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.

How Does Student Loan Debt Affect Your Credit?

Can student loans lower your credit scores? Well, yes—but how much depends largely on how you handle those debts. One thing’s for sure: the amount of student loan debt owed has increased pretty dramatically in just the last seven years.

How is Student Loan Debt Treated by Credit Bureaus?

Student loan debt is treated on your credit reports and scores as an “instalment loan”. That is to say, a specific loan that’s been structured over a period of time. Whether it’s a government loan or a private loan also doesn't matter.

The important thing is whether or not it’s paid-off on time, within the agreed-upon framework.

These kinds of debts are weighed less heavily than, say, credit card debt. This is where you might’ve heard the terms “good debt” and “bad debt.” Basically, student loan debt is good debt—it’s an investment in your future. With the money you’ve taken out to pay for education, ideally, you’ve increased your capacity for higher earnings over coming years.

What interests the credit bureaus most are your payment habits—not that you have debt, but how you manage the debt you have.

Of course, defaulting on a student loan will appear on your credit report—and stay there—for seven long years. Student loan payments that have gone unpaid for 270 days are considered to be in default. However, it is possible to make arrangements with lenders to avoid this. 

Ultimately, just like everything else relating to your credit, you want to demonstrate your trustworthiness and reliability. Don’t be afraid of improving yourself with a student loan, but make sure you’re ready to keep up with the payments as they come due.

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