Many adults who graduated from college have student loan debt. Depending on a variety of factors, the amount of student loan debt can vary widely. Either way, most people with student loans wonder, “Should I pay off my student loans early?” There’s no simple answer to that question, so we’ll walk you through what you should think about if you’re considering paying off your student loans early.
Should I Pay Off My Student Loans Early or Invest?
One common answer to paying off student loans early is to focus on investing instead of paying off loan debt. This solution works for some, but it doesn’t work for everyone. Here are a few important questions to ask yourself:
- What are my student loan interest rates? Interest rates will affect how much money you owe in the long run. Higher interest rates will lead to more money owed over time. If interest rates are high, it might be better to pay down or pay off some of your loan debt to avoid paying more on interest in the future. If your student loan interest rates are low, you may consider whether investing is the right choice.
- What type of loan do I have? Student loans from the government usually have low fixed interest rates and established protections. Private loan interest rates can be fixed or variable and your rate is based on your credit at the time you took out your loan. Although private loan options offer various repayment plans they don’t offer the same benefits as federal loans. It’s important to know what kind of loan you have and if you think you might use any of the federal benefits, like loan forgiveness or income-based repayment, in the future
- What are your financial goals? Student loan debt could be something that’s keeping you from reaching other financial goals. If you’re looking to buy a home or start a business, you might want to focus on getting rid of or paying down your student loan debt to free up your finances.
- How old are you? Your age can make a big difference in what you should be prioritizing. If you’re in your 20s, you have time to save and invest, but if you’re in your 50s, you’re much closer to retirement and may need to make different financial decisions to balance saving for retirement and paying your loans.
Besides these questions, there are certain situations where you should prioritize paying off your student loan debt early and others where investing may be the right decision. These are some of the reasons and situations to help you decide what may work best for your unique position.
When to Prioritize Paying Off Loans Early
- Your loans have a high interest rate. High interest rates will make your loans cost more. Paying off your loans early helps to avoid accruing interest and paying less in the long run.
- Your interest rates are variable. Federal loans have fixed interest rates, which means you’ll be charged the same interest rate for the entire loan period. But private loan lenders also offer variable interest rates, which means the interest rate is likely to change over time. While interest rates may start low, they can increase over time costing you more money in the future. If you’re worried about your interest rate rising, consider paying off your student loan debt early to avoid paying more interest in the long run.
- Your loans are stressful. Sometimes money isn’t just financial: it’s emotional. If your student loan debts are causing you immense stress and keeping you up at night, it may be in your best interest to pay them off early. A little peace of mind can be worth paying the loan off early.
When to Prioritize Investing
In some situations, it might be best to focus on investing and saving instead of paying off your student loans early.
- You aren’t saving for retirement. Preparing for retirement (or financial emergencies) should be a high priority. Too many Americans hit the age of retirement without enough of a retirement fund to live comfortably. If you haven’t started saving for retirement or are behind on your savings, you may find it more advantageous to focus on that instead of paying off your student loans early. The sooner you start saving for retirement, the more money you’ll be able to save over the years.
- You have credit card debt. If you have both student loan debt and credit card debt, your credit card debt should be your priority. Credit cards typically have higher interest rates, so putting that debt aside will cost you more money. If you focus on your student loan debt, you could accrue a lot in interest on your credit card bill. You’ll pay less money overall if you pay off your credit card debt quickly before turning to your student loans.
- Your employer has matching contributions. Some employers offer retirement plans, and they may match your contributions to it. If your employer offers a plan like this, it may be more advantageous to focus on saving and investing while this matching benefit is available to you. Many Americans with this option don’t take advantage of it, but it will help you more in the future than paying off student loan debt early.
Even if you choose to prioritize investing, you should keep making your monthly student loan payments, but you just won’t make extra payments or higher payments while you focus on saving.
Overall, when deciding whether to pay off your student loan debt early, you should consider your financial priorities. For most people, these should be your financial priorities:
- Establish an emergency fund. Before you worry about paying off debts or investing in retirement, you should make sure you’re prepared for a financial emergency. Whether it’s a sudden crisis, an unexpected car repair, losing your job, or a major illness or accident, it’s always in your best interest to be prepared. An emergency fund can help you keep away from turning to credit cards (and accumulating more debt to have to pay off) and keep you financially on your feet. A good rule of thumb is to have 3 to 6 months’ worth of living expenses in your emergency savings fund.
- Paying off high interest debt. You should prioritize paying off credit card debt and other high interest loans . Paying these off will help you save more money and avoid more interest.
- Investing and saving for retirement. Like we discussed earlier, saving for retirement earlier (and while you can take advantage of employer contributions) is important. Getting a good retirement fund underway should be a financial priority, after you have an emergency fund and paid off high stress debt.
Once you’ve met these priorities, you can decide if it’s in your best interest to pay off your student loan debt early. You may have other financial priorities that take precedence over larger loan payments, or you may want to get rid of your financial burden of the student loan debt and pay it off early.
Timelines for Paying Off Student Loans
But what does paying off your student loan debt early look like? Most federal student loan repayment plans will have you paying off your student loan debt within 10-25 years. The shorter your loan repayment period, typically the higher your monthly payment will be. For example, a loan repayment plan of 10 years will cost more each month than a 20 year plan, but you’ll pay more in interest overall with the longer repayment plan. Early repayment can help you avoid accumulating more interest. So consider making extra payments when you can.
If you want a more accurate picture of your payment timeline or monthly payments, use a student loan calculator. From there you can make an informed decision on when you want to repay your student loans early.
Options for Paying Off Student Loans Early
If you want to pay off your student loan debt early, you should check with your lender how to make any extra payments. Most lenders also offer an interest rate discount if you enroll in autopay and you know your payments are made on time each month.
If you’re looking for flexibility on the amount you pay each month, consider student loan refinancing. Refinancing can reduce your monthly payments and even your overall loan. Applying for refinancing can give you more options for paying off your student loan debt.
The answer to “should I pay off my student loans” will vary. It will depend on your unique situation and financial goals. For some it’s more important to pay these loans off early and start the road to homeownership and more. For others, it’s better to save and invest to be ready to retire.
Whatever path you choose, here at College Ave, we want to help you succeed. Whether it’s learning more about how to finance your college experience, learning about finances, or making a loan repayment plan, we have resources to help you.