Getting rid of your student loan debt as quickly as possible can be a life-changing goal. There are many benefits to paying off student loans early, including saving money and eliminating that stress from your life.
If you’re trying to decide whether paying off student loans early makes sense for you, here’s what to consider.
Can You Pay Off Student Loans Early?
Some forms of debt may charge prepayment penalties if you pay off your loans ahead of schedule. And you may be wondering, “are there penalties for paying off student loans early?” Luckily, neither federal nor private student loans have prepayment penalties, so there’s no added cost to pay off your student debt.
There are many strategies you can use to speed up your loan repayment:
- Pay more than the minimum: If you can afford to pay a little extra each month, you can chip away at the loan principal more quickly. Even an extra $25 or $30 a month can help cut down how long you’re in debt.
- Refinance your student loans: If you have a loan with a high-interest rate, refinancing your student loans to get a lower rate can help you save money and get out of debt faster. Before deciding if you should refinance, we suggest that you consider the unique benefits only available on federal student loans before refinancing your federal loans. When federal student loans are refinanced, they become ineligible for unique benefits such as income-based repayment or public service forgiveness. Borrowers looking for help managing multiple federal student loans should consider consolidation before refinancing. If none of those benefits fit your unique situation, then you should proceed with researching your student loan refinancing options.
- Cut your expenses: If you’re willing to make some lifestyle changes, you can dedicate more money to your student loans and shave years off your repayment term. Getting a roommate, working a side hustle, or carpooling to work are ways to save money.
Does Paying Off Student Loans Early Help Your Credit?
If you’re working on building your credit, you might be worried about the impact on your credit score paying off student loans early may have. But does paying off a loan early hurt your credit score?
You don’t need to worry; paying off your debt is a good thing. While your score might dip a little at first, your score will rebound. Changes in your credit score for paying off student loans early are usually temporary.
When you pay off a loan ahead of its scheduled end date, the lender will notify the credit bureaus that the loan was paid in full. That’s a big positive to lenders that review your credit report; it shows that you honored your loan agreement and were able to pay it off. Eliminating your loans also improves your debt-to-income ratio or the amount of debt payments you have relative to your income. This will all help your credit profile in the long term.
However, one factor that affects your credit score is your credit mix; it makes up 10% of your score. Lenders like to see that you have multiple types of credit, such as revolving accounts and installment loans.
If you don’t have any other installment loans — such as car loans or personal loans — your score might drop slightly when you pay off your student loans because you don’t have as strong of a credit mix.
However, the decrease will be minimal since the credit mix makes up such a small percentage of your score. If you keep making all your other payments on time and keep your credit card balances low, your score will improve over time.
Do You Save Money by Paying Off Student Loans Early?
Paying off federal or private student loans early can be a smart way to save money. Less interest will accrue, helping you save hundreds or even thousands of dollars. That’s money you can use for your other goals, like buying a home or building your emergency fund.
For example, Sharon had $30,000 in student loans with a 10-year repayment term and a 6% fixed interest rate. If she only paid the minimum, she’d pay $10,016 in interest charges by the end of her repayment.
If Sharon increased her monthly payments by $50 per month — going from $332 to $382 — she’d pay off her loans 20 months early. By cutting down her repayment term, she’d save $1,821 in interest charges.
To find out how much you can save, use our student loan calculator.
Pros and Cons of Paying Off Student Loans Early
When deciding whether to pay off your loans early or not, consider the following advantages and drawbacks:
- You can reduce your debt-to-income ratio: When you get rid of your loans, you lower your debt-to-income ratio. That change can improve your credit — and free up money in your monthly budget.
- Less interest will accrue: By accelerating your repayment, less interest can accrue on your loans, saving you money on the overall cost of the loan.
- You’ll reduce your financial stress: Paying off your loans can give you an incredible sense of achievement — and it can lower your financial stress. If your debt has been weighing you down, paying your loans off ahead of schedule can be emotionally freeing.
- You may dip into your savings: If you’re focused on repaying your loans as quickly as possible, you may put off building an emergency fund. If unexpected expenses pop up, you may have to use your savings — or use debt to cover the bill.
- You may delay paying off debt with higher interest rates: While paying off your student loans can be a smart idea; you should reconsider if you have other forms of debt with higher interest rates. For example, credit cards tend to have much higher interest rates than student loans; some have annual percentage rates (APRs) as high as 30%. If that’s the case, it may make more sense to target your high-interest debt before tackling your student loans.
- It doesn’t help you if you’re pursuing student loan forgiveness: If you plan on applying for Public Service Loan Forgiveness or other federal forgiveness programs, making extra payments or paying off your loans early doesn’t help you; you’ll just lose out on a portion of your loans being forgiven. If you’re eligible for those forgiveness programs, your money may be better used by paying off other debt or building your savings.
Repaying Your Student Loans
There are many benefits of paying off student loans early; you can save a lot of money, reduce your stress, and improve your debt-to-income ratio. However, it doesn’t make sense for everyone to pay off their loans before their repayment terms end, so review your finances and your goals to see if it’s the best choice for you.
Thinking about refinancing to accelerate your repayment? Use the refinancing calculator to see how much you can save and how much faster you can become debt-free.