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Should I pay off my student loans early?
It's not always a good idea — especially if you're short on savings.
Updated
Paying off your student loans early can free up your budget to focus on other financial milestones, like buying a home. But it’s not always a good idea, especially if your savings are low.
When is it a good idea to repay my student loans early?
It could be a good idea to start paying off your students loans early when you’re financially secure and have few other debts — if any. You could benefit the most from early repayment after you’ve met the following financial goals:
You have an emergency fund
Before you start making extra repayments on your student loans, make sure you have money saved up to cover unexpected expenses. Most experts recommend that you have enough money set aside to cover between three and six months of basic personal expenses, such as rent, utilities and food. Some like Suze Orman recommend you have between eight and 12 months if you really want to feel secure.
An emergency fund protects you if you lose your job, have a medical emergency or another unexpected expense crops up. Paying off your student loans before you have an emergency fund could backfire. You might end up putting these emergency expenses on a credit card or personal loan, both of which usually have higher interest rates than student loans.
You started investing for retirement
The sooner you start saving for retirement, the better. Not only will you build your nest egg faster, but there’s also more time for capital gains, interest or dividends to add up. Many employers also match your contributions — further increasing how much you’re able to put away.
Most experts recommend putting 10% to 15% of your income toward retirement in a 401(k), IRA or other plan. If you’ve got extra money left over after making this kind of contribution, you could benefit from paying off your student loans early.
You paid off higher-interest debts
Student loans tend to come with lower interest rates than other types of debt, especially credit cards. Paying off high-interest debts first saves you more in the long run. If you’ve handled all other debts — or never had any to begin with — you can benefit from paying off your student loans early.
When should I focus on other expenses?
You might want to hold off on making extra repayments on your student loans in the following situations:
- You plan on applying for student loan forgiveness. If you plan on applying for student loan forgiveness, making only the minimum required repayments can help you maximize how much you have forgiven.
- You have credit card debt. Credit cards often come with interest rates that can be more than four times that of student loans. If you have credit card debt, you’ll save more by focusing on paying that down first.
- You have no savings. A lack of savings can land you in lots of high-interest debt if you aren’t prepared for an emergency. And you’ll spend more on retirement. Start saving first before you pay off your student loans.
How to prioritize student loans vs. other expenses
| Should you pay… | |
|---|---|
| Student loans or mortgage first? | Read more |
| Student loans or buy a house? | Read more |
| Student loans or invest in retirement? | Read more |
| Student loans or car loan first? | Read more |
| Student loans or medical bills first? | Read more |
| Student loans or credit cards first? | Read more |
| Student loans or save for an emergency fund first? | Read more |
3 reasons to pay off your student loans early
Not sure paying off your student loans early is worth it? Here’s why you might want to consider it:
- It makes it easier to qualify for other types of credit. Paying off your student loans lowers your debt-to-income ratio, making it easier to qualify for a mortgage, car loan or lower-interest credit card.
- It reduces your monthly expenses in the long term. While it might cost you more in the short term, you won’t have to set aside hundreds of dollars toward your student loans each month if you get out of debt earlier.
- It reduces your total loan cost. The longer you take to repay your student loans, the more you’ll pay in interest. In some cases, you might even pay more in interest than you borrowed.
How can I get out of student debt faster?
You have a few options to help you get out of student debt faster, including:
- Refinancing. Refinancing private student loans and sometimes even federal loans can help you get a lower rate, allowing you to pay off your loans faster without increasing the monthly cost.
- Switching your repayment plan. If you can afford to set aside more each month, ask your service if you can sign up for a shorter repayment plan.
- Putting extra money toward your loans. Every time you get a raise, tax refund or other funds outside your budget, make an extra repayment toward your student loan principal.
- Applying for forgiveness. Depending on your career, you might be able to qualify for forgiveness or loan repayment assistance — or find an employer that offers student loan repayment benefits.
- Make biweekly payments. Dividing your monthly repayment in half and making payments every two weeks will give you one extra repayment a year — with little to no affect on your budget. Check out our page on setting up biweekly repayments to learn more.
15 tips to pay off your student loans ahead of schedule
Compare student loan refinancing offers
Bottom line
Paying off your student loans early can set you up to meet other financial milestones — like buying a home. But you might not want to treat it as a priority if you don’t have an emergency fund, retirement savings or have other debts with higher interest rates.
You can learn more about how it all works by checking out our guide to student loans.
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