A life free of student loan debt may look very rosy, particularly since an average student graduating in 2016 had $37,172 in debt. The good news is that financing an education is well worth it for the vast majority of Americans. An analysis of U.S. Labor Department statistics demonstrates that those holding a four-year college degree make 98% more money per hour on average than those who don’t have a degree. But now that you’re out of school and trying to decide the best way to spend your money, you will need to decide if it’s to your advantage to pay off your student loans early or put your money elsewhere.
Benefits of Paying Off Student Loans Early
Paying off your student loan debt will lower your debt to income ratio, which means it will be much easier to get a loan when you really need one, such as when you want to buy a house. Once free of your student loan debt, you could put that money into an investment such as a mutual fund. And remember, if your fortunes sink and you must declare bankruptcy, you must still pay off your student loan debt. That means it makes some sense to pay them off when you are sure you have the money to do so.
Arguments for Not Paying Off Student Loan Debts Early
However, there are valid arguments for not paying off your student loans early if you must pay more money per month to do so. You must look at your individual situation and determine what is the most advantageous plan for you. One thing to take into consideration is that student loans have low interest. Mortgage debt is typically even lower while credit card debt is quite high. You should, therefore, want to consider your needs and lifestyle. If paying off your student loan means you will have to buy needed items with credit cards, you might want to rethink that strategy.
Flexible Repayment Plans
Another reason you may not want to pay off your student loans early is that the federal government offers quite a bit of flexibility in repaying your loans. The Department of Education offers eight different payment plans and some are for borrowers with low incomes. Private lenders are not so flexible. In fact, four of these federal payment plans can result in debt forgiveness after 25 years. If you are struggling to make your student loan payments now, it is a good idea to consider these options.
If paying your loans early means you cannot put money in the bank for a rainy day, that is another reason to rethink early repayment. Everyone should have an emergency fund in case of job loss, medical emergencies or other urgent needs. Financial experts recommend you should have three to six months of expense money set aside. If all your money is going to paying off student loans, you will not be able to build an emergency fund. But if you have enough income to save a bit and still pay off your student loans early, then it may make sense to do so.
One of the arguments for paying your students loan early is so you will have money to invest. But if you are paying more monthly to pay off your student loans early, you could just take that extra money and invest with it now instead of waiting until your student loans are completely repaid.
How to Pay Off Student Loans Early
Once you have decided it’s in your best interests to pay off your student loans early, you have many options, and you’re in good company. According to the Consumer Financial Protection Bureau (CFPB), approximately 25% of people pay off their student loans within a year. About 70% fully repay before the tenth year. Let’s look at some of the ways they do it.
Pay Extra on Your Principal Every Month
One of the most straight-forward ways to pay your student loan off early is to just pay extra every month. Let’s look at a couple examples.
- If you have a 10-year loan for $20,0000 at 6.8% interest and pay an extra $100 every month (over your required $230.26), then you will reduce your loan term by 3.8 years and save $3,281.30. The amount you will save is 41.8% of the $7,849.47 interest you would have paid over the full 10 years.
- If you have a 10-year loan for 6.8% interest and pay just an extra $20 every month (over your required $230.26), you will reduce your loan term by a year and save $1,136.95. The amount you will save is 14.48% of the $7,849.47 interest you would have paid over the full 10 years.
Set Up Automatic Payments
If you have decided to pay extra, the most effective method is to set up an automatic payment, so you don’t have to think about it every month. Even if you don’t increase your monthly payment, you may be able to get a 0.25% interest rate deduction on federal student loans for enrolling in automatic payments. This isn’t much, but every little bit counts. The bigger advantage is that it keeps you on track, so you don’t miss payments and hurt your credit.
Refinance and Consolidate Your Loans
Look for student loan refinancing rates that are lower than your current student loan rate. If you can reduce your rate, then more of your payment will go to the principal and you will pay your loan off faster. Let’s take our same example where you have a $20,000 loan at 6.8% over 10 years. If you can refinance at 3%, you will save $1,683 in interest. If you have more than one student loan, you could refinance and get one consolidated loan with one monthly loan payment.
Seek Forgiveness for Student Loans
Currently, 34,000,000 are eligible for the public service loan forgiveness program, but only 552,931 are enrolled in it. To qualify for the program, you need to
- Make 10 years of qualifying on-time payments (120 in total) toward your federal student debt. Once that is completed, the U.S. Department of Education will forgive your student loan debt.
- Work in public service at least 30 hours a week after October 1, 2007. You can meet these criteria with more than one job.
- Work for a qualifying public service employer. These include
- Government organizations
- Emergency services
- Public health
- Public education
- Legal services
- 501(c)(3) nonprofit organizations
- Have a direct loan. If the word direct appears in the name of your loan, it should meet the criteria.
If you don’t qualify for public service loan forgiveness, you may still qualify for loan forgiveness if you work in some other professions. If you are a full-time teacher who has taught for five consecutive years at an elementary school, secondary school, or educational service agency that serves low-income students, you may qualify.
Student Loan Repayment Assistance Programs (LRAP)
The assistance described above apply only to federal loans and not to private loans. If you have private loans or otherwise don’t meet the criteria of the public service and teacher loan forgiveness programs just described, you may want to consider Student Loan Repayment Assistant Programs (LRAP) to help you pay off your loans. These programs have varied criteria and may prioritize people who received degrees from state schools, work in specific regions or are employed in specific fields. If you have not yet gone to college, you may want to ask your college if it partners with LRAP and get details. However, you do not need to enroll until after graduation.
Take Your Rightful Tax Deductions and Credits
You may deduct the lesser of $2,500 or the amount of interest you paid during the year on a qualified student loan. You don’t even need to itemize to get this deduction. Of course, you must meet certain qualifications.
- You paid interest on a qualified student loan in the last tax year;
- You’re legally obligated to pay interest on a qualified student loan;
- Your filing status isn’t married filing separately;
- Your modified adjusted gross income is less than a specified amount which is set annually; and
- You or your spouse, if filing jointly, can’t be claimed as dependents on someone else’s return.
In addition to deductions, also check to see if you are eligible for any tax credits. There are no tax credits that relate directly to student loans, but if you qualify for the American Opportunity Tax Credit, you can qualify for a maximum annual credit of $2,500 for educational expenses for each student. You may want to see Publication 970 (2016), Tax Benefits for Education for more information as well as Form 8863, Education Credits.
Pay Every Two Weeks Instead of Every Month
Just because your student loan payment is due every month doesn’t mean you can’t pay more often. Consider making half your payment every two weeks, which works out well if you are paid every two weeks. You will be making an extra payment over the course of a year, but it won’t feel much different than the way you are paying now. This can knock almost a year off a 10-year loan.
Pay Student Loans with the Highest Interest First
Interest is extra money you must pay to get a loan, but you don’t really get anything for it. So, if have more than one student loan and want to pay extra every month, put that extra into paying off your highest interest loan. In the meantime, look for ways to refinance these loans at a lower rate and possibly consolidate all your loans.
Seek Employment with Student Loan Assistance
It’s not common, but according to a recent survey, a small number of employers, (about 3% of companies surveyed), offer assistance with student loans. It’s certainly worth asking when you are interviewing. Employers who offer assistance typically match your payments up to a ceiling, similar to many 401K programs. It may become increasingly common for employers to offer student loan assistance to attract talent.
Whether paying off your student loan debt early is a good thing or a bad thing largely depends on each borrower and their financial situation. Paying off your highest interest loans should take priority over what type of loans they are. If you determine that your student loans should be paid off first, then the tips provided in this article can greatly help if you apply them.
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.