Should I Make An Early Payment On My Student Loans

Dec 23, 2023 By Susan Kelly

A prudent choice that might provide additional freedom and adaptability is to pay off your student debts ahead of schedule. If you pay more than the monthly minimum on your federal or private student loans, Premature debt repayment is always a possibility for you.

Should I Prepay Student Loans?

If you pay off your student loans early, the total interest you will pay throughout the loan will be lower. Suppose you increase the amount of money you spend toward paying off your student loans. In that case, however, you will need more money to achieve other financial objectives and satisfy other financial commitments.

Because of this, it is extremely important to give some thought to the financial objectives you have set for yourself, as well as the amount of money you will need to set aside to achieve those objectives.

Emergency funds

Before you even think about making more payments toward your loans, you should put some money aside in case of an emergency. An emergency fund is a money set up in a bank account to address sudden catastrophes such as the unanticipated need for automobile repairs, the loss of a job, or illness.

When you are confronted with a difficulty, the fact that you have an emergency fund assures that you won't have to resort to using credit cards. But if you don't already have an emergency fund, think twice about making more payments on your loans until you've placed some extra money into savings first.

High Credit Card Debt

If you have outstanding debt on your credit cards, paying off that sum should be your top priority before addressing your student loan obligations. The interest rates on student loans might be rather high, but the interest rates on credit cards can be absolutely astonishing. According to data from the Federal Reserve, the average interest rate on credit cards reached 16.44% during the fourth quarter of 2021

High-Interest Student Loans

When you have a student loan with a high-interest rate — federal student loans can have rates as high as 8.5%, and private loans can have even higher rates — a significant portion of your monthly payment goes toward the interest rather than the principal, which causes the total amount that you will pay for the loan to increase throughout its lifetime. Because you will have paid less interest throughout the loan term, paying off your private or federal student loans early can help you save thousands of dollars over the loan.

If You Don't Save For Retirement And Obtain The Full Company Match

When you have student debt, things like saving for retirement might seem less of a priority than they would. Nevertheless, you should start investing as soon as possible while still young.

Because of this, your money will have more time to grow, allowing you to enjoy a comfortable retirement. Although not all businesses provide 401(k) matching contributions, a significant number do so up to a certain limit or percentage.

Before making any further payments on your debt, it is strongly recommended that you first contribute the minimum amount necessary to employer-sponsored retirement plans to become eligible for the full match.

If You're Helping Other Life Objectives

When your finances are in good shape, it might be tough to decide the best thing to do with whatever excess money you have. If you have debt from student loans, consider paying it off as quickly as possible. If you want to stay caught up, paying off your student loans early should only be done if it doesn't prevent you from progressing toward your long-term goals. The following is a list of long-term objectives that you should think about donating to first:

  • Housing savings
  • Investing
  • Eliminating high-interest debt

Advantages of Paying Off Student Debt

  • You can lower your debt-to-income ratio, also known as DTI, which is a factor considered by financial institutions when deciding whether or not to extend credit to you for things like mortgages.
  • Once you have paid off all of your student loans, you will be able to put the money that you were previously putting toward those loans toward other financial goals.
  • Though you don't have to worry about managing your debt, it could be less stressful for you, even if it might make more financial sense to invest the money instead of paying it off.

Cons Of Paying Off Student Debt

  • If you pay off your federal student loans early, you risk forfeiting eligibility for debt forgiveness.
  • If you have a large amount of outstanding debt, your budget could suffer.
  • It's possible that you won't be able to accomplish your other financial objectives in the same amount of time.
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