Paying Off Student Loans Early: Pros & Cons

Written by: Kristyn Pilgrim
Updated: 6/08/20

Going to college is a dream come true for many Americans, yet the huge financial burden of student loan debt can feel more like a nightmare. It’s estimated that 44.7 million Americans have some form of student loan debt and it will take an average of 20 years for most of them to pay it off.

So, how should you approach your debt repayment? Is it better to live frugally and pay off your debt quickly? Or should you slowly chip away at your debt while building equity and savings?

Should I Pay Off My Student Debt Early?

Many savings experts recommend paying down your student loan debt as quickly as possible. Some strategies involve working multiple jobs, freelancing on the side, or even living with your parents for as long as possible to pay off your education loans faster.

While paying off your loans faster may seem like a great idea, you’ll want to understand the pros and cons of paying off your debt early before making this decision. 

To help, we’ll run you through the top points you should consider when deciding whether or not to pay off student loans early.

Pro #1: You Could Save Money on Student Loan Interest

The first benefit of paying your loans off early is fairly obvious but bears mentioning. The faster you pay off your loans, the sooner you can get out of education debt and stop stressing about your student loan payments. This can save you hundreds or thousands on student loan interest, in the long run, depending on your loan type.

You’ll also have more money in your pocket after the loans are paid off, which is always a great feeling.

Con #1: You Could Jeopardize Your Finances

In the first few years following graduation, you may earn less than you’re anticipating. According to CNBC, most college graduates expect to earn $60,000 upon graduating, but actually earn an average of $48,400 during their first few years on the job market.

Depending on where you live, if you’re paying rent and have other financial considerations, it may be difficult for you to afford significant student loan payments earlier in your career. Paying them off over time and working towards making larger payments as your salary increases could prevent you from getting into other kinds of debt.

Pro #2: You Could Lower Your Debt-to-Income Ratio

It’s not smart to carry lots of debt, especially if your monthly payments are close to your monthly income. This impacts your debt-to-income ratio (DTI), which creditors use to approve you for other types of loans and credit decisions, like buying a house or car.

You can calculate your DTI by dividing your total debt payments per month by your pre-tax monthly salary. For instance, if you pay $750 a month toward your debt (student loans, credit cards, and other loans) and make $2,200 a month before taxes, your DTI would be $34% ($750/$2,000 = 0.34). If you pay $750 a month and make $1,500 a month, your DTI would be 50%.

According to the Consumer Financial Protection Bureau, most mortgage lenders look for a DTI of 43% or lower. Typically, the lower your DTI percentage, the lower your mortgage rate. Therefore, paying your student loans off before applying for a home loan would make sense if you were looking to lock in a good rate and shed debt to increase your DTI.

Con #2: You Could Drain Your Emergency Fund

It’s important to have an emergency fund (or multiple streams of savings) once you’re living on your own. Having money on hand to pay for car repairs, medical care, or other unexpected expenses can be difficult if you’re not earning enough to make high student loan payments and save money.

Everyone’s situation is different, so it’s important to look at what you can afford. If you’re not able to comfortably save while making additional student loan payments, it might be smart to rethink this strategy.

Pro #3: You’ll Gain Peace of Mind 

If you’re someone who doesn’t like carrying around large chunks of debt, it might be stressful for you to know you’ll have student loan debt for decades. While it might be difficult to pay off your loans early, it may make the most sense for you to help give you peace of mind.

If this sounds like you, we recommend making a plan and monthly budget, so you know exactly how much you can afford to help chip away at your student debt and pay off your loans faster.

Con #3: You Could Lose Investing Opportunities

Investing in your future is particularly important during your first few years in the workforce, and particularly in your 20’s. From investing in stocks to putting money into your 401k, IRA, or other retirement plans, the sooner you begin investing, the higher the potential return.

If you’re only able to invest a small amount or nothing at all because of aggressive student loan payments, you could miss out on earning tens or hundreds of thousands extra in compounded interest for retirement or by investing in stocks.

How Your Credit Is Impacted by Paying Off Loans Early

When deciding whether or not to pay off your loans early, you should also consider how it will impact your credit. Making regular payments on your student loans can have a positive impact on your credit score by showing you’re a trustworthy borrower. Paying student loans over their lifetime can help you build good credit habits and keep your score high throughout the years.

Paying them off early isn’t necessarily bad for your credit score, but it can hurt you down the line if you don’t have additional credit or ways to show you pay off monthly balances on time. Your score won’t be impacted by paying off loans early, but it can drop over time if you don’t have a means of showing you’re still a credit-worthy borrower.

It’s important to consider how you’ll maintain your credit score and history without your student loan payments. Other options include personal loans or credit cards, which could lead to further debt and often carry high interest rates. If you plan on owning a home by the time you pay off your student loan debt, your monthly mortgage can take the place of your student loan payments.

Other Student Loan Payment Considerations

There are some other factors to consider when paying off your student loans early. First, look into student loan forgiveness programs. If you’re a teacher, for instance, your student loans may be forgiven after you work in a low-income school district for five years. If that’s the case, making the lowest possible monthly payments (and not working to pay off your loans early) might be your best option for long-term savings.

You may also be eligible for student loan forgiveness if you serve in the military or work in public service. 

Lastly, be sure to consider whether you plan to return to school for graduate studies or receive an additional degree. If so, your existing loan payments could be deferred until after you graduate. During this loan deferment period, you might be able to continue chipping away at your debt (or pause payments) to better suit your budget.

Make the Best Decision for Your Financial Future

So, should you pay off your student loans early? There’s no one answer that will fit everyone’s financial situation. If you have the resources to pay off your loans early or are willing to work extra to make it happen, paying them off early may be your best bet. We have an exhaustive guide to paying off your student loans faster, which can help you better plan your payments.

If you can’t afford higher payments, however, you shouldn’t feel bad about not being able to pay off your loans. You might find there are unexpected benefits from keeping your loans open, like establishing good credit, being able to put away more money for savings, and investing in your future early on.

You might even decide to pay off some loans early and keep working on other low-interest loans. At CollegeFinance, our team of experts can help you figure out the best loans to pay off quickly to maximize your savings.

Whatever you decide, be sure to create a monthly budget and determine what you can afford before committing to a loan payment strategy.