Should You Pay Off Your Student Loans Early?

You’ve likely seen the news: “Recent grad Bob pays off $100,000 in student loan debt in 2 years!” or “Susie destroys $80,000 in graduate school debt in 7 months!” All of a sudden, it seems rather normal for people to be devoting large sums of discretionary money to pay off their student loans. While it’s admirable for people to pay off their large debts quickly, it might not be the wisest choice for everyone to make.

We’ve all heard the theme that “debt = bad, no debt = good”, but that statement may not hold true in all cases. If you’re considering putting down serious cash to pay off your student loan debt, check out these reasons for reconsidering that. Also – for all those who disagree, I’d love to hear your reasons why in the comments!

Repayment Options for Federal Student Loan Debt

When discussing student loan debt, note that we’re talking federal student loan debt and not private student loans. Private student loans are much similar to the debt you carry on your credit cards: the interest rates can be a lot higher than federal student loan interest, and private lenders can set different payment schedules.

When we talk about federal student loan debt repayment, we’re talking about any of the following:

• Standard repayment
• Graduated repayment
• Extended repayment
• Income-based repayment
• Pay As You Earn
• Income-contingent repayment
• Income-sensitive repayment

These repayment plans vary in repayment timeframe, anywhere from 10 to 25 years depending on the repayment plan, and interest rate. Income-based repayment plans are exactly what they sound like: they cap your payments at a certain percentage of your discretionary income, ensuring you’re not paying 50% of your income toward your student loan. Some plans, like Teacher Loan Forgiveness and Public Service Loan Forgiveness allow you to have some or all of your loans forgiven in 5 (Teacher Loan) or 10 (PSLF) years.

Considering Interest Rates

Interest rates are generally very low on federal student loan debt, but can vary. For reference, I have an interest rate on one loan at 1.8%, and another loan at 7.65%. My credit cards’ interest rates? 18-22%.

The high interest rate for credit cards and other types of loans are generally why responsible financial planners encourage you to pay down high-interest rate debt first. If you paid down $50,000 in student loan debt at 2% first, but left your $20,000 at 22% credit card debt sitting there, that would be a very poor decision. While it’s great to pay off $50,000, consider how much interest you would pay if you only paid the minimum on your credit card debt. Hint: it’s a lot!

For most people, federal student loan interest rates are some of the lowest interest rates they’ll ever receive. Sure, your mortgage may be cheaper (especially before the rate hikes), but many other debt (car loans, credit cards, etc.) is likely to be much more. Also, many people do not encourage you to pay off your mortgage debt either, as it’s considered “good debt.” 🙂

Also, whereas your payments on student loan debt can fluctuate if you lose your job, take a lower paying job, or decide to go back to school/become a stay-at-home parent, your payments on other debt will not change. Do you think your credit card company cares if you take a pay cut to be at home with your kids or start your own business? No. However, if you do decide to become a small business owner, you can enroll in Income Based Repayment and reduce your payments, allowing you the flexibility to start a new career.

Predicting the Future is Impossible, So What Can You Do Right Now?

In the end, it’s impossible to predict how your life will look in 10+ years. You may decide to have a child and determine you want to shovel a ton of money to paying off your loans now, instead of waiting for the government to take care of it in 20-25 years.

You may think carrying any kind of debt is irresponsible, or you may think that having the federal government pay off the rest of your student loans is irresponsible or immoral. Lots of people would agree with you – bring up the topic of “student loan forgiveness” at a table full of mixed age groups, and you’ll find many people strongly disagree with loan forgiveness.

However, consider what you can afford right now. If you have major expenses coming up, like a car replacement, major surgery, home repair, you might need to save your money for that. You might need your money right now for day-to-day expenses – nothing frivolous, but not expenses you can ignore. You may decide stock market returns over the long term will beat out what you’ll pay in student loan interest, so it makes more sense for you to invest your money than immediately demolish your debt.

In the end, paying off your student loans early or on a federal schedule is up to you. You shouldn’t be swayed by the Bobs or Susies that pay off all their debt in 8 months – you don’t know how much money they bring in, or how many kidneys they’ve harvested and sold to pay off this debt.

If you have the ability to pay off your loans, by all means go ahead and do it. Just don’t let paying off loans now jeopardize your retirement future – you have decades to make money and consistently pay off your loans, but when you’re 70 and have no savings to speak of, you’ll find getting a job considerably more difficult.

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What do you think – should people prioritize paying off federal student loan debt above other debt? How are you paying off your debt and, if it’s paid off, what was your strategy and how long did it take you?