Should I Pay Off My Student Loans Early?

Paying off your student loans early can offer significant financial benefits, such as saving money on interest and achieving debt freedom. However, it’s important to assess your overall financial health first, including building an emergency fund and contributing to retirement savings. This decision requires careful consideration to ensure it aligns with your broader financial goals.

06.03.2023

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17 min.

Can You Pay Off Your Student Loan Early?
Should You Pay Off Your Student Loan?
Pros and Cons
How to Pay Off a Student Loan Early
Conclusion

Paying off student loans early can feel like complete freedom from debt and taking control of your finances. While it will save you interest, make sure you’re financially ready for the decision. Rushing to pay off your loans without considering the big picture could lead to new financial problems. Before you leap, you need to determine if paying off your loans is the best for your overall financial health.

Should I Pay Off My Student Loans Early?

Can You Pay Off Your Student Loan Early?

Most federal and private student loans can be paid off early with no prepayment penalties. So if you can, you can make extra payments or pay off the entire balance ahead of schedule. While it will save you interest in the long run, make sure you’ve thought this through for your situation.

Should You Pay Off Your Student Loan?

Deciding to pay off your student loan depends on your situation. Paying off your loans is a big accomplishment but make sure it’s not at the expense of other financial goals. Before you prioritize student loan repayment, you need to first establish an emergency fund, contribute to retirement (at least enough to get any employer match), and address any high-interest debts you may have. Then you can focus on paying down your student loans systematically.

When to Pay Off a Student Loan Early

You’ve already prioritized retirement savings. If you’ve been consistently saving for retirement and are on track to meet your long-term goals, it might be smart to put any extra income toward paying off your student loans. Having your retirement contributions in place first ensures you’re securing your future while also reducing your student debt.
Your income covers your goals comfortably. If your income allows you to cover your daily expenses, save for other important goals, and still have extra funds, it might be a good time to focus on eliminating your student loans sooner rather than later.
All high-interest debts are cleared. Once you’ve paid off credit card balances or other high-interest loans, you may be in a good position to redirect those funds towards paying down your student loans more quickly, especially if they have lower interest rates than the high-interest debts you’ve already cleared.
Emergency fund is in place. It’s key to have a fully funded emergency fund, ideally 3-6 months of living expenses, before considering paying off your student loans early. This ensures you’re prepared for unexpected situations and won’t be financially vulnerable.
Private loans have high interest. If your student loans are private and have high interest rates, paying them off early will save you a lot of money in the long run. These loans often don’t have the protections that federal loans do, so paying them down faster is a smart financial move.

When It’s Not Worth to Pay Off a Student Loan Early

You haven’t started saving for retirement. If you’re not yet saving for retirement, that should be your top priority. Many employers offer 401(k) matching, which means contributing enough to get the full match is essentially free money. For self-employed, alternatives like SEP IRAs or solo 401(k) accounts can help you save for retirement and reduce taxable income. Without this foundation in place, it’s better to focus on retirement savings first rather than rushing to pay off your student loans.
You still have high-interest debt. High-interest debts, like credit cards, should be tackled before focusing on student loans. Credit cards often have interest rates above 20%, making it much more expensive to hold onto this debt compared to student loans, which are usually lower. Clearing high-interest debt first can provide more long-term financial relief and free up money to pay off your student loans later.
You don’t have a savings cushion. If you haven’t built an emergency fund, that should be your priority. Without savings, you could find yourself relying on credit cards or loans to cover unexpected expenses. According to a recent survey, many Americans have more credit card debt than emergency savings, putting them at financial risk. It’s essential to have at least 3-6 months' worth of living expenses saved up before putting extra funds towards student loan repayment.
You’re eligible for federal loan forgiveness programs. If you have federal student loans, you may be eligible for programs like income-driven repayment plans or Public Service Loan Forgiveness, which could reduce or eliminate part of your loan balance. If you’re considering these options, it may not be wise to pay off your student loans early, as doing so could forgo the opportunity for loan forgiveness.

Pros and Cons

Interest savings. Paying off your student loans early will save you a lot of money in interest over time. The longer your debt remains, the more interest you end up paying, which could otherwise go towards other financial goals like savings or investing.
Psychological benefits. Carrying debt can be mentally taxing and affect your overall well-being, including your health and relationships. Paying off your student loans early will reduce stress and give you a sense of accomplishment, leading to more peace of mind and emotional relief.
Financial flexibility. Once your student loans are paid off, you have more financial freedom to focus on other goals, like saving for retirement or buying a home. However, the trade-off is that prioritizing loan repayment might delay your ability to save for these bigger goals in the short term.

Opportunity cost. By not paying off your student loans early, you have the opportunity to invest your income elsewhere. If your student loan interest rate is lower than the potential returns from investing in the stock market, you may be able to grow your wealth more effectively by choosing to invest instead of paying off loans.
Liquidity concerns. Directing extra income towards paying off student loans means less disposable income for emergencies or unexpected expenses. Without a financial cushion, you might find yourself in a tough spot if you need access to cash quickly.
Loss of tax benefits. Student loan interest can be deducted from your taxable income, reducing your overall tax bill. Additionally, using disposable income to contribute to tax-advantaged retirement accounts might provide more long-term benefits than paying off your loans early, as this can also lower your taxable income.

How to Pay Off a Student Loan Early

Make extra principal payments. By throwing a little extra towards your student loan each month, you can shave years off your repayment term. Even $25 more a month can help you pay off your loan faster and save on interest. But always make sure you have an emergency fund in place before allocating more money to debt repayment.
Set up autopay. Many student loan servicers offer a 0.25% interest rate reduction if you sign up for automatic payments. While this might not seem like much, it adds up over time and ensures more of your monthly payment goes towards reducing your loan balance.
Pay interest while in school. If possible, pay interest only while in school. This prevents interest from capitalizing on your loan balance when you graduate and reduces the total amount you’ll need to repay. Even small payments prevent your balance from growing and set you up for an easier repayment experience.
Make biweekly payments. Instead of making monthly payments, try paying half your loan payment every two weeks. This adds up to one extra payment per year and can cut your loan term and interest paid by years.
Don’t extend your repayment plan. While extending your loan term lowers your monthly payment, it increases the total interest you’ll pay over time. If you can afford the standard 10-year plan, stick with it to pay off your loan faster and with less interest.
Use the debt snowflake method. This involves using small, everyday savings to pay off debt. For example, saving from coupons, cutting back on subscriptions, or using cashback rewards can add up over time and be applied to your student loan. Even small savings applied to your debt makes a big difference.
Refinance. If you have good credit, refinancing your student loans could get you a lower interest rate and better terms. Refinancing might let you pay off your loan faster and save on interest, but weigh the benefits against the loss of federal protections and forgiveness options.
Research forgiveness and repayment assistance. If you have federal student loans, take time to research forgiveness programs or other assistance options like those for public service workers or healthcare professionals. Some employers also offer student loan repayment benefits. Knowing these options can reduce your overall debt and possibly shorten your repayment time.

Financial situation. This means having extra cash after paying essential expenses and can allow you to make extra payments towards your student loans without sacrificing other financial goals.
Retirement planning. If you’re already contributing enough to your retirement, consider allocating surplus funds towards paying off student loans early, especially if your retirement goals are on track.
Emergency fund. Make sure you have a cushion for unexpected expenses. Once you have an emergency fund in place, you may be able to focus on paying down student loan debt.
Other high-interest debt. Student loans have lower interest rates than other forms of debt like credit cards. It’s smart to tackle high-interest debt first before directing funds towards early student loan repayment.
Private student loans. Private loans have higher interest rates and fewer borrower protections than federal loans. If you have private student loans, paying them off early can save you money in the long run.

Decide if refinancing is right for you. Refinancing can lower rates and simplify payments, but you’ll lose federal benefits like forgiveness and income-driven plans. It’s ideal for private loans or if you want better terms.
Check your credit score. You’ll need a score of at least 600 to refinance, with the best rates going to those with scores over 700. Improve your score by reducing debt and ensuring your credit report is accurate.
Compare lenders. Get quotes from 3-5 lenders to find the best rate. Many lenders offer prequalification with no credit score impact.
Choose the best terms. Pick the loan that fits your needs. Consider rates, repayment terms, flexibility, and check lender reviews.
Submit your application. Apply online with personal and loan details. Approval takes a few days to a couple of weeks.
Wait for approval. Once approved, review and sign the loan terms. Continue paying your old loans until the new lender pays them off.
Consider the impact. Refinancing is beneficial for better rates, but refinancing federal loans means losing federal protections. Weigh your options carefully before proceeding.

Determine your eligibility for forgiveness. Student loan forgiveness is available only to federal loan borrowers, including parents. You may qualify if you're a teacher, government employee, nonprofit worker, medical professional, borrower with disabilities, or enrolled in an income-driven repayment plan. You may also qualify if your school misled you or closed, or if you have federal Perkins Loans.
Select the right forgiveness program. Depending on your job and situation, you may be eligible for more than one program. For example, teachers may qualify for both Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness (TLF). Consider career plans, forgiveness amounts, and additional requirements when choosing the best option. You can pursue forgiveness through multiple programs simultaneously, but you can’t double-count the same service period.
Estimate your forgiveness amount. PSLF and IDR forgiveness offer full loan discharge after meeting payment requirements. TLF offers partial forgiveness based on the subject you teach, with a maximum of $17,500 for math, science, or special education teachers, and up to $5,000 for others.
Submit your application. The application process differs by program. For PSLF, use the PSLF Help Tool to check employer eligibility and submit forms. For TLF, apply after five years of service, and have your school certify your employment. IDR forgiveness is automatic after completing the repayment period, but you must apply for an IDR plan through your Federal Student Aid account.
Explore alternatives if you don't qualify. If you’re ineligible for forgiveness, consider switching to an IDR plan to lower your payments, or use forbearance or deferment if you’re facing financial hardship. Some employers also offer student loan repayment assistance programs to help pay down debt.

How employer student loan repayment works. Companies offering student loan repayment plans make payments directly to the loan servicer or to the employee. Eligibility may depend on your tenure or completion of a degree, though some employers help even if you didn’t graduate. Typically, employers match payments annually or set a lifetime cap. For instance, Google matches up to $2,500 per year, while Fidelity caps at $10,000 per employee.
Employers that help pay off student loans. A growing number of large companies offer student loan repayment assistance. Some of the major employers include Aetna (up to $2,000 annually), Chegg (up to $5,000 per year), Fidelity Investments (up to $10,000), Google (up to $2,500), New York Life (up to $10,200), and PricewaterhouseCoopers (up to $1,200).
How employers benefit from helping you pay off student loans. Employer student loan repayment programs are a win-win, as they help attract top talent and retain employees. With the tax breaks introduced under the CARES Act, companies get a tax benefit for student loan assistance, and employees don’t pay taxes on up to $5,250 in education assistance per year through 2025. This makes the benefit more affordable for both parties.

Conclusion

Paying off student loans early reduces debt, but you need to have a balanced financial plan. Prioritize high-interest debt, build an emergency fund, and contribute to retirement before focusing on student loans. Once you’ve met those goals, you can pay down loans more aggressively and free up resources for future investments. But consider interest savings and opportunity costs to make sure early repayment fits into a thoughtful financial strategy.

FAQ

Yes, you can pay off both private and federal student loans at any time, and most lenders don’t have prepayment penalties. Paying off your loan early can save you interest and debt, so it’s a good financial move if you can.

The repayment term depends on the type of loan you have. Private student loans have terms that range from 5 to 20 years. Federal loans have a 10-year standard repayment, but if you’re on an income-driven repayment (IDR) plan or have a federal direct consolidation loan, the repayment period can be longer.

Paying off a loan early may cause a small, temporary dip in your credit score. This happens because your credit score takes into account factors like credit utilization and payment history, and paying off a loan affects those. But the impact is usually short-lived, and your score will recover quickly as long as you continue to make regular payments on other accounts. To help your score recover faster, consider these tips to boost your credit.

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