If you’re one of the millions of people with education debt, paying off student loans in full is likely a top priority. However, paying off student loans early isn’t always the best financial decision, especially if you have other forms of debt with high-interest rates. Before making extra payments toward your loans, consider the benefits and drawbacks of accelerating your payoff date.
Should You Pay Off Your Student Loans Early? Pros and Cons
If you’re considering paying off your loans ahead of schedule, weigh the pros and cons to decide if it’s the right move for you.
Pro: You Can Save a Lot of Money
If you make extra payments toward your debt, you can become debt-free sooner and save thousands of dollars. You don’t need hundreds of extra cash to make an impact; even small amounts can help you cut down interest charges.
For example, let’s say you had $25,000 in student loan debt at 5% interest and a 10-year repayment term. Your minimum payment is $265 per month, but you could save a substantial amount of money if you increase your payments. Here’s how much you’d save — and how much sooner you’d get rid of your debt — if you increase your monthly payments by $10, $25, or $50 per month.
| Minimum Payment | Minimum Payment + $10 | Minimum Payment + $25 | Minimum Payment +50 | |
| Payment Amount | $265 | $275 | $290 | $315 |
| Time To Repay | 120 months | 115 months | 108 | 97 months |
| Total Repaid | $31,827 | $31,488 | $31,039 | $30,418 |
| Total Savings | X | $339 | $788 | $1,409 |
Pro: You Can Pursue Other Goals
Your student loans can hold you back from pursuing other goals, like relocating to another state or starting your own business.
According to the Ewing Marion Kauffman Foundation, a survey of those with plans to start a business — or already started one — found that nearly half of respondents reported that their student loans affected their plans to launch a business.
When you don’t have student loan payments to worry about, you have more freedom to go after your goals.
Pro: You Can Lower Financial Stress
Student loans can be a significant financial stressor, leading to increased anxiety and depression. Paying off your student loans early can eliminate that stress, improving your mental well-being.
Con: You May Rack Up Debt With Higher Interest Rates
Compared to other forms of debt, student loans can have relatively low-interest rates. For example, the average annual percentage rate (APR) for credit cards is 16.65%, and the average APR for personal loans is 8.73%.
If you’re focused on paying off your student loans early and only pay the minimums on your other forms of debt, you could end up paying more overall in interest charges. In general, it makes sense to make extra payments toward your debt with the highest interest rate first.
Tip: If your student loans have high-interest rates, you may save money and pay off your debt faster with student loan refinancing. Creditworthy borrowers may qualify for a lower rate by refinancing their debt, helping them save thousands.
Con: You’ll Lose Out on the Student Loan Interest Tax Deduction
When you make payments toward student loans, you can claim the student loan interest tax deduction when you file your tax return — as long as your income is within the deduction’s limits. You can deduct up to $2,500 or however much you paid in interest, whichever is less.
It’s an above-the-line deduction, so you can claim it even if you don’t itemize your deductions. But if you pay off your loans, you aren’t eligible for the student loan deduction anymore.
Of course, a deduction isn’t worth keeping your student loans active. But if you have other forms of debt that aren’t eligible for deductions — such as credit card balances — targeting that debt likely makes sense before student loans.
Con: You May Be Short On Cash
If you’re focused on paying off student loans in full as soon as you can, you may lose sight of other financial priorities. Allocating all of your extra cash toward your debt can cause you to fall behind in saving for retirement or building an emergency fund, so it’s important to find a balance between paying off student loans early and pursuing other financial goals.
Deciding How to Handle Your Loans
If your student loans have been a significant cause of stress in your life, you likely think paying them off in full as quickly as possible is the best course of action. While paying down debt is good, aggressively targeting your student loans may not be the best approach in every situation.
Before making extra payments or paying off your student loans early, consider your overall financial situation. Ideally, you’d be on target for your retirement savings and have an emergency fund before accelerating your student loan repayment, and you may want to pay off other, more expensive debt first.
If you’re in a good position and are ready to get rid of your loans once and for all, you can use these ten tips for paying off your student loans faster to jumpstart your repayment.
