Tiombe Huggins, a fitness instructor at Pure Barre and an Etsy creator, paid off her $9,000 federal student loan balance in two lump sums shortly after graduating. Her only regret is that she didn't do it sooner. "My debt is gone and I could not be happier," she told me.
Zina Kumok, a freelance personal finance writer, paid off $24,000 in student loan debt in three years by allocating half of her take-home pay toward her balance. But she regrets not saving during that time or investing for retirement. "I was so laser-focused on tackling my debt that I put off everything else that mattered to me on the back burner," Kumok said.
Unlike the average student loan borrower, who takes 20 years to pay off their high education debt, Huggins and Kumok paid off their loans early.
That got me thinking about my own student loan bill.
I don't regret taking out student loans for my undergraduate education. But the $27,000 balance is starting to overwhelm me.
Would paying off my student loan debt sooner be a smart financial move? In personal finance, we highlight the importance of paying down debt, especially for high-interest credit cards and even for mortgages. Why should student loan debt be any different?
To get answers, I contacted three student loan experts: CNET expert review board member Elaine Rubin, director of corporate communications for Edvisors; Michele Shepard Zampini, senior director of college affordability at the Institute for College Access and Success; and Jennifer Finetti, director of outreach and advocacy at Scholarship Owl. Here's what I found out.
Pay off your student loans early... if you can
The student loan experts I spoke with agreed that paying off student loan debt early is generally a smart financial move. However, they pointed out that you shouldn't avoid other debt or overshadow other financial goals in the process.
In other words, it's not wise to put yourself in a precarious situation to pay off your loans early. It all depends on your personal situation, whether you have a strong financial foundation (including an emergency fund) and if you're enrolled in a student loan forgiveness plan. If you have the resources, though, it's a good option to at least consider, according to Zampini.
"For most folks, this is a luxury conversation," said Zampini. "But if your circumstances allow, it's totally reasonable to want the weight of student loans off your shoulders sooner rather than later."
Advantages of paying off your student loans early
Here are some advantages of tackling this debt early:
🙌🏼 You'll be relieved of the burden
Carrying debt comes with stress and anxiety. We constantly worry about whether we're doing enough to tackle that debt and what we could have done differently to avoid it. Paying down debt sooner can relieve you of the burden.
"Some people understandably get stressed out by debt, and they really want to get out from under it as fast as they can," said Finetti. If you're in that camp, then being more aggressive with your repayment plan can be helpful.
📈 You'll improve your debt-to-income ratio
Finetti said one advantage of paying down student loans sooner rather than later is that it can reduce your debt-to-income ratio.
Your debt-to-income ratio compares how much you owe each month in debt to how much you earn in income. Lenders look at your debt-to-income ratio to measure your ability to make monthly payments on a loan. Experts recommend applying no more than a third of your income to debt.
💸 You'll pay less interest
Like most debt, student loans accrue interest on top of the principal amount each month. Just like carrying a balance on a credit card, you're paying interest on whatever balance you have. So, the sooner you pay off your loan, the less you'll pay over the life of the loan.
Online calculators make it easy to determine how much interest you'd accrue each month. But the formula is simple if you want to do the math yourself. All you need to know is your balance and interest rate: Outstanding Principal Balance × (Interest Rate ÷ Number of Months in a Year) = Amount of Monthly Interest. My federal student loan has an outstanding principal balance of about $27,000 and a fixed rate of 4.5%, so my loan accrues roughly $101 monthly.
🏡 You'll have room for other financial goals
Another advantage to paying off your student loan debt early is being able to focus on other goals, such as saving for retirement, growing your emergency fund or building your kid's college fund. Those opportunities become possible when you have extra money, according to Finetti.
"When you don't have extra money, all those opportunities kind of go by the wayside," Finetti said.
Disadvantages of paying off student loans early
There aren't a ton of disadvantages to paying off student loans early, but there are some obvious factors to keep in mind.
✏️ You won't be eligible for student loan forgiveness
If you pay off your entire federal student loan balance early and you're on a path to forgiveness, you lose the possibility of having your debt forgiven.
Student loan forgiveness is a particularly volatile topic (for example, SAVE borrowers are currently in forbearance for the foreseeable future). Most income-driven repayment plans, also known as IDRs, have forgiveness programs built in, but the road to getting there is a long one, and the future is unclear, according to Rubin.
"Some borrowers will qualify for forgiveness, and some borrowers will not qualify for forgiveness, which is a tough reality to face," Rubin said.
If you're on a path to forgiveness, making additional payments might not make sense because you won't get that money back once you meet the qualifications. Instead, we recommend putting your additional funds in a high-yield savings account for the time being.
🐿️ You won't chip away at higher-interest debts
When you put all your resources into paying back your student loans, other debts continue to accrue interest. If you have other debt, you should prioritize paying down whatever balance has the highest interest rate.
"Start with the debt that's causing you the most problems," Zampini said. For example, having credit card debt with a 30% annual percentage rate might cost you more to hold on to in the long run.
⏰ You could delay other financial goals
It's not worth putting extra resources toward student loan repayment when you haven't established any savings to fall back on in an emergency.
"Not everybody wants to pay off their loans as fast as possible," said Finetti. "If you find yourself in a situation where you've lost your job or need money for a car repair, it pays to have cash sitting in an account that you can rely on."
An emergency fund should cover at least three months of expenses, depending on your financial situation. Finetti said to keep making your minimum loan payments while you work on building an emergency fund, and you can always reevaluate later.
Strategies to help you pay off your student loans early
If you're trying to pay off your student loans quickly, there are several ways to start. But again, don't put yourself in a situation where you're paying more than you can afford.
Zampini also shared another tip with me. Before you do anything, communicate with your student loan servicer about your plan. Servicers usually have a particular order of operations for payment applications.
"Your student loan servicer typically applies your payments to any outstanding interest before applying any remaining funds to the principal," said Zampini. "So if you're paying extra, you have the flexibility to say how you want that money applied to your balance."
Here are four ways you can tackle your debt quickly:
- Pay more than the minimum payment: Putting more than the minimum payment toward your debt can help you pay your loans off faster. Play around with the numbers using a free student loan payoff calculator online. You can see how much time you could save by paying more each month.
- Pay more frequently: Double up on your monthly payments if you can. For example, if you currently pay $100 monthly, pay $200. Set these payments on cruise control with autopay so you don't have to set reminders.
- Lump-sum payment: If you can make a lump sum payment toward your student loans and you don't have high-interest debt elsewhere, do it. Put any extra cash toward your principal balance, whether from a side hustle, inheritance, bonus checks, etc.
- Pick the right repayment plan: Take the time to weigh your main priorities in your repayment journey, whether paying off your debt as soon as possible or sticking with an IDR for a path to forgiveness. For example, I'm paying the bare minimum with an income-based repayment plan, but there are different approaches if I want to pay off my debt quickly.
What's next?
Getting out of debt is always a smart move, but there's no one-size-fits-all answer to whether you should pay off your student loans early. The most important thing is to consider all the options and choose what works best for your financial situation and goals.
Since I'm enrolled in an IDR on a path to student loan forgiveness, I'm not working toward paying off my debt early quite yet. I want to see how the SAVE plan plays out in the courts, but I'd be open to it in the future.
Questions? Comments? Reach out to me at lhall@redventures.com
