What you need to know about paying off student debt early
Updated on September 18, 2020
If you are planning to take out a student loan, you might be wondering if it’s possible to pay it back early. The answer to that question is yes. However, paying off a student loan early might not work the way you think. Here’s what you need to know:
1. Payments will initially go towards interest
Making extra payments on student loans early on will generally not affect the principal as much as you might expect. That’s because most initial payments are going towards interest rather than the principal. However, if you are able to make a large payment that pays off a substantial portion of the balance or the entirety of it, it could be a wise move.
2. Paying off your student loans in full is not advisable in all circumstances
If you have a substantial amount of extra money and paying off your student loans early will not impact your ability to save, it could be a good decision. However, many students would be better served saving up money as an emergency fund instead. Do not use large amounts of money from your savings to pay off your student loans early.
3. You’ll need to effectively budget your money
If you are planning to pay off your student loans early, it’s important to make sure that you have enough left to cover other expenses. So, make sure that you accurately list all of your expenses and sources of income before determining that you are able to make extra payments on student loans.
4. If you have money to save, consider other options as well
While paying off student loans early can be a great way to get ahead, it’s certainly not the only way to do it. In fact, saving for retirement, creating an emergency fund, and saving up for a down payment on a home are also excellent goals to have. In some cases, these goals can be a more pressing financial need than paying off your student loans early. However, this depends on your career, the goals that you have, and other aspects of your financial situation.