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You can always pay off your federal or private student loans ahead of schedule by paying more than the minimum each month. And for some, paying off student loans early can be a smart decision that gives you more freedom and flexibility.
Here are three signs that paying off your student loans early makes sense (and two you should wait):
- If you have an emergency fund
- If you have lots of credit card debt
- If your student loans have high interest rates
- If you don’t contribute to your retirement and get the max employer match
- If you’re already contributing to other life goals
1. If you have an emergency fund
Yes, paying off your student loans early is a good idea.
Before considering making extra payments toward your loans, it’s a good idea to 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, job loss, or illness.
Having an emergency fund ensures you won’t have to turn to credit cards when faced with a problem. But if you don’t have an emergency fund yet, you should consider holding off on making extra payments on your loans and put that cash toward your savings first.
2. If you have lots of credit card debt
No, paying off your student loans early is not a good idea.
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. The average credit card interest rate is 16.97%, as of September 2019.
With such high rates, you’ll probably save more money by paying off your credit card debt first than if you focused on your student loans. Take a look at how much you’d pay interest on your credit card debt and student loans over the course of 10 years:
| Rates (APR) | Interest paid | |
|---|---|---|
| Credit cards | 16.97% | $4,915 |
| PLUS loans | 7.08% | $1,175 |
| Graduate student loans | 6.08% | $1,005 |
| Undergraduate student loans | 4.53% | $743 |
| Interest paid is based on $10,000 total for all loan types paid over a 5-year term. Federal student loan rates are accurate for the 2019-20 academic school year. | ||
Keep in mind, though, that your credit card interest rate and loan APR are specific to you. So, do your own calculation to see what makes the most sense for your situation.
Find Out: How to Pay Off Credit Card Debt Fast
3. If your student loans have high interest rates
Yes, paying off your student loans early is a good idea.
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. Plus, there’s no limit to how many times you can refinance and there are no fees to do so either.
See: How to Lower Your Student Loan Interest Rate
4. If you don’t contribute to your retirement and get the max employer match
No, paying off your student loans early is not a good idea.
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.
Not all employers offer 401(k) matching, but many offer a match up to a certain amount or percentage. So at the minimum, it’s a good idea to contribute enough to employer-offered retirement plans to qualify for the full match before making extra payments on your debt.
5. If you’re already contributing to other life goals
Yes, paying off your student loans early is a good idea.
When your finances are in good shape, deciding what best to do with extra money can be difficult. If you have student loan debt, you might think about paying it down aggressively. Just make sure you’re contributing to your long term goals, as well, or else paying student loans off early could set you too far back.
Here are some long term goals you should consider contributing to first:
- Saving for a house
- Investing
- Paying off higher interest debt first
Learn More: 10 Mistakes to Avoid as a First-Time Homebuyer
Don’t let your student loans weigh you down
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.
Learn More: Using the Debt Snowball Method to Pay Off Debt
Pro tip: Save more by refinancing your student loans
If you’re financially ready to start paying off your student loans early, refinancing your loans can be a smart way to save money and pay off your student loans faster.
Credible’s done the heavy lifting for you! Instead of spending hours or even days applying with multiple lenders individually, we’ve partner with some of the top refinancing lenders so you don’t have to. Just fill out one, simple form and you can get prequalified rates from multiple lenders — all without affecting your credit score.
| Lender | Fixed rates from (APR) | Variable rates from (APR) |
|---|---|---|
 | 4.54%+ | N/A |
 | 3.50%+ | 3.17%+ |
 | 3.79%+¹ | 2.72%+¹ |
 | 4.64%+2 | 3.64%+2 |
 | 4.41%+5 | 3.36%+5 |
 | 4.25%+3 | 3.50%+3 |
 | 5.45%+ | 5.45%+ |
 | 3.23%+ | 1.58%+ |
 | 3.49%+ | N/A |
 | 4.25%+4 | 3.50%+4 |
| Ready to see how much you can save? |
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All APRs reflect autopay and loyalty discounts where available | 1Citizens Bank Disclosures | 2College Ave Disclosures | 3 ELFI Disclosures | 4SoFi Disclosures | 5EDvestinU Disclosures |
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Citizens Bank Education Refinance Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate ("LIBOR") published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of April 1, 2020, the one-month LIBOR rate is 0.92%. Variable interest rates range from 2.72%-9.05% (2.72%-9.05% APR) and will fluctuate over the term of the borrower's loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. Fixed interest rates range from 3.79% - 9.30% (3.79% - 9.30% APR) based on applicable terms, level of degree earned and presence of a co-signer. Lowest rates shown are for eligible, creditworthy applicants with a graduate level degree, require a 5-year repayment term and include our Loyalty discount and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty and Automatic Payment Discount disclosures. The maximum variable rate on the Education Refinance Loan is the greater of 21.00% or Prime Rate plus 9.00%. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of their loan. |
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Kat Tretina contributed to the reporting of this article.
