Should You Consider Paying off Student Loans Early or Invest and Save?
The financial responsibilities after college can feel daunting. How do you know the right path? Should you focus extra income toward paying off student loans early, saving for retirement, investing, or another financial goal?
We’re here to help guide you on your journey so you can make the best decisions for your circumstances. Click to what you’re looking for:
Should you consider paying student loans off early?
Student loan repayment is not a one-size-fits-all solution to debt. When deciding to pay off student loans early, there are several factors to consider, like income, types of student loans, other debt and, of course, your personal financial goals. You should also consider the current state of your finances. Do you have a secure emergency fund with at least three to six months of living expenses? Given these factors and more, your decision to pay off student loans or invest might be different than a classmate’s or your coworker’s, and that’s normal.
Off the bat, paying your student loans early might feel like the best decision because it’s likely the largest amount of debt you have, which is a lot of weight to carry—financially and mentally. As you examine your finances, think about the pros and cons of doubling down on student debt.
Pros of paying student loans off early:
- Pay less over the life of the loan: By paying more than your minimum payment, you’ll reduce the amount of interest you accrue, saving you money.
- Improve your debt-to-income ratio: When your loans decrease, so does your debt-to-income ratio, which may help improve your credit score. That may mean better insurance rates and lower interest on loans or mortgage payments.
- Financial freedom to take on other goals: When you don’t have to worry about student loan repayment, you’re able to execute plans for other goals—like buying a house or preparing for your children’s education.
Cons of paying student loans off early:
- Higher monthly payments: It’s empowering to know you’re tackling your debt head on, but if the minimum payment is already tight for you, it may be better to spread extra income to other areas of your budget rather than fixating on paying student loans early.
- Less opportunities for student loan forgiveness†: There are multiple student loan forgiveness programs available, usually dependent on your occupation. If you’re eligible and plan to apply to have your loans forgiven, it may be worth it to stick with the minimum payment until your loans are forgiven. If your application is denied, you can reevaluate paying more than the minimum to get out of debt.
Are your student loans federal or private?
The type of student loan you have determines the interest rate and repayment plans offered to you, which is key in deciding how you’ll spend your money‡.
Federal student loans are funded by the federal government with a fixed interest rate and other terms and conditions set by law. Income-driven repayment plans and loan forgiveness programs are benefits of federal student loans, often making them a good choice among young borrowers.
Private student loans are made by organizations like banks, credit unions, or schools, and have terms set by the organization. Private loans usually have higher interest rates than federal loans and typically don’t offer income-driven repayment options or loan forgiveness. If the majority of your student loans are private, your dollars may be best spent paying your student loans off early, minimizing the amount of interest you’ll pay.
How important is paying off your student loans early?
Repaying any kind of debt is necessary to preserving your credit score, but the urgency at which you pay your loans back is up to you and how comfortable you are carrying a large amount of debt.
As you weigh the pros and cons of paying student loans off early, it's crucial to stay informed on the current political environment and key dates for student loan payments§. As of September 1, 2023, interest accruals have begun on balances again. Student loan repayments officially restart in October 2023, so be sure to make payments on time to help keep your credit score healthy.
If you determine paying student loans off early is the best decision for you:
- Pay more than the minimum payment: If you can afford more than your minimum payment each time you pay your bill, you’ll cut the life of your loan and the amount of interest you pay.
- Enroll in autopay: It’s possible enrolling in autopay could trim the interest rate of your loans, saving you some money as you make payments.
- Make biweekly payments: Consider making two payments in a month—one half of your payment in the first two weeks of the month, and the second half in the last two weeks of the month. It may help even out your budget month to month. Plus, you’ll end up making an extra payment each year.
- Refinance if necessary: When you decide to refinance your student loans, you essentially replace your current loan with a new loan that has better terms. If you increased your credit score or your income since you graduated, refinancing could help you lower your interest rate and monthly payment. Be aware that if you have federal loans and choose to refinance, you may lose out on federal loan benefits like loan forgiveness programs.
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Retirement, Stock Investments, and Savings
As we’ve learned, there are some benefits to getting a handle on student debt early, especially if your biggest financial goal is to become debt free as soon as possible. However, if your long-term financial goals include building your savings or retiring early, you may want to consider paying the minimum toward your student debt each month and prioritizing extra income for investments. Below, we’ll learn more about investing in 401(k)s, investing in the stock market, or saving for a house.
We can also help you determine if it’s in your best interest to pay off your debts or invest in savings using our free financial calculator.
Invest in 401(k) or pay student loans off early?
A 401(k) is a retirement plan only available through your employer. Unlike savings accounts, brokerage accounts, or individual retirement accounts (IRAs), the specifics of a 401(k) are dependent on your employer and how long you’ve worked for the company.
401(k)s are extremely attractive investment opportunities because many offer employee matching programs. Your employer can match the amount you contribute to a certain percent. For example, your employer may offer a 50% matching contribution. If you can afford to contribute 8% of your paycheck, your employer will add a matching contribution totaling 4% of your paycheck. Now, you’re saving a total of 12% in your 401(k), an incredible kick start to your retirement fund. Even if you can only contribute a few dollars to your 401(k) each month, it will be worth it when you retire, especially if your employer offers an employee matching program. The matching contributions from your employer allow you to take advantage of extra money flowing to your 401(k) without feeling strapped in your budget.
Invest in stocks or pay student loans off early?
Investing in the stock market could help you earn a passive income over time. In other words, it’s a way to earn money with little effort, so you can focus on your career, family, friends—life in general.
Comparing the interest rate on your student loans to the return you would likely see on a stock investment could help you prioritize where your extra money should go. Historically, a reasonable rate of return on your stock investments is around 6%. If your student loan interest rates are higher than 6%, you may want to put more money toward paying down the loans and avoiding the interest.
If your student loans are less than 6%, that could be a good reason to put some extra cash toward retirement or investments. Over the years, your investments could earn more than what you would have saved by paying your student loans early.
However, it’s also important to mention the risk involved with stock market investments. Your investments could earn more over time, but that is not guaranteed. In fact, it is possible to lose money in the stock market. If you’re seriously considering a stock investment, remember to do your research and consult a financial advisor.
Saving for a house or pay student loans of early?
As you repay your student loans, it’s likely you’ll have other financial goals in mind, like saving for a home, which means planning for a down payment and mortgage. If you think that buying a house is your next financial step, build a thoughtful, strategic budget laying out all your expenses, and identify where you can cut costs.
For example, you may consider refinancing your student loans for a lower interest rate. That could free up cash for your down payment, which could lower your mortgage payment. If you’re questioning how much you can borrow or what your mortgage payments could look like, Huntington has multiple financial calculators that can help you prepare for any outcome.
Things to Keep in Mind
While it’s good to be aware of all the financial options at your fingertips, we know choosing what to do with your extra income is easier said than done. As you examine your student loans and your financial goals, remember to also keep in mind:
- An emergency fund should be a top priority: Unfortunately, you never know when disaster could strike and you need some sort of cash flow to fall back on. Before paying more than the minimum on your student loans or investing your extra income, consider building a strong emergency fund that would cover at least three to six months’ worth of expenses.
- Thoroughly understand your student loans: Earlier, we discussed the differences between federal and private student loans and the impact that could have on your decision to pay your loans off early. Make sure you understand the terms of your student loans and your interest rate. If you choose to refinance for a lower rate, remember you may lose any opportunity for student loan forgiveness and other federal loan benefits.
- Employer contributions: When weighing your financial options, take time to understand the retirement benefits your employer offers. If your employer provides a 401(k) matching program, taking advantage of this guaranteed contribution may be worthwhile compared to stock investments.
- Choose your investments wisely: If you decide to invest in the stock market, remember that each investment comes with some level of risk. Approach stock market investments with credible research and meet with a financial advisor to build a strong portfolio.
- Having a large sum of debt is stressful: Deciding where to funnel your extra income is not black and white. Prioritizing investments in a 401(k) or the stock market may feel like a strategic financial move, but having thousands of dollars of debt is a burden to carry. Make sure you understand the weight of that burden before deprioritizing paying your loans off early.
The bottom line: As you navigate these new financial responsibilities, remember that your decision does not have to be all or nothing. You can take small steps toward paying your loans off early, like enrolling in autopay, or take advantage of smart investments, like 401(k) matching contributions from your employer. No matter your goals, we want to help you prepare for the next step in your financial journey. If you’re unsure which direction is right for you, speak with a financial advisor today.
†Federal Student Aid. n.d. “Student Loan Forgiveness.” Accessed March 29, 2022. https://studentaid.gov/manage-
‡Federal Student Aid. n.d. “Federal Versus Private Loans.” Accessed March 29, 2022. https://studentaid.gov/understand-aid/types/loans/federal-vs-private
§USA Today. August 9, 2023. “Student loan payments to restart soon as pause ends: Key dates to remember.” Accessed September 13, 2023. https://www.usatoday.com/story/money/personalfinance/2023/08/09/student-loan-payments-resume-date/70554439007/
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