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Paying off debt vs. saving money is a tough financial choice. Prioritizing debt repayment can help you repay what you owe faster, freeing up more money in your budget for saving. It can also help you spend less on interest charges.

But paying off debt and delaying saving might backfire. If you don’t have savings and you get hit with an unplanned expense, you could end up with even more high-interest debt.

Whether it makes sense to pay off debt or save depends largely on your financial situation. The right decision might be to try to do both.

The First Priority for Everyone: Build a Starter Emergency Fund

Without an emergency fund, an unplanned expense or loss of income could result in racking up even more debt, putting you further in the hole.

Financial professionals generally recommend building an emergency fund of three to six months’ worth of expenses. If you’re self-employed or work seasonally, you may want to aim closer to eight or even 12 months’ worth of expenses. An emergency fund calculator can help you figure out how much to save.

You could stash your emergency savings in a high-yield savings account. These accounts are designed to earn more interest than traditional savings accounts, which could potentially help your savings earn even more.

To figure out how quickly the balance in your savings account might grow, you can look at how frequently the interest compounds. (Compounding is when the interest is added to the principal in the account and then the total amount earns interest.) By plugging your information into an APY calculator, you can see the power of compound interest at work.

💡 Quick Tip: Are you paying pointless bank fees? Open a checking account with no account fees and avoid monthly charges (and likely earn a higher rate, too).

How to Decide What Comes Next: Compare Interest Rates

Once you’ve got your emergency fund in shape, you can focus on your debt. What’s important here is the kind of interest your debt has. Analyze all the debt you have — car loans, student loans, credit cards, and so on — and determine whether it’s high-interest debt or low-interest debt.

When to Aggressively Pay Down Debt (High-Interest Debt)

High-interest debt, such as credit card debt, can quickly accumulate and become overwhelming. The longer it takes to pay off, the more interest you’ll accrue, making it harder to escape the debt cycle. When you have high-interest debt, it makes sense to focus on paying off your debt first.

When to Prioritize Saving and Investing (Low-Interest Debt)

On the other hand, if you have debts with relatively low annual percentage rates (APRs) and you don’t feel unduly burdened by them, you could prioritize saving, while paying off your loans and other debts according to their payment schedules.

Recommended: Why Your Debt to Income Ratio Matters

The Best of Both Worlds: How to Pay Off Debt and Save Simultaneously

If you have high-interest debt under control and you also have an emergency fund, consider saving and paying down debt at the same time. Here are some tips to help you manage both.

•   Create a budget: A budget can help you track your income, expenses, and savings. The key is to allocate specific amounts for debt repayment and savings to ensure both are addressed every month.

•   Cut unnecessary expenses: Review your expenses and identify areas where you can cut back. Redirect these funds toward debt repayment and saving.

•   Automate saving: Once you have target monthly savings amounts, it’s a good idea to set up automatic transfers to your savings accounts. This ensures consistent saving without the temptation to spend the money.

While you’re at it, make sure you’re happy with your banking experience. You can compare bank accounts to get the best interest rates and customer service, for example.

•   Take advantage of your employer’s 401(k) match: If your employer offers a 401(k) plan with a company match, it’s a good idea to try to contribute at least enough to get the maximum employer match. This is essentially free money and it could help add to your retirement savings.

•   Increase income: You might also want to explore ways to boost your income, such as taking on a side gig, freelancing, or asking for a raise. You can then use the additional income to pay down debt faster and boost your savings.

•   Use windfalls wisely: If you receive a bonus, tax refund, or any unexpected sum of money, consider using it to pay down debt or boost your savings rather than going on a shopping spree.

Strategies to Pay Down Debt

Once you commit to paying down your debt, you’ll want to come up with a plan for how to do it. Here are some strategies to consider.

The Debt Snowball Method

With the snowball method, you list your debts in order of size. You then funnel extra money towards the smallest debt, while paying the minimum on the rest. When the smallest balance is paid off, you move on the next-smallest debt, and so on. This can provide psychological benefits by giving you quick wins and motivating you to continue.

As you’re paying down debt, be sure to monitor your checking account regularly to make sure you have enough money in it to cover your bill payments.

The Debt Avalanche Method

Another approach is the avalanche method. With this strategy, you list your debts in order of interest rate. You then direct any extra money toward the balance with the highest rate, while paying the minimums on the other debts. Once the highest-interest debt is paid off, you move to the next highest, and so on. The debt avalanche minimizes the amount of interest you pay over time.

Recommended: How to Set and Reach Your Savings Goals

The Takeaway

Saving and paying down debt is a balancing act. Which is more important? There’s no one-size-fits all answer. Generally speaking, you’ll want to fund your emergency savings account before you aggressively focus on debt payoff. After that, you can focus on saving and knocking down debt at the same time.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What is considered high-interest debt?

While there is no one definition of high-interest debt, it is typically considered to be debt with a high interest rate, often in the double digits. For example, the average credit card interest rate as of August 2025 was 24.35%. Credit cards are considered high-interest debt, as are certain types of loans (such as personal loans) for borrowers whose credit is poor.

How much should I have in my emergency fund before aggressively paying down debt?

Before aggressively paying down debt, it’s a good idea to save three to six months’ worth of living expenses in an emergency fund. Otherwise, if you don’t have any savings to draw on to cover an unexpected expense or event, you might have to use high-interest credit cards to get by, which would compound your debt.

Should I use my savings to pay off my car loan or student loans early?

Whether you should use your savings to pay off your car loan or student loans early depends on your specific financial situation. Generally speaking, if you have additional savings beyond the recommended three to six months’ worth of money in an emergency savings fund, you might consider using some of that extra savings to pay off your car loan or student loans early. But it’s best not to use the money in your emergency fund for this, so that you’ll be covered if a surprise expense pops up.

Should I stop contributing to my 401(k) to pay off debt?

If your employer offers a 401(k) plan with matching employer funds, it’s wise to contribute at least enough to get the full employer match, if possible. This is essentially free money you would otherwise miss out on. Once you’ve received the 401(k) employer match, you could work on paying off your high-interest debt.

Does paying off debt or saving have a bigger impact on my credit score?

Paying off debt generally has a bigger impact on your credit score than saving does.That’s because paying off debt can reduce your credit utilization, which is the amount of credit you’re using compared to the amount of credit you have available. The lower your credit utilization, the better. A low credit utilization can have a significant positive impact on your credit score. In fact, credit utilization accounts for 30% of your FICO® Score.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

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College is expensive, and for many families, it’s a group effort to pay tuition, fees, and other expenses. Both parents and children may choose to take out student loans, and in some cases, parents might also help pay off their child’s student loan debt after graduation. But before you take out your checkbook, there are some things to be considered.

Ahead, we look at ways parents can help their children pay off their loans as well as pros and cons of helping with such a big financial expense.

Things to Consider Before Paying Off Your Children’s Student Loans

While there are no rules restricting parents from paying back their children’s student loans, there are a few things to think about before you do.

1. Gift Taxes

If you choose to pay off your child’s student loan in one lump sum, you may need to file a gift tax return and pay any applicable gift tax. The person who makes the payment as a gift pays the tax, not the recipient, according to IRS guidelines. In 2025, a parent may gift their child up to $19,000 before the gift tax comes into play (or two parents could gift one child up to $38,000). Even once that threshold is reached, however, a tax is not immediately triggered; rather, the excess gift is added to the lifetime gift tax exclusion, which in 2025 is set at $13.99 million. In other words, paying off your children’s student loans is unlikely to lead to tax liability on its own.

Recommended: How to Fill Out Gift Tax Form 709

2. Retirement

Parents should consider how helping their child (or children) pay off student loans might affect their retirement plans. Because parents are closer to retirement age than their adult children, it is often difficult for parents to build back up their nest egg if they deplete some or all of it helping pay back their children’s student loans.

3. Home Equity

Some parents decide to avoid using their retirement funds and instead tap into their home equity line of credit. But before you sign on the dotted line, you might want to consider the repercussions. You will want to make sure you have the necessary time to pay back that line of credit. Many borrowers opt for a 10- or 15- year home equity loan, but that may be risky if you are only 10 years from retirement.

💡 Quick Tip: Enjoy no hidden fees and special member benefits when you refinance student loans with SoFi.

How Parents Can Help Their Children Pay Off Their Student Loans

There are many factors to consider if you want to help pay off your child’s college loans, especially if you’re nearing retirement. Here are several ways you may want to help your child repay their loan.

1. Making Small Payments During College

Although most student loans don’t need to be repaid until after your child graduates, making small monthly payments — even as little as $25 a month — while your child is still in college may lower their debt by a few thousand dollars.

2. Making an Occasional Loan Payment as a Gift

When holidays and birthdays come around, instead of buying your child tickets to a concert or the shoes they’ve been coveting, consider making an extra payment on their student loan.

You can ask grandparents and aunts and uncles to do the same, if they are so inclined or have no idea what to give your child for their birthday or the holidays.

Any extra payments beyond the minimum monthly payment should be applied to the student loan principal, not to their next monthly payment. By applying the payment to the loan’s principal balance, borrowers may be able to save on interest payments in the long run. Most loan providers will allow you to make extra principal-only payments.

3. Paying Off Private Loans First

If your child has a mix of private and federal loans, you could offer to pay off the private loans while they continue to make monthly payments on their federal loans. Since private loans typically have higher interest rates, paying those loans off first might go a long way to helping your child pay back their loans quicker.

Not sure what your child’s monthly student loan payments will be? You can use our student loan calculator to estimate how much they could be paying each month. You can then decide if you want to give them money each month to go toward their payments, which in turn can help them pay off their student loans faster.

Furthermore, your child’s federal loans come with certain federal benefits such as income-driven repayment, deferment, forbearance, and access to certain loan forgiveness programs. Private loans don’t enjoy those same federal benefits, which may be another argument for paying off private loans first.

Recommended: Student Loan Consolidation Rates

4. Helping with Other Expenses

If paying off your child’s student loans is too expensive, consider helping them with some of their other monthly expenses that aren’t as steep. Perhaps pay an unexpected medical bill for them, offer to buy a week’s worth of groceries, or maybe surprise them with dinner and a movie once a month.

5. Considering a Parent PLUS Loan

If your child is still in school and you want to help them with tuition, you may want to consider a Parent PLUS Loan, which is a federal student loan that is available to the parents of a dependent undergraduate student. The interest rate is 8.94% for a Parent PLUS Loan disbursed between July 1, 2025, and before July 1, 2026.

While credit scores aren’t considered when determining eligibility for federal student loans, parents cannot typically qualify for these loans with “adverse credit history.”


💡 Quick Tip: Refinancing could be a great choice for working graduates who have higher-interest graduate PLUS loans, Direct Unsubsidized Loans, and/or private loans.

6. Applying for a Private Parent Loan

If you don’t qualify for a federal loan for parents, you may want to consider taking out a private loan to help fund your child’s education. Keep in mind that you will be the only borrower. This is very different from having your child named as the borrower, and you named as the cosigner.

Parents who take out loans need to be careful they aren’t taking on more debt than they can pay back in their lifetime.

7. Refinancing the Student Loans

If you have a Federal Parent PLUS Loan, you might be able to save money and simplify your payments by refinancing your Parent PLUS Loan.

You could also help your child refinance their student loans by cosigning, which may secure a lower interest rate and save them money over the life of the loan if you qualify. (This is usually true provided you do not extend the loan term.) Borrowers should keep in mind that refinancing their federal loans will disqualify them from all federal benefits, including income-based repayment and potential forgiveness.

The Takeaway

While parents can help ease their child’s financial burden — whether by making payments, cosigning private loans, or refinancing — it’s essential to consider both tax implications and long-term impacts. Paying off a child’s student loans may trigger gift tax filings if amounts exceed annual limits, and tapping into retirement savings or home equity can jeopardize your financial security.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

Can I pay off my child’s student loans?

Yes, you can pay off your child’s student loans, whether federal or private. Payments can be made directly to the loan servicer, either as a lump sum or regular contributions. However, the loan legally remains your child’s responsibility unless you refinance or take out a parent-specific loan.

Do I have to pay taxes if my parents pay off my student loans?

No, you will not have to pay taxes if your parents pay off your student loans, but your parents may, since it’s considered a gift. If the amount exceeds the annual gift tax exclusion ($19,000 per parent in 2025), your parents may need to file a gift tax return, though most won’t owe additional taxes.

Is there a downside to paying off student loans early?

It’s generally considered wise to pay off your student loans early if you can, as it can save thousands in interest over the years. However, paying off student loans early may reduce cash flow for other financial goals. You could miss out on higher investment returns, lose access to potential loan forgiveness programs, or limit your emergency savings by committing too much money to debt repayment.

SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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