Pros and Cons of Paying Off Student Loans Early

pros and cons of paying off student loans early

Student loan debt is the elephant in the room for many new graduates, a constant overshadowing pressure. While your student loans were invaluable to get you through school, now that you’re done with your training, they must be reckoned with. These student loan statistics from Sallie Mae show:

  • In 2019, Sallie Mae reported 24% of Americans use borrowed money for their schooling.
  • Today, 45 million Americans carry student loan debt.
  • The average debt load in 2019 was $33,654
  • Over 2.8 million student loan borrowers owe $100,000 or more. 

Once you’ve earned your degree and are moving forward with a successful life pursuing your career, you may want to tackle that debt. Should you pay it off early? As with most financial decisions, this is one that requires a little thought before making it. You need to make sure you’re doing the right thing for your current financial position. So what are some of the pros and cons of paying off student loans early?

What are the Pros of Paying Off Student Loans Early?

Paying off debt is always a good idea. There are certainly some pros to paying off student loan debt, including:

Kissing Interest Goodbye

If you have $30,000 in student loans, a 6% APR, and a 10-year term, you will likely pay around $333.06 per month. By the time you pay the last payment, you’ll have spent $9,967 in interest. If you pay that loan off in 5 years instead, you will pay $4,799 in interest, saving $5,168 in interest charges. That’s a huge chunk of change! What would you buy with an extra $5,000? 

Free Up Your Money To Spend on Fun 

You can probably think of hundreds of ways to spend $333 a month, rather than paying down your student loan debt. Maybe you have a secret Bobble Head colllection and you’re eyeing a colllector’s edition piece. Or, you could save that money for a bigger purchase, like a vacation or hot new car. No matter what you’re dreaming about, paying down your student loan debt early could give you the money to do it.

Reduce Stress, Gain Financial Freedom, and Have Fun

Thousands of dollars of student loan debt is extremely stressful. When student loan debt feels like the weight of the world, paying it off early may reduce your stress. You’ll no longer have to wonder how you’ll make that monthly payment. Reducing debt also gives you financial freedom, and makes it possible to enjoy more fun!

Lower the Debt to Income Ratio

Your debt-to-income ratio, the ratio of your debts to your disposable income, is an important factor considered when creditors look at your creditworthiness. If your debt to income ratio is 40% or higher, it shows lenders you’re financially stressed. Student loan debt is part of that debt-to-income ratio. Paying off those student loans early may help lower that ratio and make it easier to qualify for a car loan or mortgage in the future.

Start Building Wealth 

The sooner you can start investing for retirement, the better your future financial situation could be. Paying off debt early could allow you to invest more funds. Remember, money sent to pay down loans won’t grow wealth, so pay that loan off and start investing in yourself.

What are the Cons of Paying Off Student Loans Early?

If you’re riding high on the thought of those benefits, don’t worry. There’s a downside too. It’s always important to weigh both the pros and cons of paying off student loans early. So, here are some of the “cons” to consider in your decision making.

You’re Broke

If you’re strapped for money, paying down your debts early may make it diffcult to fulfill your financial obligations in other areas. The average student loan payment in 2019 was $393 per month. If you’re strapped for cash, increasing it feels impossible. Before paying off debt early, you may want to build an emergency fund and create a working budget. 

Hurt Your Credit Ratings

Yes, paying off your student loan debt may actually hurt your credit rating, at least temporarily. Student loan debt is an installment loan, which is different than a credit card. The more variety in your credit history, the stronger your credit rating. In fact, variety in your debts accounts for about 10 percent of your FICO score. Your score may dip a bit for the short term after repaying the loan.

No More Tax Breaks

Student loan debt may offer some tax breaks. This is a perk that some borrowers don’t know about, and only 1 out of 3 with student loan debt take advantage of the tax breaks. If you’re one of those who do, you need to know that paying off the loan means those deductions go away. The savings that come from paying off your debt early could easily outweigh this particular con in most cases.

Personal Debts May Be Forgotten

One of the biggest drawbacks of focusing on your student loan debt to pay it off early is the effect this could have on your personal debts. If all of your money’s going towards student loan debt, you may not be focused on other debt types. Credit card debt typically has a much higher interest rate than student loan debt, so you probably don’t want to push it under the rug.

Pros and Cons of Paying Off Student Loans Early

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Strategies to Help You Pay Off Student Loans Early 

So you’ve weighed the pros and cons and feel that paying off your student loans early makes the most financial sense for you. Just how are you going to do it? Consider these practical strategies

  • Always pay more than the minimum.
  • Refinance your loans and consider loan consolidation.
  • Put tax deductions in the right place. Do you get a refund because of your student loan deductions? Apply it to your loan balance. 
  • Start a side job such as selling online, walking dogs or put your skills to use and earn some income. 
  • Put extra money towards debts. When grandma sends that birthday check, don’t pocket it. Use it to pay off your loan.
  • Pay every two weeks by dividing your monthly payment in half instead of paying every month. This could help you pay off the principle amount.  

For many people, paying down debt early makes sense, but you always want to weight the pros and cons of paying off student loans early. If you decide that it’s the right choice, then it’s time to get disciplined. Soon you could have those debts out of the way and start enjoying the freedom that comes with less debt.

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