Pros & Cons of Paying off Student Loans Early
This story was updated on Oct. 13, 2021.
Many college grads respond to travel invitations or big life purchases with “Sure. As soon as I pay off my student loans.” But what if smart planning could erase that debt sooner rather than later?
One member of the SoFi community turned to refinancing to do just that.
Paying off student loans early is the right move for many people, if they can swing it, but not all. Everyone’s finances are different.
A Matter of Principal
Erika Jimenez is an MBA graduate who left grad school with around $50,000 in debt. At first she was resigned to paying it off over the next nine to 10 years. But after paying for three years and making only a $10,000 dent in her total balance, she decided it was time to revisit her options.
“When I first graduated, the debt felt manageable,” Jimenez said in a written interview with SoFi. But after she learned how much of her payment was being applied to interest rather than principal, the reality started to feel overwhelming.
She was initially able to contribute a little extra toward principal each month, but a move — and much higher living expenses — put an end to that.
Jimenez started looking for ways to lower her nearly 7% interest rate so that more of each payment would be applied to the principal. A lower interest rate would also give her the opportunity to go back to paying extra on the principal each month.
She considered putting the balance on a 0% APR credit card, but she worried about a lack of flexibility in case of a financial emergency. She finally decided to refinance through SoFi for the great rate she qualified for.
“I also kept continuing to refinance, and the rate got better and better,” she said. “I liked that there were no fees, and the application process is easy and straightforward.”
After refinancing, “I became obsessed with managing my money better,” Jimenez said. She created a budget and stuck to it, decreasing spending on unnecessary items and focusing on paying off debt and saving for a home.
Fast-forward three years, and Jimenez made her final payment on the remaining $40,000 or so in debt — a far cry from only shaving off a quarter of that amount her first three years.
“I was one of the first of my grad school friends to pay off their student loan,” she said.
Can You Pay Off Student Loans Early?
Yes. Federal law forbids lenders from charging a prepayment penalty on federal or private student loans.
Then the question becomes Should you pay off student loans early? That depends on your total financial picture and priorities.
Here are some pros and cons of paying off student loans early.
Pro: Less Total Interest Paid
A big advantage to paying off your student loans early is the ability to save a significant amount in interest. Early payoff gives the loans less time to accrue interest, which means you’ll pay less money in the long run.
A student loan calculator can give you a good picture of how much interest you’ll pay on your current trajectory.
Pro: Improved DTI Ratio
Paying off student loan debt early can be a smart choice if you’re in the market for an auto loan, mortgage, or personal loan because it may improve your debt-to-income ratio, which could make you more attractive to lenders.
Pro: Reduced Stress
Because student loans never go away until you pay them off, even in bankruptcy in most cases, taking that payment off the table can reduce financial anxiety.
Con: Ignoring High-Rate Debt
Federal student loan rates are often lower than rates on most other loans and lines of credit. Do you pay off the balance on your credit cards each month? If not, credit card debt can be really hard to pay off. Here’s Why Credit Card Debt Is So Hard To Pay Off.
Borrowers with a lot of credit card debt along with student loans might want to focus on getting rid of that high-interest debt first.
Con: Lack of an Emergency Fund
One more financial benchmark to consider is an emergency fund. Do you have one? Two-income households might shoot for three months’ worth of expenses; single earners, closer to six months’ worth.
Small, unexpected expenses can be a hardship for many families. If you’re in that group, you may want to build up a nest egg before accelerating student loan payoff.
Con: More Money Out of Pocket
Paying off existing student loans early means making additional payments or larger payments. That could be a struggle for many.
What About Refinancing?
Jimenez’s savings from refinancing — taking out a new loan with a new rate to pay off existing loans — didn’t happen with just one refinance. She used her lower payments to gather momentum and help pay down the principal balance. When she refinanced again on that lower balance, her rate got even lower.
The first step toward a smart refinance is to look at lenders, interest rates you might qualify for, and loan terms, or lengths. You’ll also need to educate yourself on topics like consolidation vs. refinancing.
It’s important to consider the loss of federal benefits — like income-driven repayment and Public Service Loan Forgiveness — when refinancing federal student loans with a private lender.
For Jimenez, paying off her student loan debt meant she could finally realize her dream of owning a home.
Her advice for others who want the same success?
“Never lose focus of the goal,” she said. “Not all months will be great, and that’s OK.
“It feels great to pay something off. It’s definitely a mental boost.”
There are pros and cons of paying off student loans early. If you can qualify for a lower interest rate, it might be worthwhile.
SoFi refinances both federal and private student loans, with no fees.
SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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