Paying Off Student Debt Early: Pros and Cons

Throughout the college journey, parents and students often wonder how they will pay off student debt. With the rising cost of college tuition, finances can cause hesitation as you’re trying to manage other necessary bills. In fact, a recent study shows that more than 13 million college students are more concerned about their financial future and rising college costs with current economic uncertainty.

Thankfully, there are many resources and strategies that can help support your unique financial situation. Some even allow you to pay off your student loan debt early without sacrificing retirement or emergency savings. Deciding whether to pay off interest debt early depends on your long-term budget goals, increased interest rates, and the amount of time left to pay your loans.

To determine which strategy works best for you, you should first understand the benefits and risks of each option as well as how each option could fit into your life.

Should I Pay Off My Student Loans Early?

Everyone’s financial situation is different. Student loans are a big, long-term responsibility, though paying them off early may not be the best use of your money. If you don’t decide to pay them off early, you’ll spend a longer amount of time paying off the loans and their accrued interest. 

But if you focus on putting more toward your loans, this can draw your attention from other strategies like saving money for a home, putting money away for retirement, or building an emergency fund.

It isn’t too late to develop a strategy. Recently, the U.S. government suspended all federal student loan payments and halted all interest charges through the end of September 2021 due to COVID-19 Student Loan Relief. If you weren’t prepared before, now is your chance to plan accordingly.

Consider how paying off your student debt early can affect your other financial goals. One less payment to worry about means you could get a head start on other financial responsibilities. Paying off student loans early can also improve your debt-to-income ratio, making you more attractive to lenders if you’re in the market for a home or vehicle loan.

While there are a variety of pathways you can think of taking to set yourself up for success, consider structured ways to handle your money.

How to Pay Off Student Debt Early

If you’ve decided that paying off your student loan debt early is the right financial decision, here are some ways to reduce your loan balance faster.

Make Extra Payments with Autopay

If you can afford to make extra payments toward your student loans, even just an extra $20 or $50, it can help cut the principal quickly and reduce the amount of time to pay them off. 

Ways to put extra money toward your student loans could include:

  • Cutting unnecessary bills like subscriptions
  • Saving gift money
  • Allocating tax refunds toward student loans
  • Starting a side hustle

To start making payments, you can either decide to pay more than the minimum amount when it’s due or make additional bi-weekly payments throughout the month on autopay. Using the autopay method helps you stay committed to being consistent without wondering if you should pay more each time around.

Having a lower overall balance minimizes the duration of the loan period and reduces the amount of interest that affects your total.

To put it into perspective, if you paid an extra $150 per month on a loan of $15,000 total at a 4.5% interest rate of 10 years, you’d be cutting the loan term in half. Instead of paying over $18,000 over 10 years, you’d pay just over $16,000 in 5 years.

Even this small change makes the debt significantly less restraining and saving money can go a long way.

Pay Off Capitalized Interest

A smart strategy for reducing your overall debt quickly is to pay off the capitalized interest on your loans. Interest increases the total amount you have to pay back and accrues when you don’t make payments. This occurs typically while you are in school, after the grace period ends, or after a period of forbearance.

However, if you pay off interest before the interest capitalizes, your student loans will be easier to pay off. Preventing interest from capitalizing can save you thousands of dollars. Contact your student loan servicer to apply these payments to your principal balance rather than it being considered money paid ahead.

Refinance Student Loans

Student loan refinancing is a helpful way to consolidate your loans into one. It’s a good fit for borrowers with excellent credit and if they have high interest rates on their loans. 

Refinancing student loans secures a new loan with lower interest rates, and you can opt to take on a shorter loan term. While this means you may be paying more each month, you’ll be able to avoid more interest charges and pay the debt faster.

It’s important to note that refinancing your loans can only be done through a private lender and doesn’t offer as much protection as the federal government. You’ll also no longer have access to federal programs such as student loan forgiveness or pandemic relief benefits.

Use a Home Equity Loan

Have you ever thought about borrowing against the value of your home? As you make your mortgage payments over the years and if the value of your home increases, the result is equity in your home. Home equity loans can serve as a useful solution for homeowners to pay off most or all of their school loans at once.

This type of loan offers various financial advantages including: 

  • Lower interest rates
  • Fixed payments each month
  • Cash in a lump sum
  • More flexible to obtain because it’s using your home as collateral 

However, keep in mind that if you fall behind on payments your home could be at risk of foreclosure.

Think about how this option could fit into your monthly budget. Student payments with higher interest rates add up quickly, and this could save you from stressing out about barely seeing your payments budge by eliminating those monthly payments altogether. As an added bonus, you’ll save a lot of money down the road.

Take Advantage of Tax Deductions

Student interest on both federal and private student loans is tax-deductible. This allows borrowers to deduct all or part of their interest on qualified student expenses when they file and submit their annual federal income tax return to the IRS including:

  • Tuition
  • Fees
  • living expenses
  • Transportation
  • Textbooks

The student loan interest tax deduction can reduce your taxable income by up to $2,500 depending on your income for the interest paid on student loans in the year for which you’re filing.

Those who qualify for the deduction often save a few hundred dollars on their income tax return. Paying less in taxes provides an easy way to put some extra money toward your debt. Be sure to speak with your tax advisor about any relevant tax benefits to your education and what you’re eligible for.

Apply for Loan Forgiveness

Forgiveness programs can eliminate part of your student debt under certain requirements. A well-known program is Public Service Loan Forgiveness (PSLF), which forgives the remaining balance after you have made 120 qualifying monthly payments under a repayment plan while working full-time for a qualifying employer. 

Qualifying employment includes public service positions by a government or nonprofit organization. While not everyone qualifies, you can complete a PSLF form every year to see if you’re on track.

Additional forgiveness plans you can look into include state-sponsored repayment assistance programs, military assistance, and other loan repayment assistance programs are available. What’s more, Joe Biden’s Student Loan Plan is continuing to be developed in 2021. This potentially offers to forgive $10,000 worth of student loan debt regardless of your income. 

Avoid Repayment Programs

If you’re focused on lowering your student loans or are struggling to repay them, it may be in your best interest to look into a repayment plan such as Pay As You Earn (PAYE), which extends your term from as much as 10-20 years and decreases your payments. It’s a much slower payment method that doesn’t offer extra saving incentives, which is not ideal if you are trying to pay off your student loan debt as quickly as possible.

Stick With Paying Off Student Loans Early

There are always pros and cons to every decision you make throughout your college life, and afterward especially. It’s essential to know how to manage your finances in order to pay off your loans quickly and safely. Develop a fun and motivational budgeting plan and watch how you can reach some fulfilling financial goals.

How you choose to make your finances easier to manage is up to you, and what resources you think can best benefit your own needs. Becoming debt-free with something as big as college throughout life’s obstacles is a rewarding achievement that should make you feel proud.