Should you pay off student loans early?

When the subject of debt freedom comes up, it’s often accompanied by the idea that all debt must be paid off as quickly as possible — no matter what.

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 low interest rate .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 interest rate 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.