Should I Pay Off My Student Loans Early?

It's more important to save for emergencies and retirement, and to get rid of credit card debt, than to pay off student loans early.

Brianna McGurranNovember 2, 2018

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You’ll be ready to pay off student loans fast once you’ve built a solid financial foundation by:

  • Saving at least one month of basic expenses for emergencies

  • Setting up automatic contributions to a retirement account like a 401(k) or Roth IRA

  • Paying off any debt — usually credit cards — that has a higher interest rate than your student loans

Why is meeting these goals more important than paying off student loans early?

Because emergency cash keeps unplanned crises like a car repair or job loss from turning into debt. An early start on retirement gives that money decades to grow. And credit card debt is probably the most expensive debt you have.

Nail the basics, then pay off student loans early the smart way.

5 ways to pay off student loans early

There is no prepayment penalty for student loans, which means you won’t be charged if you pay more than you’re required to each month. These are your options; use a student loan payoff calculator to see how much each could save you:

  1. Pay off capitalized interest: If your student loans are still in their grace period — generally the six months following graduation or leaving school — pay off any interest that has accrued. That will keep your balance from growing, making it easier to pay off fast.

  2. Make extra payments: Sign up for autopay, which will automatically deduct your required payment from your bank account each month. Some student loan servicers will let you deduct an extra payment and send it to a certain loan.

  3. Make biweekly payments: You can also make biweekly payments manually online, which will help you stick to a disciplined schedule.

  4. Take advantage of your employer’s generosity: Some employers pay off student loans as a workplace benefit. Ask your HR representative if this is available to you, and enroll as soon as you’re eligible.

  5. Refinance student loans: You can also shorten your repayment timeline by refinancing student loans. With good credit and stable income, you could qualify for a new loan at a lower interest rate through a private lender. Many lenders offer a five-year loan term; you can also pay extra and get rid of the loan sooner.

If you’re anxious to get rid of your student loan debt, work toward your savings and investment goals while paying a little extra toward loans. Then once you’re on strong footing, attack student debt with more gusto.

There's no prepayment penalty for student loans, so you won’t be charged if you pay more than you’re required to each month.

Should I pay off my student loans early or invest?

Ultimately, aim to save three months’ worth of expenses for emergencies, save 10% to 15% of your income for retirement, and pay off your credit card balance each month.

Once you hit those targets, whether or not you pay off loans or invest depends on:

  • Your student loans’ interest rates. A conservative but plausible return on your investments is 6% per year. That means if your loans’ rates are higher than that, you’d save more money by paying them off — and avoiding interest charges — than by investing. If your loans’ rates are less than 6%, putting extra money toward retirement or a brokerage account for nonretirement investing is a better bet.

  • Whether or not the loans are federal or private. Federal loans generally have lower interest rates and come with more benefits, like income-driven repayment options, than private loans. If you have only federal loans, investing rather than paying them off early likely makes more sense. But if your loans are primarily private, you have less to lose by paying them off fast.

  • How determined you are to pay off student loans early. Some people are more focused on being debt-free than others. If getting rid of your loans is a major personal goal, and doing so would bring you more joy than having a hefty investment account beyond your retirement savings, go for it.