Figuring out if you should pay off your student loan debt early is surprisingly difficult. While there is typically a benefit to freeing yourself from a monthly payment, focusing extra money on your student loan isn’t always the best move. Depending on your situation, you may be better served with a different approach. If you’re wondering, “Is it a good idea to pay off student loan debt quickly?” here’s what you need to consider.
The Benefits of Paying Off Student Loan Debt Early
First, let’s look at the benefits of tackling your student loans ahead of schedule. Like any debt, extra principal payments reduce the amount of interest you pay over the life of the loan. This inevitably results in a savings when compared to how much you’d spend if you remain on schedule.
Without a student loan to repay, you can focus on other debts, save for a major expense, stash more cash for retirement, and more. Alternatively, if your budget was tight before, tackling your student loan debt could provide you with breathing room, making it easier to handle other expenses.
Getting rid of that monthly payment can also give you a lot of peace of mind. You have one less debt hanging over your head, and that’s a big deal. This is especially true since federal student loans aren’t automatically discharged if you file for bankruptcy. Instead, it takes a separate adversary proceeding, a move that may not go your way.
The Drawbacks of Paying Off Student Loans Quickly
The biggest drawback of paying off your student loan early is that the extra money you send can’t be used elsewhere. It could put a strain on your budget, make it harder to shoulder an emergency, or delay reaching other financial goals.
For those eligible for a student loan forgiveness program, like Public Service Loan Forgiveness or Teacher Loan Forgiveness, paying off the debt means you miss out on the benefits of that program. You end up repaying money you didn’t have to, which isn’t ideal.
Additionally, many student loans aren’t high-interest debts. If you have, for example, a balance on a credit card with a higher interest rate, focusing on your student loan isn’t giving you the most bang for your buck. If you put that money toward your credit card instead, you’d save more overall.
Similarly, if all you have is low-interest debt, you may be better off investing. If you already have a healthy emergency fund, sending your extra money to an investment with a return rate higher than the student loan’s interest rate can result in a net gain.
Finally, student loan payments can provide a tax benefit. You may qualify for a student loan interest deduction, reducing the amount of federal taxes you have to pay. Since interest payments on credit cards, auto loans, and personal loans don’t lead to a deduction, you may want to focus your energy on those, first, even if the interest rates are fairly low.
Is It a Good Idea to Pay Off Student Loan Debt Quickly?
Ultimately, whether it’s a good idea for you to repay your student loans fast depends on your overall financial situation. There are occasions where any extra money you would consider sending to your student loan would be better sent elsewhere, like high-interest credit cards, investment accounts, or even emergency savings.
However, if you are only carrying low-interest debt, already invest regularly, or would benefit from the peace of mind that tackling your student loans would provide, doing so isn’t a bad idea. While you may miss out on a larger tax deduction or certain other benefits, that alone shouldn’t stop you.
Consider which approach best meets your needs. If paying off your student loan debt early is your best choice, then do it. You’ll free yourself of a major financial burden, and that alone may make it worthwhile.
Do you think it’s a good idea to pay off student loan debt early? Why or why not? Share your thoughts in the comments below.
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Tamila McDonald has worked as a Financial Advisor for the military for past 13 years. She has taught Personal Financial classes on every subject from credit, to life insurance, as well as all other aspects of financial management. Mrs. McDonald is an AFCPE Accredited Financial Counselor and has helped her clients to meet their short-term and long-term financial goals.