Pros and Cons of Paying Student Loans Early

Paying off your student loans early may make sense if you have the financial means to do so and are not trying to qualify for student loan forgiveness. Reducing the standard 10-year repayment plan for federal student loans or a similar timeline for private student loans means you can start working toward your other financial goals much sooner.

You may choose to refinance student loans if you simply want a lower monthly payment. With student loan refinancing interest rates so low, you can reduce your monthly payment and save money on interest. But how much could refinancing student loans save you?

When managing your student loan repayment plans, it’s helpful to consider the pros and cons of repaying federal student loans or private student loans early. Here’s a closer look at what paying off student debt early involves.

It’s cheaper to pay off student loans early: One of the best reasons to consider paying off student loans early is to save money on interest. Even though student loan interest rates may be low, the longer the repayment period, the more interest you pay. Reducing any amount of time, whether it’s a few years or a few months, from your student loan payments can save you hundreds or even thousands of dollars.

Frees up money to pay other debts: Missing a monthly student loan payment can put more money back into your budget than you could put toward other debts. If you have a credit card or car loan payment, for example, you can use the money you were setting aside for your student loan payments to pay off those debts faster. This can help you save even more money on interest fees.

It can help with obtaining other financing: Paying off your student loans early can help improve your debt-to-income ratio, as you’ll have less money toward debt each month. You may also see an increase in your credit score once your paid-off loans appear on your credit history. Less debt means a better credit utilization ratio, which can make it easier to qualify for other loans or lines of credit when you’re ready to borrow.

Refinancing your student loans, however, is also a smart way to lower your monthly payment, lower your loan interest rate, or – in many cases – both. Click here to compare student loan refinancing rates from up to 10 lenders without affecting your credit. Plus, it’s 100% free!

REASONS YOU MAY BE DENIED FOR A FEDERAL STUDENT LOAN

This means less money in your budget that could be saved: Paying off your student debt early means allocating a larger portion of your budget to paying off your loan. And in turn, that could mean less room in your budget to save money for emergencies or other financial goals. Not having an emergency fund could mean going into credit card or loan debt if you’re in a tight spot and need to borrow money to cover an unexpected expense.

Reduces the average age of your accounts: Part of your credit score is based on your credit age, or how long your accounts have been open. Paying off college debt early can lower your average credit age, which can cause you to lose some credit score points. This is important to know if you’re working on building your credit history or if you plan to apply for new loans in the future.

There may be a fee: One thing to watch out for when paying off a student loan early is the prepayment penalty. Some lenders include this fee in your loan agreement as a condition of loan repayment. It could be a flat rate or a percentage rate, but either way, it’s important to check the fine print to see if you will be penalized.

STUDENT LOAN REFINANCING RATES REACH ANOTHER NEW LOW

The decision whether or not to accelerate your student loan payments depends on your personal financial situation, how much you can afford, and what you could save by doing so. It’s also important to consider how much you have in savings in case a financial emergency arises.

Consider whether student loan refinancing could be your best option. Student loan rates for private loans are at historic lows, so you could save a significant amount of money through refinancing.

Using an online student loan repayment calculator can also help with decision making. You can compare the numbers to get an idea of ​​how much you could save by increasing your monthly student loan payment by different amounts.