Paying off student loans has become an increasingly difficult challenge for many Americans. With rising tuition costs and stagnant wages the student debt crisis only seems to grow over time. You may feel pressure to aggressively pay down your loans as fast as possible. However this is not always the best financial decision. Here are some reasons why you may want to think twice before paying extra on your student loans.
Income-Driven Repayment Plans
If you are on an income-driven repayment (IDR) plan for your federal student loans, then paying more than the minimum is usually not recommended. IDR plans base your monthly payments on your discretionary income and family size. After 20-25 years of payments, any remaining loan balance is forgiven.
Making additional payments on an IDR plan does not help you pay off your loans faster. Since your payments are based on income, paying extra does not lower your monthly dues. The extra amounts simply go toward the interest, which is forgiven after your term. You’d be better off investing extra funds for retirement or other goals rather than wasting money on interest that will ultimately be canceled.
The recently introduced Student Aid Value for Empowerment (SAVE) plan makes extra payments even less valuable. SAVE allows borrowers to pay just 5% of discretionary income toward undergraduate loans (down from 10%) and stops interest accumulation when monthly payments don’t cover it entirely. Your objective should be maximizing forgiveness, so extra payments are counterproductive.
Loan Forgiveness Programs
Programs like Public Service Loan Forgiveness (PSLF) provide forgiveness after 10 years of payments while working for an eligible employer. For those pursuing PSLF, paying more than the minimum also provides no benefit. You still need to make 120 qualifying payments over 10 years regardless of how much extra you pay. Focus on meeting the requirements and minimums for forgiveness rather than interest costs.
Other Financial Goals
Aggressively paying down student loans often means sacrificing other goals. An emergency fund should take priority over extra loan payments. High-interest debt like credit cards should also get addressed first. Retirement accounts, brokerage investing, home down payments, and other objectives may provide better long-term returns than eliminating student loan debt.
Federal student loans have reasonable interest rates and flexible repayment options. Paying the minimums frees up cash flow for the other important aspects of your financial life.
Potential Future Forgiveness
Although broad student loan forgiveness has faced setbacks, the idea still garners a lot of support. The Biden administration proposed forgiving $10,000 per borrower, and this policy could be revisited in the future. Congress may eventually approve some level of widespread forgiveness.
You don’t want to overpay loans now only to see balances erased later. Keep making the minimums on your federal loans and stay updated on forgiveness proposals.
Key Takeaways
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Income-driven repayment plans base payments on income, so extra payments don’t help pay them off faster. Focus on maximizing forgiveness.
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Programs like PSLF provide forgiveness after a set number of payments, so paying extra does not speed up the process.
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Building an emergency fund and paying down high-interest debt should take priority over eliminating student loans.
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Potential widespread student loan forgiveness proposals make prepaying loans risky.
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Stick to the minimums on federal student loans and devote extra money to other financial goals.
While it may seem satisfying to aggressively pay off student loans, doing so is often not the optimal strategy. Federal loans offer flexible repayment and forgiveness options. You’re better off making minimum payments and using surplus funds for emergencies, high-interest debt, and other important goals. Prepaying loans can mean lost opportunities for better returns and the risk of overpaying debt that could get forgiven later. Evaluate your entire financial situation and think critically before paying more than you need to on student loans.
Improve your standard of living
A lesser-made argument: You could enjoy life more by spending that money.
Not making your student loan payment means more money in your pocket now — who’s worried about future debt? You could die tomorrow, and you might skip a latte today because some financial guru told you to?
Not making a student loan payment could mean more resources available each month to take care of yourself through things like:
- Higher rent: You could choose to live in a cheap house in central Wisconsin (heyyy!), but you might want the community and basic human rights protections that come with living in a city or state that happens to have a higher cost of living.
- Pricier groceries: It would literally not be that difficult to spend your extra $400 on just eggs right now.
- Gym membership (or running shoes or a bike, etc.): Staving off depression and anxiety takes a lot of work in these uncertain times. A little exercise might be your only relief, especially if therapy and medication are completely out of reach.
- Nicer stuff: I’ve lived with a $12,000 annual income, and I’ve lived with a $100,000 income. I can attest to the psychological benefit of sometimes buying new clothes, the latest iPhone and a couch that doesn’t smell weird.
Student loan forgiveness & cancellation
The crème de la crème of not paying your student loans is to get the lender to tell you you don’t owe the money anymore. It usually takes a while, and qualification is particular, but here are your options for federal student loan forgiveness:
- Public Service Loan Forgiveness: Work in government or nonprofits, and you could qualify to have your balance forgiven in about 10 years under this not-as-simple-as-it-sounds ED program. Teacher Loan Forgiveness is similar but quicker and harder to qualify for.
- Cancellation and discharge: The government will forgive your loan balance for a bunch of other reasons, too, but it can be persnickety. If you’re disabled or die, or your school closes, you (or your heirs, who, yeah, inherit your debt) can look into this option.
- Forgiveness under IDR: After your IDR repayment term, your remaining loan balance is forgiven. (See above re: court action and forgiveness eligibility.)
What Everyone’s Getting Wrong About Student Loans
FAQ
How long would it take to pay off $100,000 in a student loan?
| Repayment term | Monthly payments | Total interest paid |
|---|---|---|
| 5 years | $1,933 | $15,997 |
| 10 years | $1,110 | $33,225 |
| 15 years | $844 | $51,984 |
| 20 years | $716 | $71,943 |
Is $70,000 in student loans a lot?
What is considered a lot of student loan debt? A lot of student loan debt is more than you can afford to repay after graduation. For many, this means having more than $70,000 – $100,000 in total student debt.
Is $40,000 in student loans a lot?
The average student loan debt per borrower is nearly $40,000. With an average interest rate of 5.5%, that works out to about $393 a month. And here’s the kicker: it typically takes borrowers 17 to 23 years to pay off those loans.
Do student loans go away after 7 years?
What happens if you don’t pay your student loans?
While the fate of the SAVE Plan is being decided by the courts, borrowers are being placed on an interest-free administrative hold. Regardless of SAVE Plan’s ultimate impact, some borrowers are simply refusing to pay their student loans.
Should you pay off student loan debt?
It would be a shame if you devoted too many resources to paying off student loan debt only for the debt of others to be wiped away in the future. This is even more true if you put off other goals like buying a house or investing for retirement to make extra student loan payments each month.
Should I pay extra on my student loan debt?
Most borrowers should not pay extra on their student loan debt. Aggressively paying your student loans could actually be a bad financial decision.
Do you have to pay off your loans if you don’t graduate?
Even if you don’t graduate, you still have to pay off your loans. Fewer than 60% of college students graduate within 6 years, which means that at least 40% of students either take longer—accumulating more debt with every passing year—or don’t earn their degree at all. Unfortunately, your lender doesn’t care if you graduate or not.
Are borrowers not making their student loan payments?
However, recent reports paint a more complex picture. The New York Times recently reported that almost half of borrowers are not making their student loan payments. Additionally, in June and July, federal judges in Kansas and Missouri blocked the SAVE Plan, as reported by CBS News.
Should you take out a loan for college?
In other words, we take college from an overly expensive drain on your bank account, badly plugged by future-killing student loans, and turn it into something that you can actually pay for out of pocket. Reason 14. You really don’t need to take out a loan for college.