Student Loans: The Pros and Cons of Paying Your Loans Off Early
Do you ever look at your monthly bills and ask yourself, “will I ever be done paying off my student loans?” or “should I try to pay my students loans off early, so that I don’t have the monthly financial stress and can allocate my money elsewhere?” If you’ve had these questions, don’t worry, you are not alone. Today, Americans owe over “$1.48 trillion in student loan debt, spread out among 44 million borrowers”—most of whom are likely asking themselves the same questions as they work to figure out how to best navigate the financial burden of their student loans (Student Loan Hero).
It seems to make sense that paying off your debt early is a good thing, right? However, for student loans that may not always be the case, and may vary from one borrower to the next. That’s why, once you have your diploma in hand and before you set the goal of paying off your student loans early, it’s important that you weigh the options of your loan repayment strategy. To help, we’ve listed below a few pros and cons to paying off student loans early:
Pros: Making the Case for Paying Student Loans Early
- The Impact of Interest Costs: Before you make the decision to pay your student loans early, it’s advised that you review your interest rates, since they may be a significant factor in deciding if you should pay off your loan ahead of schedule or not. For example, “if you have an interest rate over 5%, you may want to make paying off debt your main priority. High interest rates can tack on a lot of extra money to your balance, making the repayment period even longer” (Student Loan Hero).
- Free Up Monthly Income: If the idea of having extra money in your account every month really excites you, you may want to consider paying off your student loans early by making an extra payment or paying more than the minimum monthly payment. Since “there are no prepayment penalties, you can make extra payments of any amount” and “you can pay more than the minimum payment with no penalty” (Forbes). In the short-term, this strategy may mean cooking at home more and less ordering on UberEats, but the long-term benefit is that you will have extra money each month to allocate towards retirement or other investments, like purchasing your first home.
- Peace of Mind: For some of us, the idea of having any debt associated to our name is a burden that we don’t want to have. If having an on-going student loan payment causes added stress, make it a priority to pay the student loan off early. Supporting this idea is Fiscal Times, which featured an article that said a “great reason for paying student loans early is for the peace of mind. Getting rid of the debt once and for all means one less burden you’ll have to carry, and you can focus on investing for retirement or saving for a house.”
Cons: Why a Long-Game May Be the Best Financial Move
- Spread the Wealth: Did your mom ever say to you, “Don’t put all of your eggs in one basket?” While sometimes taking advice from parents is the last thing you want to do, your mom has the right idea in this case.
Say you’re in your early 20s; there’s a good chance that the last thing on your mind is retirement planning or setting up an emergency savings account. However, if you want to get ahead of the curve and set yourself up for financial independence, you’ll want to consider the best strategy for how to your allocate your income across your various responsibilities, i.e. debt, expenses, savings and other funds. What does this mean when it comes to paying off your student loans early? In short, if you fail to look at the full picture, and only focus on paying off your student loans early, you may deprive your different accounts (i.e. purchasing your first home mortgage or investing in your 401K) of reaching their full potential.
- The Beauty of Tax Advantages: Despite the many changes from the new tax law, the Tax Cuts and Jobs Act, the student loan deductions are going to stay as is—meaning that the IRS will “allow you to deduct up to $2,500 in student loan interest each year. While there was talk of doing away with this deduction, the final version of the tax bill allows it to stand. And that’s good news for the average 20- to 30-year-old who’s paying just over $350 a month to a student loan debt servicer (Investopedia)”.
However, it is important to remember that there are some restrictions to the student loan interest deduction parameters, which you should keep in mind when deciding if you want to pay your student loans off early or not. For example, according to Forbes, “You can claim the full $2,500 deduction if your modified adjusted gross income is $65,000 or less. The deduction is gradually reduced when your modified adjusted gross income is between $65,000 and $80,000” and “you can’t claim a deduction if your modified adjusted gross income is $80,000 or more.”
- Options for Debt Forgiveness: According to the Money/CNN article, Why Paying Off Student Loans Early Could be a Mistake, taking your time to pay off your student loan can actually lead to debt forgiveness and depending on the which federal student loan repayment option you have, you may be able to reap the benefits of automatic debt forgiveness. For example, “If you choose the Income-Based Repayment Plan, the Income-Contingent Repayment Plan, or either of the Pay As You Earn Repayment Plans, any balance you owe on your federal loans after 25 years will be automatically forgiven.”
If you still have questions on whether or not you should pay off your student loans early, feel free to contact our team at American Heritage Credit Union, and we can help you learn more about the options that will work best for you and your goals.