Student loan debt is a financial burden for millions of Americans. If you are one of the many who owe money for your education, you may be wondering whether you should focus on early payoff to free yourself from this albatross and move on with your life.
The reality is, there are pros and cons to paying off your student loans ahead of schedule. Before you send extra money to your lender, there are a few big questions you should ask yourself.
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1. Will you be giving up the chance at loan forgiveness?
Before you consider early payoff, you should think about the possibility that you'll be giving up the chance to get some of that debt wiped clean in the future.
President Joe Biden recently put forth a plan to forgive up to $20,000 in student loan debt per borrower. While this plan was struck down by the Supreme Court, the fact remains that student loans are still a big political issue due to the number of Americans burdened by educational debt.
A future Congress could authorize the forgiveness of student loans with a plan that is within its constitutional powers. And, even if it doesn't, other forgiveness programs are already in place including one for public service workers.
If you've paid off your debt, you'll miss out on the chance to have some of it disappear if Congress acts to provide relief or if you become eligible for one of the existing forgiveness options. You won't get back the money you put in.
2. Do you have other debt to pay with less favorable terms?
If you have federal student loans, you have very advantageous terms. You probably have a low fixed interest rate on your loans and can change your payment plan as needed including switching to an income-driven plan that capped payments at a percentage of income. Your federal loans also allow you to pause payments by putting them into forbearance or deferment. And payments could be paused for you in times of disaster, such as during the recent COVID-19 pandemic.
It's unlikely that any other debt you have is going to come with all of these benefits, or any of them. Your mortgage lender isn't just going to let you reduce your payment to 10% of your income if you have a hard time paying it, and your credit card company is probably charging you a lot more interest than the Department of Education.
So, if you have other debt you owe, you may want to think twice about repaying your federal student loans ahead of schedule until you've taken care of those obligations.
Now, private student loan debt doesn't tend to have such borrower-friendly terms. But it still offers forbearance and deferment opportunities, and the rates you're paying may still be lower than other kinds of loans. You'll need to take a more careful look at how those debt costs compare when deciding whether to prioritize paying your private student loan off or repaying other creditors.
3. What is the opportunity cost of early payoff?
Finally, consider the opportunity cost of making extra student loan payments. Any extra you send to your lender is money you can't use for other things like saving for retirement or a house down payment.
There's a big opportunity cost to giving up that money -- especially since student loans tend to have affordable interest rates and up to $2,500 in student loan interest is tax deductible for most people.
If you can earn a better return by investing rather than paying your student debt off early, or if you want to do other important things like buy a house, early payoff may not make sense for you until you've accomplished your other goals and put some money into retirement investment accounts.
This, again, will vary depending on whether your student debt is private or federal and, if it's private, what the interest rate is. With private student debt, it's important to look at your individual rate when weighing this issue.
Ultimately, though, while it would be nice to be free of student debt, it's probably not the biggest priority for most people. So you should think carefully about whether it really makes sense for you.
