’ll want to confirm how much of your student loans are eligible for forgiveness compared to what you might pay in a standard 10-year student loan repayment plan. 

Depending on how the numbers come out, it might be better to take advantage of a student loan forgiveness program instead of paying off your student loans early.

What Should I Consider If My Student Loan Interest Rate Is Low?  

Many federal student loans will have interest rates around or below 5%. But refinance a student loan or get one from a private lender, and the interest rate can range anywhere from 2% to around 15%.

Imagine you have a car loan with a 5% interest rate and a $10,000 principal balance. Imagine that you have a student loan debt of $10,000 with an interest rate of 3%. Each of these debts has a five-year loan term. At the end of these loans, you’d pay $1,322.74 in total interest with the car loan and $781.21 in total interest with the student loan. It’s easy to see why paying off the higher-interest debt first is the better option.

What Else Can I Consider When Thinking About Paying Off Student Loans Early? 

How much you’ll have to pay in interest for your student loan is just one part of the equation. Another major factor to think about is what your financial goals are.

Do you want to buy a house soon? If so, you’ll need to save up some money for a down payment. Depending on the terms of your mortgage, you’ll want to make a down payment that’s at least 20% of your home’s value. If you don’t do this, you risk getting a higher interest rate for your mortgage or having to pay for private mortgage insurance.

Then there’s examining what’s going on with the laws concerning student loans. Over the past few years, there have been steadily increasing discussions in Washington, D.C. about forgiving student loan debt. The last thing you want to do is pay off your student loan only to hear that it was eligible for forgiveness a few months later.

Even if there isn’t loan forgiveness, Congress could pass laws that may affect your student loans. For instance, due to the coronavirus pandemic, Federal Student Aid announced deferment relief to borrowers in the form of a temporary suspension of certain student loan payments and collections. They also temporarily reduced the student loan interest rate to 0%.  

If this type of relief were to continue for the next six months, you’d likely want to wait six months before paying any student loans off.

How Can I Pay Back My Student Loans Early?

There are two aspects to consider if you’ve decided to pay back your student loans early. First, you need to figure out the process of paying back your student loan debt more quickly. Second, you’ll want to find a way to have extra money to make additional payments to reduce your student loan balance.

The Mechanics Of Paying Off A Student Loan Early. 

One way involves setting up your student loans for autopay and paying a little extra each month. Even an additional $20 per month can make a significant dent in your student loan over time. 

Another benefit of this approach is that you don’t have to think about the extra money you’re paying. It’s deducted automatically, and before you know it, you’ve adjusted to this change in your monthly cash flow.

Another option is to use a credit card to pay down your student loan. This will make financial sense if your credit card offers rewards that exceed the transaction fees or the credit card has an interest rate that’s lower than your student loan’s interest rate. Also, make sure you have a financial plan to pay off this credit card. Otherwise, you’ll find yourself trying to pay off that credit card without any money.

How To Find The Funding To Pay Off A Student Loan Ahead Of Schedule 

The most obvious way is to increase your income. There are various ways to go about doing this, like starting a gig or side hustle. If you have plenty of free time and live in a well-populated area, perhaps driving for a rideshare company is something to consider. If you’re artistic, maybe you can sell crafts on eBay or Etsy.

Other possibilities include finding a higher-paying job or asking for a raise. You may be able to obtain either by asking. But often, you must enhance your skills and knowledge to become more marketable and in-demand. Luckily, there are many free online classes, MOOCs (massive open online courses), and programs available from organizations like Microsoft and LinkedIn.

Next, you can free up some extra cash by reducing your expenses. To do this, you’ll want to create a monthly budget so you can fully understand how much your expenses are and which ones are essential and which ones are luxuries. 

For example, your internet bill is probably an essential monthly cost. Even if you use it for personal reasons most of the time, you still likely need it for school or work. But the chances are good that your Netflix subscription is a luxury expense.

If you come across any windfalls, like a tax refund or some inheritance money, you can earmark all or part of that to go to a student loan repayment.

Lastly, see if your employer will pay off some or all of your student loans. While not available everywhere, some companies will have student loan repayment options as an employment benefit.

Let’s Summarize

Student loans are worthy investments, but can sometimes get in the way of achieving specific life goals or hurting your psychological well-being. This means you might feel the temptation to pay off your student loans early.

Depending on your goals in life and your financial situation, paying a student loan off early may be an excellent decision. This is especially true if your student loans have the highest interest rates of all your debts, you have no other debts, or you are otherwise financially secure. 

Even if you have the financial ability to pay off your student loan early, there could be other factors that might mean it’s better to hold off, such as your student loan being forgivable, so make sure to investigate all of your options before deciding what to do.

Written By:

Curtis Lee, JD


Curtis Lee is a writer and co-owner at Marvel Hill Freelance. Curtis earned his Bachelor of Science in Business from Wake Forest University and his Juris Doctor (JD) from Villanova University School of Law. After graduating law school, Curtis had the honor of clerking for a stat... read more about Curtis Lee, JD

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