“These payments are as much as my rent.”
“Imagine what I could do with this money instead.”
“It would feel amazing to not have a monthly payment anymore.”
If you find yourself making statements like these, you’re likely sick of your student loan payments.
Student loans are a major burden on college graduates, causing them to pay hundreds or even thousands each month to pay off their student debt. While many borrowers struggle to make ends meet, you face another tough decision once you secure a well-paying job and have a little extra money each month: Should you pay off your student loans early?
Should I pay off my student loans early? 5 signs it’s a good idea
You can always pay off your federal or private student loans ahead of schedule by paying more than the minimum each month. But for some, paying off even more than that can be a smart decision that gives you more freedom and flexibility. Here are five signs that paying off your student loans early makes sense.
1. You have an emergency fund
Before even considering making extra payments toward your loans, you should make sure you have an emergency fund. An emergency fund is money set aside in a bank account to cover sudden crises, such as an unexpected car repair, damage to your home, or illness. Having an emergency fund ensures you won’t have to turn to credit cards when faced with a problem.
If you don’t yet have an emergency fund, you should probably hold off on making extra payments on your loans and put that cash toward your savings first.
2. You don’t have credit card debt
If you have credit card debt, paying off your balance should be the priority before turning to your student loans. While student loans can have high interest rates, credit card interest rates can be staggering. According to the Federal Reserve, the average credit card interest rate is 16.46%, as of August 2018.
With such high rates, you’ll save more money by paying off your credit card debt first than if you focused on your student loans.
3. You contribute enough to your retirement to get the max employer contribution
When you have student loans, future goals like retirement may not seem that important. But it’s important to invest now, while you’re young. This gives your money time to grow so you can have a comfortable retirement.
At the minimum, you should contribute enough to employer-offered retirement plans to qualify for the full match before making extra payments on your debt.
4. Your student loans have high interest rates
If you have high student loan interest rates — federal student loans (from the federal government) can have rates as high as 8.5%, while private loans (from private lenders) can be even higher — a good deal of your monthly loan payment goes toward interest rather than principal, increasing how much you’ll pay over time. Paying off your private or federal loans early can help you save thousands over the length of your loan since you’ll be paying less interest.
If you do have high-interest debt, you can make your money work harder for you by refinancing your student loans. With a stable income and good credit score, you could qualify for a low interest rate, helping you save more and become debt-free faster.
5. Your student loans weigh you down
When it comes to personal finance, it’s very — well, personal. If your student loans weigh you down, cause you anxiety, or make you feel like you can’t pursue other goals while you have them, it might be worth tackling them early.
Getting rid of your debt can give you a sense of freedom and independence you wouldn’t otherwise have if you let the debt linger. It can also motivate you to work toward paying down your other debt, as well.
Managing your student loans
Once you’re in a stable financial position, deciding what best to do with extra money can be difficult. If you have student loan debt, you might think aggressively paying it down is a smart choice. However, it’s important to hit other financial milestones first to make sure you’re in good shape.
If you’re financially ready to start paying off your student loans early (more than just slightly over the minimum), refinancing your loans can be a smart way to save money and pay off the debt faster. It’s a good idea to compare rates from multiple student loan consolidation companies to ensure you find the best lender for your situation.
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