President Donald Trump promised to move oversight of the federal student loan portfolio from the Department of Education to the Small Business Administration. At the same time, the department recently announced plans to amend existing loan repayment and forgiveness programs.
Clearing your loan debt as quickly as possible has benefits and downsides. It’s important to consider your unique financial situation when determining the best path forward for you.
Student loan debt is a huge financial burden for millions of Americans. The average student loan balance for bachelor’s degree graduates is around $28,400. With total U.S. student loan debt reaching $1.75 trillion in 2022, many borrowers are wondering if they should pay off their loans as fast as possible or hold out for potential forgiveness programs. Here is a comprehensive look at the pros and cons of paying off student loans versus pursuing forgiveness.
The Case for Paying Off Loans Quickly
There are several benefits to aggressively paying down your student loans:
Save Money on Interest
Student loans accumulate interest every day. You will pay less interest over the life of the loan if you pay off the principal balance faster. If you make extra payments on high-interest loans first, you can save thousands of dollars compared to just making the minimum payments.
Free Up Cash Flow
Your monthly student loan payment takes a big bite out of your budget When your loans are paid off, you can redirect that cash flow to other financial goals like saving for a house, retirement, or starting a business The feeling of no longer having a huge monthly student loan bill is very liberating.
Build Wealth Sooner
When you no longer have to pay for college, you have more chances to get rich through real estate, investing, and other methods. You have more extra money that you can invest in ways that will help you get rich.
Peace of Mind
Simply being debt-free provides immense psychological benefits. You no longer have to worry about making payments or the possibility of defaulting on your loans. Clearing your student debt gives you more financial security and peace of mind.
The Potential Benefits of Forgiveness Programs
While paying off your loans aggressively has advantages, pursuing federal student loan forgiveness programs can make financial sense in certain situations:
Lower Monthly Payments
Income-driven repayment plans offered by the Department of Education base your payment on how much you earn, not how much you owe. Monthly payments can be as low as $0 per month. This helps free up cash flow for other priorities.
Loan Forgiveness
If you qualify for Public Service Loan Forgiveness (PSLF), you can have your remaining federal student loan balance forgiven after 10 years of payments and public service employment. Forgiveness under income-driven plans takes 20-25 years.
Interest Subsidies
If your payment under an income-driven plan doesn’t cover all the interest owed, the government will pay a portion of the unpaid interest on subsidized loans for up to 3 years. This benefit can save you thousands.
Tax Benefits
Any amount forgiven under PSLF is tax-free. While forgiveness under income-driven plans is taxable, your income and tax rate may be lower when the forgiveness happens in 20-25 years.
Key Factors to Consider
When deciding whether to pay off your loans quickly or pursue forgiveness, here are some important things to think about:
- Current and future income – Lower earners benefit more from income-driven payment plans. Higher incomes make you pay off loans faster.
- Interest rates – The higher your interest rate, the more worthwhile it is to pay off loans aggressively.
- Family situation – Marriage or children may impact your expenses and ability to pay.
- Career trajectory – Public service careers benefit more from forgiveness programs.
- Debt amount – The more you owe, the longer it takes to repay and the more forgiveness helps.
- Retirement timeline – Paying loans longer results in less money for retirement savings.
Finding the Right Balance
The decision on how fast to pay off student loans versus pursuing forgiveness is personal and depends on your financial situation. Here are some strategies that can provide a balanced approach:
- Make minimum payments and pursue PSLF if you qualify
- Pay any extra cash towards highest-interest loans
- Refinance private loans to lower rates, keep federal loans for forgiveness
- Target loans over 4-5% interest for early payoff
- Use windfalls like bonuses and tax refunds to make lump sum payments
- Run the numbers to see which approach saves you the most money
Most of the time, the best plan is one that aggressively gets rid of high-interest loans and takes advantage of federal options for loan repayment and forgiveness. This fair method helps you pay off your debts in a smart way while saving the most money.
The Bottom Line
There is no one-size-fits-all answer on paying off student loans versus forgiveness. Run the numbers based on your specific situation. If you don’t qualify for forgiveness programs, pay down high-interest debt aggressively to become debt-free faster. For those in public service, pursue PSLF but also chip away at loans when possible. The ultimate goal is minimizing total interest costs and paying off your loans in the most efficient way.
Ability to Invest Elsewhere
A common rule of thumb for deciding whether to pay off debt or invest your money is to examine whether your returns would be bigger than the interest you’re paying on your loans.
For example, the current interest rate for unsubsidized federal student loans is 6.53%.
That means that unless you have an investment opportunity that promises to generate more than 6.53% each month, it’d behoove you to instead pay off your debt first. Once you rid yourself of your student debt, you can ramp up your savings and investment portfolio.
Off-loading your debt may bring a sense of relief.
Student loan debt can often feel like an anchor weighing borrowers down. By paying off your loan debt early, you can discard that feeling of anxiety.
Wiping your student debt also means you’ll have one fewer thing to worry about if a considerable, unexpected expense — such as medical bills — comes across your plate.
Want to learn more about different kinds of student loans? Learn more here
Benefits of Paying Off Student Loans Early
There’s no one-size-fits-all answer to whether you should pay off student loans early. However, if it’s a prospect you’re seriously considering, here are some of the benefits of clearing this debt.
Student Loans 2022 (Should I Pay Off My Student Loans or Invest??)
FAQ
Is it worth it to pay off student loans right now?
Accrue less interest: The sooner you pay down debt, the less interest it can accrue, which will save you money in the long run. Improve credit eligibility: Lenders may be unwilling to issue new loans if you have a lot of student debt, so paying off those outstanding loans can improve your ability to access credit.
What is the 7 year rule for student loans?
The “7 year rule” for student loans refers to how long negative information, like late or missed payments and defaults, can remain on your credit report after a student loan enters default. Specifically, student loans that have been defaulted on and collection accounts that are linked to them will usually stay on your credit report for seven years from the date of the first late payment that caused the default.
Is $80,000 a lot of student debt?
The average student loan debt owed per borrower is $28,950, so $80K is a larger-than-average sum.
How much would a $30,000 student loan be monthly?