For those in the unfortunate position of owing student loans, the decision to pay them off early can be a difficult one. Should you take the cash now and put it to work for you, or should you leave it to grow into an asset for you to use at a later date? The answer to this question is one that is very personal and the decisions you make for yourself will be different from one another.
For most, the idea of paying off a student loan early seems illogical because of how many other bills have to be paid first. But in reality, the best time to pay off a student loan is during the first year after you graduate. This is when you have the most disposable income, since you haven’t started paying rent or any other bills yet.
After graduation, student loans can blow your budget. High costs often seem to be an obstacle on the road to financial freedom.
If you have the option of paying off your student loan early, you have an important decision to make. It may seem like an easy decision to pay off your student loan, but in some situations, it’s not always the best financial decision.
Personal finance is not the only solution. There are several factors to consider when determining whether it’s worth paying off your student loan early.
Should I repay my student debt early?
Depending on your situation, paying off student loans may be the right solution. But in other scenarios, it makes sense to work on other financial goals.
Here are some questions to ask yourself if you are considering permanently forgiving your student loans.
Do I have credit card debt?
Credit cards can be useful financial instruments. You can use credit cards to stretch your money even further with the reward strategy. You also have easy access to extra credit if you need to cover your expenses in an emergency.
But with credit card debt, you can easily get into trouble. Due to the high interest rate, credit card debt can add up quickly.
If you have a lot of credit card debt, you should focus on paying off that debt before you pay off additional student loans.
Since interest rates on student loans are often much lower than on credit cards, it’s best to pay off your credit cards first. As a bonus, you can improve your credit rating by paying off a credit card with a high interest rate.
Do I have an emergency fund?
The pension fund is an important part of a solid financial basis. With an emergency fund, you are better prepared for anything life throws at you. If you are facing unemployment or major car repairs, an emergency fund can come to the rescue and save the day.
Most experts recommend building an emergency fund based on three to six months of expenses. You can also create your own emergency fund by putting your savings in a high-interest savings account.
If you don’t have a savings pot, you should pursue this goal before you pay off your student loans. But if you already have an emergency fund, it may make sense to pay off your student loan early.
Do I contribute to my pension?
Retirement is a big expense that requires years of saving. It is important to start building up your retirement savings as soon as possible.
If you are under the age of 20, you have an additional opportunity to take advantage of compound interest. Funding takes your retirement account to the next level.
Are you still saving for retirement? It’s a good idea to set up a retirement plan before you take out all those student loans. If you already have a retirement plan, you can decide if paying off your student loans early is part of that plan.
What types of student loans do I have?
Borrowers of federal student loans have access to several programs that help them repay their loans early. For example, it is not a good idea to make additional payments under the PSLF.
But if you have private student loans, the choice is very different. Since these loans are not protected by federal programs and benefits, it may make sense to pay them off early. That is, unless you have more pressing financial matters to attend to.
If you have a private loan, one alternative is to take advantage of low interest rates by refinancing your student loans. With a lower rate, you can use the extra money in your budget to achieve another financial goal, for example. For example, making a down payment on a house or increasing your pension savings.
Is there an early repayment penalty on my student loan?
If you decide to repay your student loan early, you should check to see if your loan has early repayment penalties. You don’t want to be forced to pay exorbitant fees just for the right to pay off your loan early.
Not sure if there is a penalty for early repayment? Please contact your creditor for details.
How soon can you repay your student loan?
There are several payment options you can consider if you decide this is the right path for you. Here are some strategies for paying off student loans quickly.
Bi-weekly payments
Let’s say you have a $25,000 student loan with a 5% interest rate. They are now making monthly payments of $250. But you choose to make bi-weekly payments to earn $500 per month.
This is what you’ll see when you use a student loan planning calculator.
Special payments allow you to pay off your loan six years and one month early! This is a significant improvement, especially since you save $4,315 in interest payments.
Single payments
Let’s say you have a $25,000 student loan with a 5% interest rate. They are now making monthly payments of $250. However, they opt for a one-time payment of $10,000.
This is what you’ll see when you use a student loan planning calculator.
This additional one-time payment allows you to pay off your loan five years early! It is important to note that you may be able to pay off this loan faster by using the two-week method. But you save $5,055 in interest.
Refinancing
Let’s say you have a $25,000 student loan with a 5% interest rate. Currently, the monthly debt is $350. However, they choose to make additional monthly payments totaling $500. You can also refinance your loan at lower rates with a private lender, with a lower interest rate of 3%.
That’s how much you can save by refinancing.
With the extra payments and refinancing, you can pay off your loan four years and three months early! That’s a lot of progress. This way you will save $4,833 in interest payments.
Total
Graduates know that after the grace period ends, monthly student loan repayments can become a heavy financial burden. In extremely difficult situations, options such as deferred payment or payment by instalments can be used as a last resort. But it’s best to get rid of these loans for good before it gets to that point.
If you’re ready to tackle your student debt, use our free student loan calculator. Research your options based on additional weekly, lump sum or monthly payments.
A plan for a student loan
Refinance your student loan and receive a bonus in 2021.
1,050 BONUS1 For 100k+. 300 bonus for 50k to 99k.1
1,000 BONUS2 for 100,000 or more. 200 for 50,000 up to $99,9992.
Bonus of $1,0503For $100k+. 300 bonus for 50k to 99k.3
1,275 BONUS4 for 150k+. Multi-level bonus from 300 to 575 for 50k to 149k.4
1,000 bonus5 for $100,000 or more. 300 bonus for 50k to 99k.5
1,000 BONUS6 for $100,000 or more. 200 for $50,000 up to $99,9996
1,250 BONUS7 for 100k+ or $350 for 5k to 100k.7
1,250 BONUS8 For 150,000 and above. Multi-level bonus from 100 to 400 for 25k to 149k.8
Not sure what to do with your student loan?
Take our 11-question quiz to get personalized advice on PSLF, IDR, or refinancing (including information on which lender we think can offer the best interest rate).
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All of the above rates reflect the APR. 1General obligation If you refinance over $100,000 through this website, $500 of the above cash bonuses will be provided directly by Student Loan Planner. General Bond Disclosure. 2Earnest: $1,000 for $100,000 or more, $200 for $50,000 to $99,999.99. For Earnest, if you refinance $100,000 or more through this site, $500 of the $1,000 cash bonus will be provided directly by Student Loan Planner. In the above price range, an additional discount of 0.25% is included for automatic paymentInformation on income.
3Laurierweg: If you refinance over $250,000 through our link and Student Loan Planner receives the loan, a $500 cash bonus will be paid directly to Student Loan Planner. If you are a member of a professional association, Laurel Road can offer you the choice of a reduced interest rate or the $300, $500 or $750 cash bonus mentioned above. The Laurel Road proposals cannot be combined. The above price range includes an additional 0.25% discount for automatic payment. Laurel Road Disclosure.
4Alfie: If you refinance over $150,000 through this website, $500 of the above cash incentives will be provided directly by Student Loan Planner. Uncover Alfie. 5Spraying: If you refinance over $100,000 through this website, $500 of the above cash bonuses will be provided directly by Student Loan Planner. Disclosure of bouts. 6Sofi: If you refinance $100,000 or more through this website, $500 of the $1,000 cash bonus will be provided directly by Student Loan Planner. The above price range includes an additional 0.25% discount for automatic payment. Disclosure of information about Sofi. 7Valid: If you refinance over $100,000 through this website, $500 of the above cash bonuses will be provided directly by Student Loan Planner. Reliable dissemination of information.
8LendKey : If you refinance over $150,000 through this website, $500 of the above cash incentives will be provided directly by Student Loan Planner. The above price range includes an additional 0.25% discount for automatic payment.
Frequently Asked Questions
Does it make sense to pay off student loans early?
It can make sense to pay off student loans early if you have a high-interest rate and are able to save more money by doing so.
Should you pay off student loans early or save?
If you have a lot of student loans, it might make sense to pay them off early. If you’re in a low-paying job, it might make sense to save up for retirement instead.
Why shouldn’t you pay off student loans early?
If you’re in a position to pay off your student loans early, it’s important to consider the long-term consequences of doing so. If you’re able to pay off your student loans early, you’ll be able to save money on interest payments and potentially have more money for retirement or other investments. However, if you’re not in a position to do so, it may be better for your financial future if you keep the loan balance as low as possible.
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