Having extra money in your bank account provides a feeling of security. But using that extra money to pay down your student loans more quickly could reduce both financial stress and the overall interest you’ll pay in the long run. There are advantages and disadvantages to consider when deciding whether to accelerate your student loan payments. Let’s take a closer look.
Advantages to Quickly Paying Off Student Loans
Nobody likes having large debts hanging over their head—or the monthly payments that go with them. If you have the extra money, there are real benefits to paying off your student loan debts at an accelerated pace.
Pay less in interest and lower your monthly payments. Over time, student loan interest can be expensive. The biggest benefit to paying your student loans off quickly is to lower the overall cost of your loan. For instance, a student loan debt of $35,359 at a 5.05% interest rate will cost you $45,108 over a typical 10-year repayment period. You’ll pay $9,749.00 in interest. Paying down your loans more quickly could potentially save you thousands of dollars in interest you could put toward other financial goals.
Become debt-free faster. Paying off any amount of debt is a cause for celebration. When you pay it off more quickly, it eliminates a huge financial burden and frees up money to pay for other things like a nicer car, a bigger apartment, and a vacation.
Save more money. Accelerating your payments helps you pay off your student loans in a shorter time. Once you no longer have a student loan payment, you can use that payment amount to boost your savings, whether that be your emergency fund, retirement savings, or future down payment on a house.
Benefits to Keeping Monthly Payments
Staying on track with monthly payments can also be beneficial. Here are a few reasons you may not want to rush to pay off your student loans.
You may be eligible for student loan forgiveness. If you have federal student loans, you may not have to pay back the entire amount you owe. You may be able to make payments for some time and get the remaining balance forgiven if you qualify for Public Service Loan Forgiveness. You may also get your student loans forgiven when you meet other requirements regarding your income and your profession—and future federal policies may instantly reduce the amount you owe (though you shouldn’t base your decision solely on possible future legislation).
You have more money for other bills. If you have the extra money in your budget, you can put it toward paying down balances on high-interest credit cards. You could even split up your extra cash and put some toward your student loan payment and some toward other financial goals.
You can start an emergency fund. If you don’t have an emergency fund, it’s time to start one. This dedicated savings account helps cover unexpected but necessary expenses, such as a needed car repair. If you don’t have any money set aside for emergencies, start saving for that before paying off your student loans. Experts recommend having three to six months’ worth of expenses on hand, but even setting aside one month’s worth of expenses is better than having no accessible emergency cash.
Improve your credit score. While paying down your student loan debt can help your credit, paying it off completely could cause a temporary decrease in your credit score. Alternatively, paying down high-interest credit cards can significantly improve your credit score.
Want to go ahead and pay it off faster? If, after reading this, you’re convinced that paying off your student loans more quickly is the way to go, there are several methods you can use to go about that. Confirm with your loan servicer that you want any extra payment amount to go toward your current month's payment. This confirmation makes sure your additional payments reduce the principal of the loan.
The Bottom Line
Step back and view your overall financial health before deciding how quickly to pay off student loans. Keep in mind that the most important aspect of paying your student loans is never missing a payment and making all payments on time. Skipping a loan payment could seriously hurt your credit score. Ensure that your score stays in good standing so you’ll be able to qualify for loans, such as a car or a house, in the future.
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