Pros & Cons of Paying off Student Loans Early
How many college graduates have responded to travel invitations or big life purchases with, “Sure, as soon as I pay off my student loans.” It’s a burden that can saddle a graduate for years after the last day of classes, but what if smart planning could erase that debt sooner rather than later?
But we should first mention that this member’s story is just an example we can learn from—and what worked for them might not work for someone else. Following in her footsteps might not yield the same results, because everyone’s finances and debt payoff strategy is different. But the key takeaways from these members’ repayment approaches might help if you’re currently crafting a plan to knock out your student debt.
Erika Jimenez, a member of the SoFi Community, is an MBA graduate who left grad school with around $50,000 in debt. At first, she said she was resigned to paying it off over the next nine to 10 years. But after paying for three years and only making 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, it started to feel overwhelming. She was initially able to contribute a little extra toward principal each month, but a move to Los Angeles—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 was interested in learning more about how to refinance student loans, but her research yielded limited options and rates that weren’t much better than she already had.
She considered other options, including 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 rates 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 solely on debt payoff and saving for a home.
Fast forward three years, and Jimenez made her final payment on the remaining $40,000ish 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.
Paying Off Student Loans Early: Pros
Refinancing her loans was a smart decision for Jimenez, but it wasn’t one she made on a whim. So while the answer to “Can I pay more on my student loan?” can often be yes, there are pros and cons to paying off student loans early.
A big advantage to paying off your student loans early is potentially saving thousands of dollars in interest payments. A student loan calculator can give you a good picture of how much interest you’ll pay on your current trajectory.
Paying off student loan debt early can also be a wise choice if you’re in the market for other loans, including auto or mortgage loans, because it can help improve your debt-to-income ratio; this can help make you more attractive to lenders.
And finally, a pro that’s a bit more intangible: less stress. Because student loans are one of those payments that never goes away until you pay them off (even in bankruptcy in most cases), taking that worry off the table can be life-changing, both from a financial and mental standpoint.
Paying Off Student Loans Early: Cons
Although it may seem counterintuitive, there are also some good arguments for keeping your student loan debt. The first is your interest rate.
We talk a lot about getting out of high interest-rate debt, such as credit cards, but federal student loan rates are often much lower than rates on other debts. Right now, federal student loan interest rates are between 4.53% and 7.08% (they’re set by federal law every year, with new rates effective on July 1) depending on the loan. For borrowers with a lot of credit card debt on top of their student loans, it might be wiser to focus on getting rid of that high-interest debt first.
One more financial benchmark to consider is an emergency fund. Do you have one? The most recent numbers show that only about 40% of American households have enough money saved to last three months. If you’re among that group, you may want to build up a nest egg before you start paying off debt.
Refinancing Your Student Loans Can Equal Big Savings
Jimenez’s savings from refinancing didn’t just happen with one refinance. She used her lower payments to gather momentum and help pay down the principal balance—and when she refinanced again on that lower balance, her rates got even lower.
The first step toward a smart refinance is to know your loans—who your lender is, what the interest rate is, and what your loan term is. You’ll also need to educate yourself on topics like consolidation vs. refinancing and fixed vs. variable interest rates.
It’s also important to consider the loss of federal repayment benefits—like income-driven repayment and Public Service Loan Forgiveness—when refinancing student loans with a private lender. Those options might make more sense for your career goals and income than working with a private lender.
For Jimenez, paying off her student loan debt meant she could finally realize her dream of owning a home. And using what she learned from her student loan experience, she’s working at quickly paying down her mortgage debt as well.
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 okay.” Jimenez said the flexibility to adjust her SoFi payments helped her get through the rough periods.
“It feels great to pay something off,” said Jimenez. “It’s definitely a mental boost!”
Member Testimonials: The savings and experiences of members herein may not be representative of the experiences of all members. Savings are not guaranteed and will vary based on your unique situation and other factors.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS, PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF SEPTEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
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.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC .