The Pros and Cons of an Early Student Loan Payoff

If you went to college sometime in the past several years there is a good chance you are still carrying student loan debt. While student loans can help you pay for college, they can also feel terribly restricting once the diploma is hanging on your wall and reality sets in. There is a great deal of conflicting advice over whether or not student loan debt ought to be paid off early. Unlike a loan for a car, mortgage, or business, most student loan debt is funded through government programs and carries a very low interest rate.

Should I Pay Off My Student Loan Early?

Is it worth it to pay off that debt early or should you just stick to the standard repayment plan? Here are the pros and cons to an early payoff of your student loan:


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Pros

  1. Though your interest rate is probably very low, you will ultimately pay less for your education by paying off your loans early.
  2. You will improve your debt-to-income ratio by eliminating that loan from your financial plate. This will free up more money for a home down payment, investments, and saving for your kids’ college education. Improving your debt-to-income ratio will also improve your credit score, which can pay off in many ways.
  3. Student loan debt will not be forgiven if you have to declare bankruptcy later in life. Making an early payoff on your student loan will help you take better control of your finances and relieve you of an extra payment if you hit a rough financial patch.
  4. Though the interest on your student loan is tax deductible, you are still only saving a portion of what you’re spending on interest. If you’re in the 25% tax bracket each dollar you spend in interest only saves you 25 cents in taxes. Paying off your loan saves you the full interest amount rather than a deducted portion of it.

Cons

  1. Since interest rates on student loans are so low, you could take the difference between what you can pay and what you are paying each month and invest it. If you can find an investment that gives you a higher rate of return than the interest rate you are paying on your loan, this alternative makes financial sense.
  2. As long as you are making a good faith effort to pay the lender is willing to work with you. It is possible to put loans on forbearance, to consolidate loans, to change the repayment amount, the repayment schedule, and even the date that your payment is due each month. If you hit a rough financial patch it won’t be the end of the world.
  3. You take this debt with you at death. Unlike virtually every other type of debt, the payoff amount of your student loan is forgiven should you pass away or become permanently disabled. Having an unpaid student loan will not burden your loved ones should tragedy strike, so you can take your time paying it back.
  4. Staying on top of your minimum payment each month helps your credit score. Having a mix of debt on your credit history with a consistent payment and no missed or late payments brings your score up.

What Should You Do?

To pay or not to pay is ultimately up to your level of comfort, discipline, and monthly income. It makes no sense to pay off your student loan if you are carrying more expensive debt. But even once you’ve paid off everything else, there are compelling reasons both for and against paying off your student loans. If having debt bothers you it makes sense to zero it out. If the idea of paying down a loan with money that could otherwise be invested and working for you is tough to swallow, it makes sense to keep your loan on the books.

About the Author

By , on Apr 21, 2011
Emily Guy Birken
Emily Guy Birken is a freelance writer, recovering English teacher, and stay-at-home-mom. She lives in Lafayette, Indiana, with her mechanical engineer husband and infant son. Her musings on life and parenting can be found at The SAHMnambulist.

Leave Your Comment (4 Comments)

  1. M in DC says:

    As someone who just bought my first place and is re-allocating my budgeting and debt payoffs, I spotted another con to paying off student debt vs. other kinds of debt – hardship deferral. If I get in a tight spot and lose my job, I can defer my student loans, but not my mortgage.

    • @M in DC: True, but what is the carrying cost of the debt? It’s like you’re buying hardship insurance that you may never need. It depends on your interest rate and loan balance, I suppose.

  2. Frugally Savvy says:

    I am in no hurry at all to pay off my student loans because I know money is worth more today then it will be down the road.

  3. tmgbooks says:

    All your points are well considered and reasonable as to the pros and cons of paying off your student loans sooner rather than later. And for those who already have the debt, it is sound information.

    But the decision-point that is most critical and where you can have the greatest impact on your financial future, is before the debt exists.

    Working your way through college is the best way to finance an education. Now are there reasons you could put forward for taking on student debt? Well, of course. And I hear all sorts of reasons from my clients as to why they have credit card debt, as well.

    My daughter is going to junior college and living at home for the first two years. She is not even applying for a four-year college. If/when she makes it through those two years, we can talk about the next two at that point; but even then we will apply for all the free money we can.

    I do not want to see her enter her adult life saddled with debt. Have no doubt: She will get as much education as she wants, but she will also be learning life skills that are just (if not more) important by working while she is pursuing a degree.

    I earned my first four degrees without taking on any debt and worked full-time the entire time I was going to college. I took on debt to finance my graduate degree and I realize in retrospect that it was unnecessary to do so; the financial “advisors” at my university actually encouraged me to do so! I know now that they did so because it was in their best interest, not mine.

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