If you're tired of sending off student loan payments every month, you may want to consider paying extra to your lender so you can become debt-free ahead of schedule.
While this may be a worthy financial goal to pursue, it's not necessarily the right choice for everyone. Before you jump into early payoff of your educational debt, it's important to consider whether this is the best move for your financial situation.
Here are some issues to think about.
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What borrower benefits will you be giving up?
Federal student loan debts are unlike most other kinds of loans. You can choose income-driven repayment plans to cap payments at a percentage of discretionary income, or put loans into deferment or forbearance if you go back to school or experience financial or other challenges. There are even some options to get part of your loans forgiven.
Up to $2,500 in interest on student loans is also tax deductible for many borrowers, which means the government subsidizes your interest costs. And there is a looming possibility of loan forgiveness or payments being paused as the federal government takes steps to protect student borrowers.
By paying off your loans ahead of schedule, you'll be giving up all of these benefits specific to this type of debt. You won't find these advantages elsewhere, so it may not be worth using your extra money to repay loans early when they have such advantageous terms.
What other debts do you have?
You'll need to consider what other kinds of debt you have before deciding to focus on paying student loans off early. If you have debt with a higher interest rate, such as credit card or personal loan debt, you should generally aim to repay that before making any extra payments on your student loans.
Many other kinds of debt do cost more over time than student loan debt will, and there's little use in paying off your "cheaper" debt while costlier loans linger -- especially since those other debts are not going to provide the benefits that federal student loans do.
What is the opportunity cost of early payoff?
If you are like most people and have only a limited amount of money, you'll want to consider the opportunity cost of using some of your funds to repay your student loans ahead of schedule. You won't be able to invest this money or use it toward a down payment on a house.
Delaying other financial goals may not be worth it if your student loan debt is at a reasonable interest rate. In fact, if you aren't maxing out your employer matching contributions to your 401(k) or if you could invest in a reasonably safe investment and get a higher ROI than you'd get from early loan payoff, you probably don't want to put extra money toward your loans above and beyond your required monthly payment. There are more important uses for it.
What's the benefit of paying off your loans early?
Finally, you should think about the benefits of paying off student loans early, because there are advantages as well as downsides.
You won't have to worry about having a monthly payment any more, and you'll get rid of debt that's very difficult to eliminate in bankruptcy if you ever face serious financial hardship. You may also feel more free once your debt is behind you.
Ultimately, it's important to take the time to answer these questions, and to weigh all the pros and cons, to make an informed choice about whether early student loan payoff makes sense or is a financial goal you shouldn't pursue.
