With outstanding student loan debt in the United States at more than $1 trillion, this is the next type of debt in the crosshairs. But does it always make sense to pay off your student loan debt early? Are there downsides to getting rid of your student loan debt beforetime?
Advantages of paying off student loans early
Of course, the biggest advantage to paying off student loan debt early is the fact that you are getting rid of debt, and no longer pay the interest. Another advantage to paying off the student loan debt early is the peace of mind that comes with being debt-free. Student debt is one of those things you can’t just discharge in a bankruptcy, and not paying on your student loans can result in other consequences when it comes to government jobs and benefits.
If you pay off your student loans early, you have the potential to save money in interest, and achieve greater peace of mind.
When paying off student loans early doesn’t make sense
While I can see some attraction in paying off student loans early, financially it doesn’t make a lot of sense for me.
First of all, I am fortunate to have an interest rate that is below 2 percent. Instead of putting extra money toward paying down my low-interest student loan debt, it makes more sense for me to invest that money. My potential for return is much higher than 2 percent if I put more money toward retirement instead of paying off my student loan early.
Secondly, the interest is tax-deductible. So, while that doesn’t completely make up for the fact that I’m paying interest, the reality is that the tax deduction does alleviate some of the pain of paying interest. Add that to the better returns in an investment portfolio, and I come out pretty far ahead financially, even while keeping my student loans to term.
Finally, I know that if I run into financial difficulty, I can be placed on income-based repayment, or defer my loan payments. My student loan payments aren’t likely to be a real problem if my finances break down. I can put them “on hold” while my emergency fund goes toward other expenses.
It may be a bit of an unconventional approach, but I like to acknowledge that not all debt is created equal. Run the numbers. It might make more financial sense to put your money to work elsewhere, instead of pay off the student loans early — as long as you are comfortable with the idea of carrying debt a little bit longer.