Is Paying Off Student Loans Early Always Smart?

February 19, 2019 · 5 minute read

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Is Paying Off Student Loans Early Always Smart?

There’s no question that student loan debt is at an all-time high. As of March 2018, Americans owed $1.5 trillion in student loans, according to the Federal Reserve .

Student loans can place an undue burden on graduates, leading many to want to pay off their loans as soon as possible. But is paying off student loans early a smart move? Do the benefits of paying student loans off early always outweigh the negatives of carrying other debt?

That depends on a variety of factors, including whether you are carrying additional debt, if you have a savings account, and how you define your financial goals—among others. For instance, if you’re carrying a large amount of credit card debt and are paying 16% interest on it, but your student loans have a 5% interest rate, it may make more sense to pay off your credit card in full before you pay off your student loans in full.

Here’s a look at the pros and cons of paying off student loans in full early.

Pro: You Don’t Have to Worry about Prepayment Penalties

Regardless of whether you have federal or private student loans, lenders can no longer charge prepayment penalties. The Higher Education Opportunity Act of 2008 gives borrowers the right to prepay their student loans, at any time, without incurring a penalty. That means you can reduce the balance of the student loan by making extra payments and even pay off the entire balance before it’s due without being charged an extra fee.

Keep in mind that when you make an extra payment on your loan, the payment is applied first to any late charges and collection costs, then to outstanding interest and then to outstanding principal, according to FinAid . Any amount beyond this total is considered a prepayment on the principal of your student loan.

Pro: The Peace of Mind Knowing Your Debt is Paid Off

There’s no question that paying off your student loan can be a huge relief, especially since student loans aren’t typically discharged if you file for bankruptcy.

In fact, according to the U.S. Department of Education’s Federal Student Aid office , to possibly have your federal student loan discharged in bankruptcy, you must file a separate action known as an “adversary proceeding,” requesting that a bankruptcy court find that repayment would impose undue hardship on you and your dependents.

However, bankruptcy courts do not use a single test to determine “undue hardship .” According to the U.S. Department of Education’s Financial Student Aid office , bankruptcy courts typically look at these three factors to determine if requiring you to repay your loans would cause an undue hardship:

•  “If you are forced to repay the loan, you would not be able to maintain a minimal standard of living.

•  Evidence that this hardship will continue for a significant portion of the loan repayment period.

•  You made good faith efforts to repay the loan before filing bankruptcy.”

Unfortunately, these factors can be subjective and courts have a lot of discretion in determining your eligibility.

However, according to the U.S. Department of Education’s Financial Student Aid office , if the court determines that requiring you to pay your loans would cause an undue hardship, they may decide:

•  “Your loan may be fully discharged, and you will not have to repay any portion of your loan. All collection activity will stop.

•  Your loan may be partially discharged, and you will still be required to repay some portion of your loan.

•  You may be required to repay your loan, but with different terms, such as a lower interest rate.”

Con: You Risk Missing Payments

Sometimes borrowers get so excited about making extra payments on their student loans, they forget to make consistent payments. Keep in mind that if you make an extra payment each month, but then miss a minimum payment deadline the next month, you will be charged a late fee for the payment you failed to make.

Doubling up on payments doesn’t give you the luxury of missing a monthly payment. Always make sure you are able to meet your monthly minimum payment deadlines. And if you have more than one student loan, consider making extra payments on the loan with the highest interest rate so that you pay less interest on the loan over time.

Pro/Con: Your Credit Score Might Change

While you might think paying off your student loans early will improve your credit, that isn’t always the case, according to the National Foundation for Credit Counseling (NFCC). Most lenders and banks like to see a history of money being borrowed and paid back on time before they give you credit.

If student loans are your primary source of open credit, once you close your student loan accounts, you could lose a significant factor driving your credit history. And don’t forget that “a shorter history typically means a lower credit score,” according to the NFCC .

Con: You May Miss Out on Other Worthwhile Financial Goals

Repaying your student loans shouldn’t be your only financial goal (and it probably isn’t). You might also be thinking about saving for a car or a house, or investing money toward your retirement. If you focus solely on repaying your student loans, you might miss opportunities to save for retirement, a family, or a down payment on a house.

It’s also important to have an emergency fund—typically at least three to six months worth of living expenses saved up—in case you lose your job or get hit with an unexpected bill. Rather than using a tax refund or bonus to make an early payment on your student loan, for example, you might want to put those funds toward an emergency fund first.

Refinancing Might Make More Sense

Instead of paying them off, it might make more sense to refinance your student loans, with a private lender, like SoFi. If you qualify, refinancing your student loans can help you change the terms of your loan so that you have a lower interest rate.

Or refinancing could potentially get you a lower monthly payment and a more flexible student loan repayment plan. For federal loans, an income-based repayment plan could also help you secure a more manageable monthly payment. However, if you refinance, you’ll forfeit your right to federal loan benefits like income-based repayment.

If you hold multiple student loans from either the government or private lenders (or both) with different interest rates and payment plans, refinancing can also allow you to consolidate your loans into one loan with a single interest rate and one monthly payment. It can make your repayment schedule so much more straightforward.

Check your rate in two minutes to see if refinancing your student loans with SoFi is the right option for you.


The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the
FTC’s website on credit.
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