Should You Pay Off Student Loans Early?
Credit: Anchiy / E+ / Getty Images- In many instances, it’s beneficial to pay off your student loan debt as early as possible.
- The sooner you pay your loans, the less you’ll ultimately pay in interest.
- However, there are some downsides to paying off your student loans early.
- Clearing your debt could hurt your credit score in the short term, for example.
The student loan landscape is seemingly in a period of transition.
President Donald Trump promised to move oversight of the federal student loan portfolio from the Department of Education to the Small Business Administration. At the same time, the department recently announced plans to amend existing loan repayment and forgiveness programs.
These actions may leave you wondering whether you should pay off your student loans early.
Clearing your loan debt as quickly as possible has benefits and downsides. It’s important to consider your unique financial situation when determining the best path forward for you.
Pros
Pay Less Over Lifetime of Loan- More Money for Discretionary Spending
- Ability to Invest Elsewhere
- Peace of Mind
Cons
Impact on Credit Score- Lose Out on Loan Forgiveness
- Opportunity Cost of Investing Elsewhere
Benefits of Paying Off Student Loans Early
There’s no one-size-fits-all answer to whether you should pay off student loans early. However, if it’s a prospect you’re seriously considering, here are some of the benefits of clearing this debt.
Pay Less Over Lifetime of Loan
The earlier you pay off your student loan debt, the less you’ll ultimately pay in interest on that debt.
EXAMPLE:
The average federal student loan debt was $38,375 by the end of 2024.
The current interest rate for unsubsidized student loans is 6.53%. If you graduate this May with $38,375 in loan debt at this interest rate, you will ultimately pay $52,359 over the next 10 years on a standard repayment plan to completely clear your debt.
That’s $13,984 in added costs, solely from interest, over a decade.
Paying your loans early helps reduce overall costs. Every extra dollar you spend to erase this debt each month will lessen the interest that accrues each month.
More Money for Discretionary Spending
The sooner you pay off your student loan debt, the sooner you can allocate your money toward other expenses.
A 2022 poll of Gen Z adults found that 54% chose to live with their parents. A 2016 report from the Pew Research Center found that the percentage of college-educated young adults living at their parents’ homes had been steadily growing.
Traditionally aged college students can use their time living at home — which typically limits expenses — to pay off student loans.
Doing so can allow them to focus on other purchases like a home sooner. Once you’re out from under the weight of student loan debt, you may be able to more easily save for a down payment, for example.
Ability to Invest Elsewhere
A common rule of thumb for deciding whether to pay off debt or invest your money is to examine whether your returns would be bigger than the interest you’re paying on your loans.
For example, the current interest rate for unsubsidized federal student loans is 6.53%.
That means that unless you have an investment opportunity that promises to generate more than 6.53% each month, it’d behoove you to instead pay off your debt first. Once you rid yourself of your student debt, you can ramp up your savings and investment portfolio.
Peace of Mind
Off-loading your debt may bring a sense of relief.
Student loan debt can often feel like an anchor weighing borrowers down. By paying off your loan debt early, you can discard that feeling of anxiety.
Wiping your student debt also means you’ll have one fewer thing to worry about if a considerable, unexpected expense — such as medical bills — comes across your plate.
Want to learn more about different kinds of student loans? Learn more here
Downside to Paying Off Student Loans Early
There are some downsides to paying off student loan debt early, including a potential hit to your credit score and losing out on debt forgiveness programs.
Impact on Credit Score
Paying off your student loans could negatively impact your credit score.
While that may seem counterintuitive, it’s worth remembering that FICO scores are calculated using five primary data points:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- New credit: 10%
- Credit mix: 10%
Once you pay off your student loan debt, the account is closed. This could negatively impact your average length of credit history, especially if your loan debt is among your oldest debts.
Additionally, closing this account could harm your credit mix.
Still, payment history is the most important factor in determining your credit score. Avoiding default is the most important thing to remember concerning your student loans, so by paying them in full, you avoid worrying about the possibility of defaulting.
Lose Out on Loan Forgiveness
The federal government has forgiven more than $195 billion in federal student loan debt, mostly over the past five years.
While most don’t expect Trump’s administration to forgive debt en masse, many existing debt forgiveness programs still remain. The Public Service Loan Forgiveness (PSLF) program, which is still active, promises complete federal loan forgiveness after 10 years of repaying while working in public service.
Depending on your salary, you could end up paying less in the long term through an income-driven repayment (IDR) plan and PSLF than if you pay off your debt early.
EXAMPLE:
Let’s say you graduate and owe $10,000 in federal student loans. If you decide to pay off that entire balance from day one, you’ve saved yourself money that otherwise would have gone toward interest on those loans.
However, if you enrolled in an IDR plan and worked in public service for 10 years, you could end up paying significantly less than $10,000. Under an IDR plan, your monthly payment depends on your annual salary. It’s feasible, however, to qualify for payments as low as $0 a month and still qualify for a complete discharge of your original $10,000 in debt.
Opportunity Cost of Investing Elsewhere
For the same reasons paying off loans could help you invest smarter, it could also be a detriment.
When your loan interest rates are lower than the expected gains for an investment, it would benefit you more to put your money into that investment. That’s because you’ll ultimately net more money through the investment than you would have saved if you paid off your loans early.
EXAMPLE:
Let’s say you have the opportunity to invest in a savings account or index fund with a 10% yield. On the other hand, you have a remaining debt balance for a loan with an interest rate of 6.5%.
Paying off the loan debt in full will save you the 6.5% in interest you otherwise would have paid to your loan servicer. However, you would have made more money than you saved each month if you invested in the high-yield savings account or index fund instead.
This math is made somewhat more complex when you consider that you still must make monthly loan payments, or else you’ll fall into default. You can use Federal Student Aid’s loan simulator to get a clearer idea of the net impact of paying off your remaining loans early.
How to Pay Off Your Student Loans Early
You can pay part or all of your student loans at any time, even before your next due date.
Student loan servicers have portals that allow you to make a direct payment. According to the Department of Education, any amount you pay in addition to your required monthly payment is applied to your outstanding interest before it is applied to your outstanding principal balance.
It’s worth noting that you can target specific loans or make early payments to your entire loan debt.
You should target the loans with the highest interest rates first. This will save you more money in the long run, especially if you don’t plan on paying down the entirety of your remaining balance in one go.
Some ways you can plan to pay off your debt early include:
- Make your monthly required payment every two weeks instead of every month
- Use tax returns or other cash windfalls to pay off loans in chunks
- Hold money in a savings account or other investment until you have enough funds to pay off a loan in full