Should You Pay Off Your Student Loans Now Or Later?

Student loan debt is one of the most challenging types of debt to have. It’s an I.O.U. against your future earnings – and as such, most financial gurus tell you that you should try to pay off your student loans as fast as possible.

And for many people, that’s sage advice. However, there are other things that you should do to better your financial future before you put your full focus on paying off your loans.

Things To Do Before Paying Off Your Loans

Before you start throwing all of your extra income at paying off your student loans, you should make sure that you’re taking care of yourself first. Personal finance isn’t just about being debt free – it’s about finding financial balance. That balance includes savings and investing.

If you have a 401k or 403b plan available to you, you should take advantage of any employer matching contributions before you pay down more debt. If you don’t contribute to your 401k at least to your employer’s match, you’re leaving free money on the table.

Second, you need to have an emergency fund with at least 6 months of expenses. This should be kept safe in a savings account. If you lost your job or had an unexpected expense come up, what would you do? That’s why it’s important to have extra cash in a savings account for emergencies. Plus, if you lose your job, you might also not be able to afford your student loan payments without this fund.

When It Makes Sense To Pay Off Your Loan Sooner

Sometimes it makes total sense to pay off your loans as quickly as possible. If you’re already taking advantage of your employer match and you have an emergency fund, and are wondering what to do with your excess income, paying down the debt makes sense.

Remember, when you pay off debt, you’re getting a guaranteed return on your money: if your student loans were at 6.8% interest, eliminating those loans is the equivalent of investing and receiving a 6.8% return. That’s really good!

However, you should only focus on paying off your loan sooner if you’re on a standard repayment plan – standard, graduated, or extended. If you’re on an income-based plan, making additional payments could raise red flags and harm your eligibility for the program.

Options When You Can’t Do Either

If you’re not able to save or invest because you can’t afford your student loan payment, there are a couple of options.

First, you can make sure that you’re in a repayment plan that makes sense. Consider switching to an income-based plan, such as IBR or PAYE, which could lower your payments.

Second, you could look at student loan refinancing or consolidation. This may help you lower your monthly payment to something more manageable, which in turn would allow you to start building that emergency fund and take advantage of your 401k.