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Should You Pay Off Student Loans Early?

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Content was accurate at the time of publication.

You can typically pay off student loans early without any penalties or fees. But is it a good idea?

While paying off your student loans ahead of schedule saves on interest, you want to ensure you have the finances to do so, rather than taking on new debt to retire your college loans.

Let’s take a look at whether you can and should pay off your student loans early.

Can you pay off student loans early?

Education debt, including federal student loans and private student loans, can usually be paid off early without incurring prepayment penalties.

But while an early debt payoff could help save you some money in student loan interest, you still need to decide if it’s the best move for your financial situation.

Should you pay off student loans early?

It’s important to consider all aspects of an early debt payoff, such as how it affects other areas of your financial health. Here are some situations when paying off your student loans early is a good idea:

  • You have disposable income. If you create a budget to pay off debt and have extra funds left over, consider speeding up your student loan payoff.
  • You’re on track for retirement. It’s important to save for retirement, even when carrying student loan debt. Consider paying extra toward your student loans if you’re on track to reach your retirement goals and have cash to spare.
  • You have an emergency fund. Be sure to set aside a few months’ worth of expenses for any emergencies that may arise. You can prioritize your student loan debt once you build up your emergency fund.
  • You don’t have other high-interest debt. Some types of debt, such as credit cards, have much higher interest rates than student loans. Once you’ve repaid your high-interest debts, you can focus on your student loans.
  • You have private student loans. Since private student loans tend to have higher interest rates and less flexible terms than federal student loans, it makes sense to tackle them first. Also, there’s no need to rush an early payment if you plan on having your federal student loans forgiven through an income-driven repayment plan or student loan forgiveness program.

Pros and cons of paying off student loans early

ProsCons

 Reduces interest charges

 Gets you out of debt faster

 Improves your debt-to-income ratio

 Allows you to pursue other financial goals

 Can’t claim the student loan tax deduction

 Increases your monthly payments

 No longer eligible for student loan forgiveness

 Delays building other types of savings

 May risk defaulting on other loans

There are many benefits to paying off your student debt early. You will save on student loan interest and get out of debt faster while improving your debt-to-income (DTI) ratio. With a higher DTI ratio and more disposable income, you could pursue other financial goals, such as buying a house or saving for retirement.

You can also check out our repayment calculator to see how an early repayment of some of your loans will affect the overall cost of your debt.

However, early debt payoff comes at a price. You will need enough income to cover a higher monthly payment, which could delay saving for other goals.

Furthermore, paying too much toward your student loan could cause you to fall short on essential bills like rent or a car loan. Defaulting on any loan could result in long-term effects on your credit score.

Note that you also won’t be able to take advantage of the student loan tax deduction once you repay your student loans in full. It’s not worth keeping your loans around just for the tax deduction, but if eligible, you could reduce your taxable income by up to $2,500 per year. This is a nice bonus if you need to prioritize other expenses while making the minimum student loan payment.

Yes, most student loan servicers allow you to pay off your student loans ahead of schedule without a penalty. To pay your loan in full, contact your servicer for a student loan payoff letter showing the final amount due.

Although paying off a loan is typically cause for celebration, your FICO Score will likely take a minor, temporary hit. This is because your credit score is based on your credit utilization, payment history, credit mix and length of credit history.

However, the negative impact shouldn’t last long and your score should bounce back as long as you manage to keep up with your monthly payments. To speed things along, follow our tips to boost your credit score.

The decision to refinance your student loans depends on your specific situation and potential savings. A student loan refinance is generally a good idea if you qualify for a lower interest rate — you can check out our list of preferred refinance lenders to get an idea of available rates..

However, it’s best to avoid refinancing federal student loans since you’ll forgo access to government benefits like income-driven repayment plans and student loan forgiveness programs.

If you decide that an early debt payoff is right for you, here are some tips for how to pay off student loans faster.

  • Make extra payments. One of the best ways to pay off student loans is to make extra payments. Use our student loan payoff calculator to see how much you could save by making additional student loan payments.
  • Refinance for a lower rate. Switching to a lower rate with a student loan refinance could help put more money toward your loan’s principal.
  • Pick the right repayment plan. If you are on an extended or income-driven repayment plan, consider switching to the 10-year standard repayment plan to speed up your repayment time frame.
  • Enroll in autopay. Many student loan servicers offer a 0.25% rate reduction when you enroll your student loans in autopay. Automating your bills also helps ensure you don’t miss a payment.  
  • Use a cash windfall. Lump sums of money, such as a tax return or cash gift, could help make a significant dent in your student loan debt.
  • Start a side hustle. Increasing your income is one sure way to pay down your student loans. Try starting a side hustle and put the extra earnings toward your student debt.
  • Consider other ideas. Check out our guide on how to pay off student loans faster for more options.

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