Can You Pay Off Student Loans Early

If you’re one of the nearly 43 million Americans with student loan debt, you might be wondering if you can pay off your student loans early.

The answer is yes. There’s no penalty for paying off student loans ahead of schedule, and you could save a lot of interest by doing so. However, prepaying student loans doesn’t make sense for every borrower, especially if you have other financial obligations that take priority.

Here’s a closer look at the pros and cons of paying off student loans early so you can determine whether this is the right move for you.

Pros of Paying Off Student Loans Early

Accelerating your student loan repayment offers a few advantages.

Pay Less Interest

Student loans accrue interest every day you have them, so the longer you’re in debt, the more interest you’ll pay. Paying off your loans early, however, creates significant savings.

Let’s say that you borrowed $30,000 at a 5% interest rate. On a 10-year repayment plan, you’d pay $8,184 in interest. If you zeroed your balance two years early, you’d pay just $6,461 in interest, and if you clear the debt in five years, you’d pay only $3,968 in interest. That may be a good plan if you can afford to pay more each month.

The savings are even greater if your loan has a higher interest rate, like that of a private student loan or Direct PLUS loan.

“Many borrowers make payments for decades, spend thousands of dollars and barely see their balance move,” says Michael Lux, attorney and founder of The Student Loan Sherpa. “Paying off a student loan early can mean many thousands of dollars saved on interest.”

Pursuing Other Financial Goals

Student loan payments can eat up a good portion of your paycheck every month, making it difficult to put aside an emergency fund, invest for retirement, save for a home down payment or achieve other financial objectives. By saying goodbye to that monthly bill, you’ll have more room in your budget for other money goals.

Plus, you might feel a big weight off your shoulders once that student loan payment is gone from your life.

“There’s a sense of freedom that comes with paying off your student loans,” says financial aid expert Mark Kantrowitz. “You can then direct the amounts you were previously paying each month to other purposes, such as saving for retirement [or[ paying down other debt.”

Lowering Your Debt-to-Income Ratio

Your debt-to-income ratio, or DTI, measures your monthly debt payments against your gross income. Lenders typically consider your DTI when you apply for a mortgage, car loan or other type of financing.

A high DTI can hurt your chances of getting approved for credit or securing a low interest rate. Zeroing out your student loan balances reduces your DTI, making it easier to qualify for a loan and access better rates and terms.

[Read: Best Private Student Loans.]

Cons of Paying Off Student Loans Early

There are downsides to speeding up student loan repayment.

Paying More Each Month

When you decide to prepay student loans, you’ll have to throw extra money at your debt. Accelerating repayment could be difficult if you’re just starting out in your career or don’t have much disposable income. Take a look at your budget (make one if you haven’t already). While you can take steps to cut spending and increase your earnings, you don’t want to put undue pressure on yourself or sacrifice your quality of life.

Neglecting Other Financial Priorities

Clearing student loan balances early shouldn’t always be your top financial priority. For instance, if you’re carrying credit card debt or other loans with high interest rates, it makes sense to pay off that debt before prepaying your student loans. It’s also important to build an emergency fund to cover unexpected expenses or an interruption in income.

Saving for retirement is also a priority. You might earn more money from investing than you’d save by prepaying student loans, especially if your loans have a relatively low interest rate. Definitely take advantage if your employer offers to match 401(k) contributions. That’s free money.

“I’ve worked with many borrowers who preferred to focus on saving for retirement while they made minimum payments on their low-interest federal loans,” says Lux. “If you can put money in [an account] earning 5%, it doesn’t make much sense to make extra payments on a student loan charging 3.5% interest.”

Missing Out on Student Loan Forgiveness

Federal student loans are eligible for various loan forgiveness programs, such as Public Service Loan Forgiveness and Teacher Loan Forgiveness. If you’re eligible for a forgiveness program, you may not want to pay off your student loans early and miss out on this valuable benefit.

Losing the Student Loan Interest Tax Deduction

Paying off your student loans would mean you no longer qualify for the student loan interest tax deduction. This tax break lets you deduct the student loan interest you paid over the year up to $2,500, as long as your income falls within allowable limits.

[See: Best International Student Loans]

Should You Pay Off Student Loans Early?

Weigh the pros and cons to determine if repaying your student loans early makes sense for you. Here are some additional questions you can ask yourself to determine the best course of action.

Have you saved an emergency fund? If you’ve fully funded an emergency fund that could cover three to six months of expenses, you’re in a good position to focus on aggressive student loan repayment. If not, shore up your rainy day fund first.

Do you owe other high-interest debt? Credit cards can carry rates of 21.59% or higher, while the average two-year personal loan rate is 12.49%. Current federal student loan rates for undergraduates, by contrast, are 6.53%. If you owe debt with higher interest rates, paying that off first would result in greater savings.

Are you maxing out an employer 401(k) match? If your employer offers a matching benefit on your retirement account, that represents a 100% return on your investment right away. Prioritize maximizing that contribution over prepaying your student loans. Even if you don’t have an employer match, consider setting aside some money for retirement to prepare for your future.

Can you afford the extra payments? Take a look at your budget to assess your ability to pay off student loans early. Cutting expenses and boosting your income could give you extra funds to funnel toward student loan repayment. If your budget is already stretched to the breaking point, however, then accelerating your student loan payments may not be the right move at the moment.

Could you qualify for student loan forgiveness? Working in public service or as a teacher in a low-income school could make you eligible to get your loans discharged. Some states also offer student loan repayment assistance for qualifying professionals.

Everyone’s situation is different, so there’s no one-size-fits-all answer to the question of whether you should pay off student loans early. By taking the full picture of your finances into account, including your other debts and retirement goals, you can determine the best path forward for your finances.

More from U.S. News

How Student Loan Interest Rates Work

How to Prepare for Dramatically Higher Federal Student Loan Interest Rates

15 Companies That Help Pay Off Student Loans

Can You Pay Off Student Loans Early originally appeared on

Federal News Network Logo
Log in to your WTOP account for notifications and alerts customized for you.

Sign up