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3 Questions to Ask Yourself Before Paying Off Your Student Loans Early

By Maurie Backman – Updated Feb 6, 2020 at 8:15AM

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Before you rush to rid yourself of student debt, make certain that's the best use of your spare cash.

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Many people struggle to keep up with their student debt payments, so much so that they wind up negotiating their loan terms and extending the life of their repayment period. But what if you land in the opposite scenario? What if you find yourself with a pile of spare cash and the opportunity to pay off your student loans ahead of schedule? You may be tempted to eliminate that debt for good, but before you do, be sure to ask yourself these key questions. 

1. Do I have an emergency fund?

We all need a healthy level of emergency savings to protect ourselves from life's unknown expenses. Ideally, you should have an emergency fund with enough money to cover three to six months of essential living costs. If you don't, then you're better off socking your spare cash away in a savings account and waiting until your emergency fund is complete to start paying down your student debt ahead of schedule.

The reason? Imagine you pay off your student loans but are left with virtually no money in the bank. If your car encounters an issue that'll cost you $2,500 to repair and you don't have the cash, you'll incur more debt in order to fix it. And chances are, that debt will come with a higher interest than what you were paying on your loans. 

Of course, that assumes that you'll have the option to charge that expense. If you don't have a high enough credit limit, you'll really be out of luck. That's why building an emergency fund should take priority over all other financial goals -- student loan payoffs included. 

2. Do I have higher-interest credit card debt?

If you racked up a hefty credit card balance in addition to a pile of student loans, it makes sense to first pay the debt that carries the highest interest rate. And if you took out federal loans for college, then that debt is likely costing you much less than the interest rate you're paying on your credit cards. If that's the case, then knocking out your credit card balance first will save you more money in the long run.

Now if you borrowed privately for college, there's a chance the rate attached to your student loans could be comparable to that of your credit card, so take a look at those numbers and, again, pay off whichever loan comes with a higher interest rate. But, keep in mind that the interest rate on your private student debt can vary and climb over time, so review your loan terms and factor that information into your decision. 

3. Will paying my debt early impede other life goals? 

You may be eager to rid yourself of student debt and not have that burden to worry about. But before you allocate all of your spare money to eliminating those loans for good, think about the other financial goals you've set for yourself, and whether paying off your student debt early will make them more difficult to achieve.

Imagine, for example, that you're hoping to buy a house in the next five years. The money you spend paying off your student debt could cause you to come up short on a down payment, thereby forcing you to push off that milestone. Similarly, if you're looking to have children, you may want to do so at a time when you have a healthy financial cushion. But if you focus more on paying down student debt and less so on building savings, then you may have to delay your plans to expand your family as well. Therefore, think about the things you'll potentially be delaying or giving up by paying off your student debt ahead of schedule, and make sure the sacrifice is really worth it.

Let's be clear: Paying off your student loans as quickly as you can is a smart move. The sooner you do so, the less interest you'll pay on that debt. But if you're managing those monthly loan payments just fine, and you have a relatively low interest rate attached to that debt, then it might make sense to dedicate your financial resources to something other than an early student loan payoff. 

You should especially make sure to build an emergency fund and pay off higher-interest credit card debt before knocking out your student loans. And if eliminating your student debt early means missing out on major life milestones, then it might make sense to carry that debt a bit longer so you can check those accomplishments off your list. 


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