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Can You Pay Off Your Student Loans Early?

Published: January 3, 2022
 

Student loans help you pay for college, but they become a full-fledged responsibility after you graduate. Once you begin the repayment process, that responsibility can feel like a financial burden—one that you may want to get rid of as quickly as possible. While you can generally pay off your student loans early without penalty, in some situations, you may not want to. A better financial decision may be to pay off other, more expensive, loans first.

When to Pay Off Your Student Loans Early

Paying your student loans off early can save you money in the long run. Since the interest you pay is based on the principal, at the beginning of your note, you pay more in interest because your principal is higher. So even though the monthly payment amount stays the same, the portion of it that goes toward interest is higher early on and lower as your principal is paid down. This means if you pay your loan off early—especially if you pay toward principal only—you will save money. The money you save could be used for a big purchase such as a car, a home, investments, or even retirement. Also, the less debt you have, the better your debt to income ratio looks to lenders when you want to make those big purchases that require a credit check.

Before you applied for a student loan, you probably considered the pros and cons of borrowing money for your education. If you’re thinking about paying your loans off early, you need to do the same.

If you fit into either of these situations, it may be a good idea to pay off your loans sooner rather than later.

You Have a High Interest Rate

If your interest rate is high, it’s a good idea to 

ay off your student loan. A high interest rate means most of your monthly payments is put toward interest, and not principal. For federal student loans, interest rates can be as high as 8.5%, and the rates for private student loans can be even higher.

You Already Have an Emergency Account

If you have a significant amount of savings or a separate emergency account set up, it’s a good idea to consider putting some extra money toward your student loans. You should have at least three to six months of expenses saved up in case of an emergency such as a health issue, a natural disaster, or the loss of a job. If you have little to no savings, wait until you’ve built up that nest egg before tapping into it.

When to Wait on Paying Off Your Student Loans

Although you might be anxious about the amount of time it will take to pay off your student debt, there may be reasons to hold off. As long as you are paying your monthly payments in full and on time, you shouldn’t worry too much about your student loans—especially when there are other important bills you may need to pay. Here are a couple of instances when you may want to choose those bills over your student loans:

You Have Other High Interest Debt

If you have credit card debt or have taken out personal loans at higher interest rates than your student loans, focus on paying those back before you pay off your student loans. Chances are the interest rate is higher for your credit cards than for your student loans and you want to get rid of higher-interest rate debt first.

You’re Eligible for Public Service Loan Forgiveness

If you work full-time for a government or nonprofit organization, you might be eligible for the Public Service Loan Forgiveness program, which forgives the remaining balance of your student loans after you’ve made 120 qualifying payments. If you meet the eligibility requirements for the program, it may make more sense to make the qualifying payments and have your balance forgiven rather than to pay off the loan early.

At Charter College, we understand that paying for college can be a challenge. We offer many options to you assist you with your educational costs, including financial aid. Whether you study Business, Health Care, Information Technology, or a Trade, we can help you take the next step in your career. Call 888-200-9942 or fill out the form to learn more.