College students
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Should You Pay Off Your Student Loans Early? Pros and Cons to Consider

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Aug. 2 2021, Published 3:05 p.m. ET

Everyone wants to cut down or eliminate their debt, but should you pay off your student loans early?

Well, the answer might not be as clear-cut as you would expect. There are important pros and cons to consider when you contemplate an early payoff of your student loan debt, and some people choose to direct their money elsewhere.

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“I’m not concerned with paying off my student loans early,” a Twitter user wrote in June. “They’re sitting at 3.54-percent interest, so I plan on making the minimum payments until they’re paid off so I can use my money to invest in the stock market. Debt-free is great, but I’m more concerned with building wealth.”

Here are some pros and cons to consider.

On the upside, you would be paying less money to interest and could devote more money to other goals.

One of the biggest perks to paying off your loan early is that you could potentially save thousands of dollars of interest—with more savings the sooner you make a payment.

According to Bankrate's Student Loan Calculator, a 20-year loan of $50,000 with a 6-percent interest rate would ultimately incur $35,971.73 in interest. A one-time payment of $10,000 at the start of the term would cut the interest to $18,804 and the same payment five years in would cut the interest to $24,906.72.

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College student
Source: Getty Images

If you aren't burdened with making monthly payments on student loans, you could put that money to other goals, including retirement savings or down payments on a home or a car.

Finally, the less student loan debt you have—and the less debt in general—the better your debt-to-income ratio will be. Lenders often look at applicants’ debt-to-credit ratios, so decreasing your debt will make it easier to get a mortgage or some other line of credit.

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On the downside, you might want to pay other bills first, especially if student loan forgiveness is in your future.

With all of those potential gains, why wouldn’t you try to pay off a student loan early? Well, for starters, you might have more pressing demands on your wallet.

For example, if you have another debt with a higher interest rate, you might want to devote any extra money to paying off that debt first to save money on interest. (It helps that student loan interest is tax-deductible under certain conditions.)

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You might also want to invest that extra money in the stock market if you think the rate of return of your investment would be more than the student loan interest you would have to pay. Or you might want to put the extra money toward retirement, especially if your employer matches 401(k) contributions. You also might want to stash the extra money in an emergency fund.

Finally, you might want to hold out for student loan forgiveness. The Public Service Loan Forgiveness program can eliminate some qualified individuals’ student loan debt. Politicians are pushing for the cancellation of $50,000 in student loan debt per borrower, and President Joe Biden has expressed support for debt cancellation to some extent. Progress on that front has been slow, but if your student loan debt is manageable, you might want to wait for more updates.

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