Owing money in student loan form can be problematic on multiple levels. First, there's the burden of having to keep up with your monthly payments -- and having to put other goals on the back burner because your debt is monopolizing a lot of your income.
Secondly, the simple fact of owing money in student debt form could be enough to cause you mental anguish. You might feel stressed about having debt hanging over your head, and you might find yourself getting aggravated every time you make a loan payment.
As such, you may be eager to shed your student loan debt ahead of schedule. It's a good idea in theory, and one that could save you money in interest. But here are a few reasons it may not be the best idea to pay off your student loans early.
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1. Your interest rate is fairly low
If you took out private loans to pay for college, then you may be facing some pretty serious interest rates on your student debt. But if you took out federal loans, the interest rate on your loans may be far more affordable. And in that case, you may want to just keep paying your loans on schedule, since you're not looking at the same amount of savings with an early payoff as someone who borrowed privately.
2. You're investing your extra money
It's one thing if you have spare money in your monthly paychecks that you're spending on things like nights out, clothing, and entertainment. But if you're currently using your spare cash to invest, whether in a dedicated retirement plan or another account, then you may not want to accelerate your student loan payments. If you do, you'll lose out on the opportunity to keep generating returns on that cash.
In fact, it may be that you're earning a higher return in your IRA or 401(k) plan than the interest rate you're paying on your student loans. If that's the case, then it makes sense to keep investing your extra money.
3. You want to keep enjoying a tax deduction
Repaying student loans isn't fun, but it could work to your advantage from a tax perspective. You may be eligible to deduct up to $2,500 in student loan interest per year on your taxes, depending on your income, as this benefit phases out for higher earners.
It's natural to want to get rid of your student debt as quickly as you can so you can stop worrying about those monthly payments and start focusing on other major goals, like building a retirement nest egg or buying a house. But paying off student loans early isn't automatically the right move for everyone. Before you make it a goal of yours, think about whether you're better off repaying that debt on schedule.
Remember, in time, your student debt is apt to be gone. It's just a matter of when. If the idea of owing money isn't particularly upsetting to you, then you may decide to just stick to your original repayment plan.
