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Student Loans: Should You Pay Them Off Early?

Student Loans: Should You Pay Them Off Early?
Sulaiman Abdur-Rahman
Sulaiman Abdur-RahmanUpdated October 12, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Millions of federal student loan borrowers who qualify for President Joe Biden’s debt relief plan may have no reason to pay their loans off early. Biden extended the student loan repayment pause through Dec. 31, 2022, and announced a plan that would provide up to $10K in debt relief to federal student loan borrowers with annual incomes below $125,000 ($250,000 for married couples).Some borrowers may qualify for $20K in debt forgiveness under Biden’s plan if they’re Pell Grant recipients who meet the income threshold. Of the 43 million borrowers eligible for relief under the Biden plan, about 20 million of them would no longer owe federal student loan payments if they receive the $10K or $20K in loan forgiveness.The Biden administration’s loan forgiveness plan is broad, but it’s not a game changer for all borrowers. Paying off student loans early may benefit certain borrowers, and making extra payments toward student loan debt obligations may minimize your interest costs and bring you closer to achieving financial freedom.

Guide to Paying Off Student Loans Early

Some people opt to pay off their student loans early to minimize their interest costs. Paying off your student loans early means you repay your student loan debt ahead of schedule. For example, borrowers with a 10-year student loan repayment plan may minimize their interest costs if they repay their student loans within five years — or five years early.Student loans generally feature monthly payments that go toward principal and interest charges. Borrowers can pay off their student loans early and without penalty by making at least one extra payment above and beyond the obligated monthly payment amount.Some borrowers, however, may lack the means to make extra payments. Making extra payments is not necessarily wise if it depletes your savings. Some may ask, how long does it take to pay off student loans? It can take borrowers between 10 to 30 years to pay off federal student loans and five to 25 years to pay off private student loans.Some borrowers may never finish repaying a student loan during their lifetime. What happens to student loans when you die is the debt might be discharged, although some private lenders may demand repayment from your estate.The federal government in March 2020 suspended student loan payments in response to the COVID-19 pandemic. After a number of extensions, the moratorium on student loan payments is scheduled to be lifted on Dec. 31, 2022. Borrowers can make more than the minimum payment when paying off student loans, and this can minimize your interest costs and allow you to pay off the loan faster than scheduled.

Do Student Loans Have Prepayment Penalties?

There are no prepayment penalties for paying off student loans early, including federal and private student loans. A 2008 federal law, the Higher Education Opportunity Act, amended the Truth in Lending Act to ban private lenders from imposing early repayment fees on private education loans.The U.S. Department of Education imposes no prepayment penalties if you repay your federal student loans in full ahead of schedule. Paying off student loans early may deplete your savings, but it might be worth it if you can afford to make extra repayments.Some consumer lending products, such as car loans, may feature prepayment penalties. Borrowers with federal or private student loans, however, may face no prepayment penalties like on auto loans that may sometimes feature early repayment fees.

When Is It a Good Time to Pay Off Student Loans Early?

Here are times when it might be good for you to pay off student loans early:

Saving a Lot for Retirement Already

If you’re already saving a lot for retirement and have extra discretionary income to spend, this might be a good time for you to pay off your student loans early. Vanquishing student debt faster than scheduled may help you achieve financial freedom sooner rather than later.

Your Income Is High Enough to Afford Other Goals

If your income is high enough to afford other goals, this might be a good time for you to pay off your student loans early. You can minimize your interest costs by making early repayments.

You Paid Off All High-Interest Debt

If you have paid off high-interest debt on other accounts, this might be a good time for you to pay off your student loans early. Eliminating other debts can free up your budget and empower you to make extra payments toward student loan obligations.

Your Emergency Fund Is Full

If your emergency fund is full, this might be a good time for you to pay off your student loans early. Paying off your student loans early may minimize your interest charges and improve your debt-to-income ratio. Your debt-to-income ratio, also known as DTI, measures your ability to afford new debt without defaulting on your existing obligations. 

Pros of Paying Off Student Loans Early

Here are some of the pros of paying off student loans early:

Minimizes Interest Costs

Paying off your student loans early can minimize your interest costs. That’s because making early and extra repayments ahead of the loan repayment schedule can reduce the amount of interest charges you face during your period of indebtedness.

Improves Debt-to-Income Ratio

Paying off your student loans early can improve your debt-to-income ratio. As mentioned earlier, DTI measures your ability to afford new debt without defaulting on your existing obligations. Most lenders like to see a DTI below 36%. Paying off your student loans in full sooner rather than later can expedite your path of having no more student loan monthly debt payments to make.

Promotes Financial Freedom

Paying off your student loans early can eliminate your student debt obligations well ahead of your loan repayment schedule, which can bring you closer to financial freedom. Your discretionary spending power may increase if you no longer have to make student loan payments on a monthly basis.

No Prepayment Penalties

As mentioned earlier, there are no prepayment penalties for paying off student loans early. The U.S. Department of Education does not impose prepayment penalties on borrowers who make early repayments on federal student loans, and federal law prohibits private lenders from imposing prepayment fees on private student loans.

Cons of Paying Off Student Loans Early

Here are some of the cons of paying off student loans early:

Can Deplete Personal Savings

Paying off your student loans early can deplete your personal savings. The average federal student loan debt in 2021 stood at $36,510 per borrower, while private student loan debt averaged $54,921 per borrower, according to the Education Data Initiative. Paying off your student loan debt obligations sooner rather than later may deplete your bank account savings and impact the amount of interest you can earn on deposits.

Prevents Student Debt Forgiveness

Paying off your student loans early can prevent you from receiving student loan debt forgiveness. There are 43 million borrowers eligible for President Biden’s debt relief plan, and some student loan borrowers may also qualify for student loan debt forgiveness under programs like Public Service Loan Forgiveness. Paying off your student loans early, however, can preempt you from receiving possible student loan debt forgiveness.

May Impact Student Loan Interest Deduction

Paying off your student loans early can impact your ability to claim a student loan interest deduction. The student loan interest deduction allows eligible taxpayers who have paid interest on a qualified student loan to claim a deduction on their federal income taxes. The student loan interest deduction is a tax break that can reduce your taxable income by up to $2,500 during an annual tax period. Paying off your student loans early can limit your ability to claim this deduction in future tax periods.

Can Impact Your Ability to Make Other Investments

Paying off your student loans early can impact your ability to make other investments. Making extra payments on student loan debt obligations can diminish your ability to invest in other areas. Spending your discretionary income on extra student loan repayments may not be the best personal finance strategy for you.

How Refinancing Can Help You Pay Off Your Student Loans

Student loan refinancing in some cases may provide borrowers with a lower interest rate. Student loans can be federal or private, and borrowers may refinance both.The difference between private and federal student loans is that federal student loans are provided exclusively by the U.S. Department of Education. Banks, credit unions, online lenders, and select state-based or state-affiliated organizations may offer private student loans.Refinancing federal student loans can allow borrowers to replace their existing federal loans with the terms and conditions of a private loan agreement. This will also cause you to forfeit your federal student loan benefits.To refinance your student loans, you may submit a student loan refinancing application with a private lender and see whether you qualify.

Pros and Cons of Refinancing

You can review the pros and cons of student loan refinancing before submitting any refi applications. One of the advantages of refinancing student loans is it may provide you with a lower interest rate.One of the big disadvantages of refinancing student loans with a private lender, however, is you’ll be forfeiting federal benefits, including income-driven repayment plans and federal student loan forgiveness programs like the one announced by President Biden.Private lenders can set their own underwriting standards for student loan refinancing, but some may require applicants to have steady income and good credit to qualify. For subprime borrowers, it might be difficult to refinance student loans with bad credit.Borrowers can refinance while still in school, but refinancing before you complete your degree or certificate program may not be right for you. In the end, your personal circumstances may dictate whether student loan refinancing is right for you.

Student Loan Refinancing With Lantern:

Student loan refinancing might be right for you if you can lock in a lower interest rate. Average student loan interest rates among all existing borrowers as of April 2022 stood at 5.8%, according to the Education Data Initiative.If you remain burdened with education loan debt after receiving Biden’s forgiveness perk and would like to refinance student loans, Lantern by SoFi can help. Refinancing might be right for you if you can lock in a lower interest rate.Find and compare student loan refinance options with Lantern.

Frequently Asked Questions

Is it better to pay off student loans in full?
Does paying student loans early help your credit score?
What happens if you pay off your student loans all at one time?
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Photo credit: iStock/Pekic
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About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and currently serves as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.
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